Policy Options for Closing the Competitiveness Gap Between Fossil and Zero-Emission Fuels in Shipping

To decarbonise shipping new policy frameworks need to be in place within the next few years. A new Insight Brief explains why and presents an overview of policy options.

For shipping’s decarbonisation to be in line with the Paris Agreement temperature goal, by 2030, we must reach at least five percent zero-emission fuels in international shipping and have commercially viable zero-emission vessels operating along deep-sea trade routes. This will need to be supported by the necessary infrastructure for scalable zero-emission fuels and energy sources including production, distribution, storage, and bunkering. Even to reach the least ambitious interpretation of the Initial IMO GHG Strategy’s reduction target (50% reduction of greenhouse gasses (GHG) by 2050 compared to 2008), and given ships’ usual life of 20-25 years, ordering zero-emission vessels must be the competitive choice no later than 2030.

A zero-emission fleet is only commercially viable and investable if zero-carbon energy sources are competitive with traditional fuels. However, under current policy and technology frameworks, fossil fuels remain readily available, reliable, cheap – and compatible with existing ships and engines – creating a competitiveness gap that the market alone cannot solve. Without new policy or policies, this gap will persist for decades, not only hindering the decarbonisation of shipping, but also further delaying decarbonisation of the global economy dependent on shipping. The time to act is now.

A forthcoming report by UMAS analyses policy measures for closing the competitiveness gap between fossil fuels and zero-emission alternatives in shipping. The report considers the extent to which different measures can close the competitiveness gap and how they could enable an equitable transition. Fairness and equity aspects are emphasised by e.g. the Initial IMO GHG Strategy. Therefore, the viability of any IMO climate policy instrument depends to a large extent on how these aspects are considered and operationalised.

This Insight Brief explains which policy options could help close the competitiveness gap and enable an equitable transition. It considers the policy options shown in the diagram below.

In many other sectors and countries, economic instruments, or market-based measures (MBMs), are widely used by regulators to internalise the costs of pollution caused by economic activities, address market inefficiencies and decrease price differences between fossil fuels and alternatives. MBMs have been on the IMO agenda since 2003 (IMO Resolution A.963(23)) and although discussions of MBMs in the IMO were suspended in 2013, MEPC 76 in June 2021 adopted a structured plan to start work on mid-term measures to cut GHG emissions from ships, which include MBMs alongside other measures.

MBMs can support the decarbonisation of shipping by closing the competitiveness gap between fossil fuels and zero-emission fuels by increasing the costs of using fossil fuels through setting a price on carbon, and/or reducing the costs of zero-emission alternatives, e.g. through tax breaks, RD&D funds, subsidies, or a combination of these. Additionally, MBMs can also help to mitigate some of the market failures and barriers which are slowing decarbonisation efforts. The main MBM policy options are summarised in the table below.

Any one policy option will not be enough, so it is important to combine options and tools to deliver on agreed goals. One potential route forward is the following policy package:

1. Adopt a global MBM capable of generating significant revenue. This mechanism needs to create a carbon price that incentivises emissions reductions and investments into readily available GHG mitigation options in the near term, and fuel switching once alternative zero-emission fuels are widely available.
2. Combine an MBM with an effective and fair use of revenue recycling and other revenue use options to drive both demand and supply of zero-emission fuels whilst also supporting an equitable transition and addressing disproportionately negative impacts on States.
3. Use a direct command-and-control measure such as a fuel mandate in the long term to send an unequivocable signal to the market that a fuel transition will take place.
4. Develop national and regional policy that can ensure the transition of domestic fleets at least at the same rate or sooner than international fleets and that work in synergy with global IMO-driven policy.
5. Promote voluntary initiatives and information programmes to stimulate supply-side investments in RD&D and infrastructure, encourage knowledge sharing and support capacity development.

Shipping is an essential global industry which is currently on an emissions trajectory that is dramatically out of line with the Paris Agreement temperature goal. As such, there is an urgent need for the development of policies which guide and support this sector through an equitable transition towards zero emissions.

 

Read the full insight brief here. [Español] [Português]

This Insight Brief was made possible through funding from the High Tide Foundation.