Thetius analyst and US correspondent Patrick Finn considers the importance of free market participation in setting the pace and direction of carbon neutrality in shipping by bringing data and supply-chain transparency to the fore.  But in a world where technological barriers are too often overcome by nominal credit trading, how can the shipping industry and commerce at-large ensure that high quality offsets remain the de facto currency? 

There are few discussion points within the maritime industry that spark as much debate as to what the fuels of the future will be. Over the past century of ocean trade, ships have burned various carbon based fossil fuels that have evidently contributed to climate change. Today, all options remain on the table. From gaseous ammonia to nuclear fuel, a single identifiable solution remains elusive. While a silver bullet is as yet undiscovered, the fact remains that achieving true carbon neutrality is a much deeper challenge than simply altering the design of an engine or increasing the availability of alternative fuels. 

The importance of considering the whole

Efforts led by the IMO have largely been focused on downstream (shipboard) emissions, referred to as a “tank-to-wake” analysis. Measurement of these emissions begin at a ship’s fuel bunker, and only consider the combustion gases emitted up the stack as exhaust. This method for accounting for emissions has been the subject of much criticism (particularly for LNG) but does offer a level playing field on which all fuel types can be assessed. However, from an environmental standpoint, Greenhouse Gas (GHG) emissions measured purely from exhaust gas are effectively meaningless unless upstream emissions are also accounted for. As such, there has been an increased call for a “well-to-wake” approach to fuel lifecycles to be used within the sector. If the maritime industry is to genuinely achieve carbon neutrality, then exploration, extraction, and the supply chain must become an integral part of calculations moving forward.

A common analogy for the need to consider upstream and midstream emissions can be found in electric vehicles (EV). A Tesla car runs on electricity and is therefore marketed as a zero-emissions vehicle to an environmentally-conscious customer base.  But, if the energy used to charge the battery is derived from coal, then how “green” is the vehicle in real terms? What energy sources are used to extract and refine the metals that make up the car’s batteries? What other impacts does this extraction and refinement have? And what about its production? Cobalt, a rare metal, is critical to the sophisticated batteries found in EVs. It is incredibly energy-intensive to obtain. With a typical EV battery containing roughly 30 pounds (13.6 kg) of refined Cobalt, it is necessary to extract and process nearly 13.6 metric tons of ore. So how “green” are EV’s really? What are the wider costs to the environment? The same question is currently being asked of the future fuels of the maritime industry. Regardless of whether a ship burns HFO or hydrogen, what are the upstream emissions throughout the supply chain? If tomorrow, the industry miraculously shifted to a zero GHG emitting fuel, would it verifiably be 100% carbon neutral? How would we know?

The question of well-to-wake analysis has recently been highlighted by Maersk’s big bet on a methanol-powered fleet and their efforts to obtain the fuel from a carbon neutral source. When the shipping giant set about on this bold mission, it was unknown as to where the fuel would come from.  There is a ready supply of methanol available on the market. Over 100 ports globally have the supportive infrastructure and supply chain in place, but securing the contract for a green methanol was a true challenge for Maersk. Indeed, if they are to reap long term success with methanol, green production sources will have to scale to meet future demand. 

Supply, demand, and other market forces

In a recent press release, Maersk announced that they had secured an alternative fuel delivery contract, and that the fuel will be made using energy from a solar farm in southern Denmark. The annual 10,000 mt supply of methanol will be produced by converting solar electric to hydrogen and then to clean methanol. It marks a major milestone in Maersk’s journey to decarbonise, but the scope of supply in this contract accounts for just a single ship. While the plan is to scale up, the question remains: Will such production successfully keep up to meet the demands of an entire fleet? What about the broader industry? Will suppliers have to turn to converting dirty fuels into methanol and can markets function to account for the carbon footprint across a fuel’s entire lifecycle?

As is the case with other global challenges, market based solutions frequently outpace bureaucratic or governance-led change. While it is true that government influence has proliferated non-technical approaches such as the emission trading schemes of the European Union (EU) or China, free market participants have begun developing solutions of their own. In a world where demand for voluntary carbon offsets is increasing, working to provide transparency of information will in turn be reflected in price discovery and value. While left as an afterthought, the concept is not lost on the International Maritime Organization (IMO). In the organization’s initial GHG strategy, they spoke of developing  “robust lifecycle GHG/carbon intensity guidelines for all types of fuel”. This was a proposed candidate measure to address how the IMO would move forward with their reduction goals, but has since received little further development. Indeed, shaping carbon intensity guidelines for fuels requires transparency, and extracting such information over multiple supply chains is an extraordinary task.

If history can be used to find a pathway to success in future fuels, then perhaps the solution lies not within the bureaucratic halls of Brussels, Beijing or Washington DC, but in the markets that turn the cogs of commerce. In other words: carbon markets. Even though the international maritime industry has largely bypassed inclusion into mandatory emission schemes such as in the EU and China, the pressure from capital markets, lenders, and external industries and consumers, will inevitably demand end-to-end transparency. 

An example from LNG

We need look no further than the global (Liquified Natural Gas (LNG) trade to see how voluntary transparency and carbon markets are leading the charge towards a solution and forcing the maritime industry to integrate and adapt. When considering LNG as a transition fuel, there is much talk about carbon neutrality and offsets using ‘carbon credits’. The concept is hailed as the best practical near-term solution by advocates, but considered absurd by its critics. The lifecycle of LNG must be closely scrutinized to fully account for emissions. Likewise, the supply chain must ensure that emissions offsets derived from production, transportation, and storage, are of a high quality. LNG is by no means perfect for a future clean maritime industry, but some argue it is the only proven transitional fuel we have. Compared to marine diesel, LNG emits 20% less carbon when burned, but even that still fails to meet the IMO 2030 reduction of 40%. 

