For decades, the global supply chain has been powered by the dirtiest, cheapest fuel, a sludgy byproduct of oil refineries, called bunker fuel or marine fuel oil. Black smoke billowed from the world’s fleet of 50,000 cargo vessels, accumulating to 3% of annual global carbon emissions, a larger share than all but six countries. But cheap fuel meant cheap shipping, and there was little incentive to do anything about it.
In the last two years or so, the drumbeat has grown for the shipping industry to decarbonize and the path to zero-emissions shipping had begun to coalesce around hydrogen-derived fuels—which emit no carbon when burned—and its carriers, like ammonia or methanol.
However, hydrogen generation is a nascent industry, and the fuel is currently being produced in small quantities at prices expected to be two to five times more expensive than marine fuel oil. For cargo ships, which fuel up with more than a 1,000 tons at a time, those prices are unattractive, if not prohibitive.
As long as fossil fuels are cheap, zero-carbon fuels won’t take off. A carbon tax changes the calculus of which fuel an industry uses by making fossil fuels more expensive.
Making bunker fuel as expensive as hydrogen
According to a report (pdf) released this week by the Getting to Zero Coalition, an industry group led by the think tank Global Maritime Forum, to make zero-emissions fuels competitive, each metric ton of carbon emitted by burning marine fuel oil will need to be taxed at an average of $200 per ton of carbon emitted to phase out emissions-belching fuels between 2030 and 2050. For comparison, the European Union’s carbon trading scheme has a price, as of December 2021, of about $100 per ton of carbon.
Burning a ton of marine fuel oil releases 3.2 tons of CO2 into the atmosphere. A carbon tax of $200 per ton would therefore add $640 on top of the price of a ton of marine fuel oil, which today is roughly $600 per ton, totaling to $1240, more than doubling the cost of fuel at the bunkering station for each ship. There are a lot of moving market forces that will determine the future price of green ammonia fuel, but estimates put it in the range of $1300 to $2400 per ton, once it is being generated at scale.
Government policy, such as tax credits per ton of emissions reduced, could help bridge the gap further.
The technology is there, but not the political will
The Forum’s report lays out multiple market and regulatory scenarios around effective carbon prices.
For now, $200 is the average price, based on beginning as low as $11 and potentially climbing to as high as $360, depending on what other mechanisms are in place. Kasper Søgaard, head of institutional strategy at the Global Maritime Forum, says that a carbon price lower than $200 could be effective, particularly if the funds are funneled to building out and scaling green hydrogen and ammonia production, driving down the price. Eventually, perhaps around 2040, once a global green hydrogen infrastructure is built out, banning fossil fuels may be more efficient than disincentivizing its use with carbon prices.
The question, Søgaard said, is not whether the technology exists to decarbonize the shipping industry, it’s whether “the political will will be there to make this investable.”
The International Maritime Organization (IMO), the UN agency tasked with regulating the shipping industry, is set to talk about carbon prices later this year. The Marshall Islands, a small country will an outsized influence at the IMO, has proposed a carbon price of $100 per ton, and is rallying support from some countries, as well as opposition from others. Maersk, one of the world’s largest container shipping lines, has suggested a carbon price of $150 per ton. The International Chamber of Commerce, an industry group that represents ship owners, says they support a carbon tax, though they haven’t set a number that they will back.
Passing a resolution at the IMO can take time, and is fraught with competing interests that may slow or water down progress, but a serious consideration of carbon prices would go a long way in setting “a clear direction of capital,” Søgaard said. “It removes that uncertainty that makes it really, really hard to operate businesses.”
Banks and companies could start investing in green hydrogen and ammonia infrastructure, and the ships that could run on them if they know this is the direction the industry is heading. There are some pilot projects (pdf) testing ammonia fuel on ships. Ammonia used as fertilizer is already transported by sea, and these vessels are likely to be the first ones to transition to using their cargo as fuel.
Supply chain crisis shows shipping can afford higher fuel prices
In the years before the pandemic, the received wisdom in the shipping industry was that the market would not bear prices above $3,000 per container. The industry resisted the cost of decarbonizing their ships with the argument that it was too expensive, and would lead to higher prices for consumers. One study, published just before the pandemic by the Energy Transitions Commission, a London-based think tank, estimated the costs of decarbonization to add about 1% to the final cost of a finished good, the equivalent of adding $1 to the price of a $100 pair of sneakers.
Then the pandemic hit, setting off the supply chain crisis that sent container prices skyrocketing, as high as $15,000. It turned out that the market could afford to pay more to have our stuff shipped. Right now, most of the astronomical increase in container prices goes into pure profit for shipping companies, the largest of which raked in billions of dollars each during the pandemic. As the supply chain crisis eases, container prices could settle on a number that takes into account the cost of decarbonizing shipping.