Shipping decarbonisation goal can be achieved with financial incentives like Contracts For Difference

1st June 2022

At the closed-door public-private event yesterday co-organised by the Royal Belgian Shipowners’ Association and the Getting to Zero Coalition, participants discussed how the EU could drive shipping’s transition to zero emission in Europe and globally through a dedicated Ocean Fund, Contracts for Difference, and Green Shipping Corridors.

Entitled “Will Shipping’s Zeal Seal the Green Deal?“, the event was attended by more than 40 participants from the EU institutions, industry, and other stakeholders. The event featured a series of presentations, followed by breakout sessions on three key elements in maritime decarbonisation: “Scalable Zero-Emission Fuels”, “Contracts for Difference” and “Green Corridors”.

Amongst the speakers were Jutta Paulus (MEP Group of the Greens/European Free Alliance), Bart Verboomen (DEME Group), Rasmus Bach Nielsen (Trafigura), Natalie Gupta (Yara Clean Ammonia) and Alex Clark (Oxford University), and Lau Blaxekjær (Global Maritime Forum). The event was moderated by Kasper Søgaard (Global Maritime Forum).

MEP Jutta Paulus emphasised that the EU should take leadership to drive shipping’s decarbonisation:

“This decade we have to take decisive action if we want to limit global warming to well below 2 degrees Celsius as agreed in Paris seven years ago. The shipping sector has to be addressed in particular, as its emissions are projected to even increase. It is not understandable why the Commission did not propose 100 % GHG neutral fuels by 2050, claiming that efficiency efforts would be sufficient for reducing the remaining emissions. The European Parliament should take the opportunity to boost our innovative industries that already invest in sustainable fuels and just wait for legislative incentives.”

One of the main takeaways from the discussions is the need to create and develop a good regulatory environment to encourage and sustain investments in zero emission. As explained by Bart Verboomen, Head of DEME Group’s Technical Department during his presentation at the event:

“Boosting energy transition in shipping is about creating incentives and recognition for upstream enablers like investors in plants and renewable electricity installation equipment needed for the production of green fuels, and also operators of distribution vessels bringing the green fuels to main hubs of shipping activities like ports.”

The biggest share of investments needed for maritime decarbonisation lies in the land-based infrastructure and production facilities for low or zero carbon fuels, which make up around 87% of the total investment. The other 13% (~ US$130-182 billion) of the investments needed are related to the ships themselves, which include the machinery and onboard storage required for a ship to run on low carbon fuels in newbuilds and, in some cases, for retrofits. In order to accelerate the green transition of the sector, a specific maritime fund is required.

“Without enough investments or the right regulatory framework, there will not be the massive transition that we need,” said Hugo De Stoop, CEO of Euronav. “This can only be triggered when there are enough resources to kickstart the process. For a frontrunner like Euronav, we fully support the idea of establishing an Ocean Fund using revenues generated from the auctioning of maritime-related allowances under the EU ETS. But having enough resources in the Fund is only the first step. We need the fund to be fully transparent and inclusive, particularly in relation to the setting of priority areas, criteria and grant allocation procedures. The Fund should be tied to financial mechanisms to generate favourable market conditions for the new green fuels.”

Members of both the RBSA and the Getting to Zero Coalition also expressed their commitment to drive shipping decarbonisation this decade and expressed the need to for a clear target to decarbonize shipping by 2050 as well as supportive policy measures to bridge the price gap between conventional and scalable zero-emission fuels. A mechanism such as (Carbon) Contracts for Difference under the dedicated Ocean Fund will encourage private investments to help scale up and accelerate the production and uptake of the required zero-emission fuels by sending a clear price signal.

Rasmus Bach Nielsen, Global Head of Fuel Decarbonisation at Trafigura voiced the need for effective financial mechanisms:

“We and many other companies and organisations across the maritime value chain are committed to fully decarbonise international shipping by 2050 in line with the Paris Agreement. But we cannot achieve zero-emission shipping without ambitious policy action, especially regulation that puts a sufficient price on carbon that incentivizes the use and production of zero-emission fuels as well as energy efficiency measures.”

This position is echoed by Alexander Saverys, CEO of the Compagnie Maritime Belge (CMB):

“In the last few years, by investing in alternative fuels such as hydrogen, our company has shown that industry frontrunners are more than willing to go zero emission. As shipowner, we believe that fuel-only Contracts for Difference are not only the best tool to accelerate the introduction of clean fuels in the maritime industry, they will also create more frontrunners by rewarding them for their efforts. On the one hand, CfDs incentivize clean fuel producers to sell as much fuel as possible, whereas classic CAPEX subsidies always carry the risk of building infrastructure that will not be used. A well-developed fuel-only CfD can also help make part of the money flow back to whomever produces the fuel and meets the standards, both within and outside the EU. On the other hand, CfDs ensure that frontrunners with the new fuels are rewarded from Day One. CfDs are thus a simple, transparent and effective way of accelerating the energy transition and unlocking entrepreneurship.”

“For full decarbonization of shipping to be possible by 2050, we should reach five percent scalable zero-emission fuels by 2030 to allow for rapid uptake in the following decades. But we won’t get to five percent without incentives that kickstart investment into zero-emission fuels, so that costs come down. We’ve seen policy measures like Contracts for Difference work for solar and wind and they can have the same catalytic impact for zero-emission shipping fuels,” concluded Kasper Søgaard, Managing Director and Head of Institutional Strategy and Development at the Global Maritime Forum.

To find out more about Belgian shipowners’ position on fuel-only Contracts for Difference under the Ocean Fund, read the RBSA’s position paper here.

To find out more about how EU Contracts for Difference can support zero-emission fuels, read the GTZ”s Insight Brief here and watch their previous presentation.