If an economical way to produce synthetic LNG can be found, the carbon molecule will be omitted, resulting in  0% CO2 emissions at the point of combustion. Of course, this doesn’t negate the issue of methane release; a powerful and harmful GHG in itself. This ‘methane slip’ is just one of many issues with LNG, occurring as a result of incomplete combustion, emitting methane gas into the atmosphere via the engine exhaust or crankcase ventilation. To help reduce methane slip, dual-fuel engines have been proposed to better complete combustion and effectively eliminate the issue. Likewise, ships using LNG are able to be retrofitted to burn ammonia or other clean gaseous fuels. From this train of thought and the standpoint of existing infrastructure and availability, LNG engines that are future-fuel ready appear to be a strong option, but it is all for nought if upstream emissions, including boil-off, outweigh the benefits at the point of combustion. Even the most advanced LNG extraction facilities have found it impossible to achieve net zero emissions. They must offset their operations by purchasing credits in order to sell “carbon neutral” fuel, and this accounts for just one portion of the fuel’s lifecycle. While questions remain as to how to ensure the quality of carbon credits, the system provides transparency of emissions and allows the free market to reward more progressive operators. How will future markets bolster this system, ensuring greater accountability as alternatives are developed? As with HFO or LNG, in order to identify value and verify a green fuel’s legitimacy, markets will form on the foundations of transparency and data. 

In to the clear blue

Carbon markets are in their infancy, but they offer a compelling way of accounting for GHG throughout a supply chain and vetting the quality of offsets through greater transparency. There have been several interesting developments throughout their establishment which don’t simply deal in the trading of nominal credits. The Baltic Exchange is widely known for its Baltic Dry Index that provides benchmark prices for the transportation of bulk commodities by sea. In a recent move, the exchange integrated carbon emission reference values via the IMO-designed Energy Efficiency Operational Indicator (EEOI). In effect, they have integrated maritime shipping carbon emissions per voyage – per vessel – into the market. While this doesn’t complete the “well-to-wake” data cycle needed to understand the complete carbon intensity of a fuel, it does provide the tools for price discovery based on a ship’s emissions. The Baltic Exchange has created a path for the free markets to incentivise greener shipping by providing a benchmark shipment charter price that is tied to carbon emissions, thereby rewarding the leaders and shaking out the laggers beyond the capability of any government statute.

Based in Singapore is a particularly interesting innovator in this space -Abaxx Technologies. The company and its management team consists of former Goldman Sachs commodities exchange, mining, and maritime specialists. Abaxx has been quietly working on a solution to connect LNG directly to its climate-influencing externalities and the global markets. As an identified transition fuel, demand for LNG has been steadily increasing, but the fuel lacks a structured market. Unlike oil and its derivative fuels, it lacks benchmark prices and an exchange that enables transparent delivery contracts. This is akin to the issues Maersk faced when obtaining their green methanol contract, but on a much larger (and growing) scale. While the Singapore-based exchange is awaiting official approval before its launch within the next year, the company has been building out a series of complementary systems that enable transparency, security and fluidity of trade. Abaxx is a pioneer in ‘Web3.0’ platforms, enabled by blockchain technology. The exchange and its spinoffs are poised to create an environment where stakeholders can track, account for, and verify emissions; effectively tying deliveries of commodities like LNG to their fuel lifecycle. While they are still in the pre-revenue phase, companies like Abaxx Technologies have the potential to allow the maritime industry to meaningfully account for upstream emissions by arming them with the data to make informed decisions for the energy transition.

Complimentary to the Abaxx and Baltic Exchange solutions is the development of the Singapore Exchange’s Carbon Impact X (CIX) platform. Set to launch at the end of 2021, the CIX will act as a free-market response to the mandatory emissions trading schemes of the EU and China. At its core, the CIX is a voluntary carbon market, allowing companies that are unable to achieve net-zero emissions to purchase offsets for carbon neutrality. A major focus of the CIX is in ensuring that offsets are of high quality and meet auditing requirements before listing, thereby eliminating the so-called “greenwashing” issue. While the maritime industry largely operates beyond such accountability, it is seemingly inevitable that aspects of the industry, whether shipbuilding, port facilities, or a cargo’s supply chain, will be pressured to clean up or voluntarily funnel money to help meet the challenge elsewhere. 

Conclusion

In order for the maritime industry to achieve carbon neutrality, or even the goals of IMO 2030, the effort required will be enormous. The very nature of the challenge ahead necessitates no stone remaining unturned. This reflection of the “well-to-wake” strategy for emissions reduction is far more complex than the past years’ approach. While some nation’s technocrats as in China or the EU have the political clout to establish mandatory systems, the fact remains that much of the world will operate beyond such emission schemes. For nations like the US, working under the pretence of free markets, operators like Maersk will begin to win consumer confidence and delivery contracts simply based on transparency. Regardless of whether the dominant marine fuel of the future turns out to be methanol, LNG or some variation thereof, the choice will only be effective if the industry accounts for the entire lifecycle of that fuel. Still yet, even a ship’s lifecycle will become accounted for, from the steel it’s made from, to how it’s recycled. Emissions must be accounted for in all aspects of the maritime industry, and participation transparency through carbon markets is increasingly inevitable.