Despite the rise in emissions, a more ambitious IMO strategy and industry actions towards technology adoption positions shipping on a positive track for a net-zero pathway.

Fuel combustion in maritime operations accounts for over 80% of the total shipping life cycle emissions, primarily due to the current reliance on fossil fuels.⁷⁸ Bulk carriers, oil tankers and container ships are responsible for 65% of these emissions.⁷⁹ As per IMO targets, absolute emissions need to be reduced by at least 20% by 2030 and at least 70% by 2040 compared to 2008.⁸⁰ As past trends show, shipping emissions continue to exceed the 2008 benchmark.⁸¹

Shipping emissions intensity varies based on factors such as fossil fuel use, vessel load use, size, speed and route characteristics. For example, in the case of container ships, the South-East Asia to/from North-East Asia shipping lane has the highest emission intensity among the top 10 trade lanes by activity, 35% above the average emission intensity levels.⁸² To meet the IMO targets, carbon intensity trajectory has been considered (see Figure 20). This trajectory requires a 40% reduction in intensity levels (vs 2008) and near-zero intensity levels in 2050.⁸³

Meeting the IMO net-zero target by or around 2050 demands substantial collaboration from governments, industry stakeholders and research institutions. The industry’s primary focus should centre on advancing clean hydrogen-based ZEFs and incentivizing their widespread adoption, to align with Global Maritime Forum (GMF) transition strategy. ZEFs are expected to occupy more than 90% of the 2050 energy mix, facilitating the achievement of net zero.⁸⁴ While these fuels develop, biofuels – and, to a limited extent, liquified natural gas (LNG) – will serve as transition fuels. In addition to fuel-switching, emissions can be further reduced through operational efficiency enhancements and design improvements, which are crucial for meeting the near-term 2030 IMO targets.

Switching entirely to clean hydrogen-based ZEFs, such as methanol, ammonia and liquid hydrogen, holds the potential to achieve near-zero well-to-wake shipping emissions. While methanol-fuelled ships are available, they currently rely on natural gas-based feedstock. Commercial availability of ammonia and liquid hydrogen propulsion technology is expected by 2025. However, transitioning to these fuels may increase total ownership costs by 30-80%.⁸⁶ Key barriers to their adoption include higher vessel ownership costs, limitations in the fuel supply chain, the absence of global bunkering infrastructure, and the need for modifications in onboard storage configurations. The TRL of ZEFs can be considered in terms of the maturity of the fuel production process, the maturity of propulsion technologies and the readiness of bunkering technologies. Globally, there are over 200 R&D projects dedicated to advancing these fuels and related technologies.⁸⁷

Currently, ammonia, methanol and hydrogen are derived from natural gas feedstocks. Clean hydrogen-based production for shipping applications is currently limited to demonstration projects. In addition to clean hydrogen, methanol production will require CO2 , which can be sourced from industrial point sources or via DAC technologies. Clean hydrogen production facilities and carbon capture technologies need to be sufficiently scaled at an industrial level to advance the production of ZEFs.

An example of progress is Danish energy company Orsted’s construction of Europe’s largest clean methanol plant in North Sweden, set to commence operations by 2025. It is expected to supply 50,000 tonnes of clean methanol annually.⁸⁸

Methanol engines have been successfully demonstrated and are in the early adoption stage of development. Currently, there are around 30 vessels running on methanol.⁸⁹ In 2023, Maersk will start operating the world’s first container ship powered by clean methanol, with further ships in the order book.⁹⁰ Ammonia and liquid hydrogen engines are still in development and are expected to mature after 2025.⁹¹

Methanol bunkering and onboard storage/handling technologies have been successfully demonstrated. For ammonia and liquid hydrogen, these technologies need to be progressed beyond the prototype stage.⁹²

Additional decarbonization pathways are essential to ensure that the shipping industry meets the near-term IMO targets for 2030. Transition fuels, such as biofuels, can be considered as potential options. Moreover, achieving decarbonization in shipping necessitates improvements in operational and technical technical efficiency. For instance, optimizing routes and enhancing vessel use can result in emission reductions of up to 10%.⁹³ Additionally, innovative systems, such as wind-assisted propulsion, are under investigation to further contribute to emissions reduction.

Adopting ZEFs hinges on scaling clean hydrogen, CO2 handling and bunkering infrastructure, however less than 1% currently exists.⁹⁵ Investments of up to $0.8-2.1 trillion will be needed by 2050,⁹⁶ mainly for clean hydrogen-based fuel infrastructure. To meet the 2050 net-zero scenario, clean hydrogen production capacity of 160 MTPA is required,⁹⁷ necessitating an investment of $0.6-1.9 trillion.

By 2050, up to 130 MTPA of CO2 will be needed as a feedstock for producing ZEFs.⁹⁸ If the CO2 is sourced from industrial point sources not co-located with the ZEF producing facility, adequate CO2 transport infrastructure must be established. This is projected to require investments in the range of $10-23 billion.⁹⁹

ZEFs need to be supported by bunkering infrastructure, which will require an additional $132-176 billion in investment.¹⁰⁰ Notable efforts include Yara International and Azane Fuel Solutions partnering to create a “zero-emission” ammonia fuel bunker network in Scandinavia, backed by around $9 million in public funding. This network will supply “zero-emission” ammonia to ships as early as 2024, expediting fuel adoption.¹⁰¹ Also, Clean Energy Marine Hubs, a public-private platform between energy, maritime, shipping and finance stakeholders, has been recently launched to de-risk investment into the necessary ZEF infrastructure and accelerate pace of deployment.¹⁰²

Demand for decarbonized shipping services is rising as nations and businesses pursue strict environmental, social and governance (ESG) goals. However, the feasibility of cargo owners absorbing the estimated green premium of 30-80% remains untested on a large scale.¹⁰³ As an industry working on narrow margins, passing the costs on to cargo owners will be challenging and hence, increased policy interventions may be necessary to reduce the green premium.

While the increase in shipping costs is expected to have a minor impact on end-consumers, resulting in an approximate 1-2% green premium (see Figure 25), it’s important to note that shipping costs represent only a small fraction of the final retail price of products.¹⁰⁴ Nonetheless, this premium can result in significant absolute cost increases for essential commodities like oil, grains and metals, particularly affecting emerging and developing economies.

The ability of shipping companies to pass on or profit from the green premium of decarbonized shipping services depends on the demand from industrial or consumer segments and the location. For instance, low-income countries that heavily rely on maritime trade for essential commodities may feel a more significant impact. As the market progresses, regulatory measures could help reduce green premiums and promote the adoption of decarbonized shipping services, thereby driving increased uptake of ZEFs.

The adoption of ZEFs may also need business model changes across the upstream shipping value chain. For example, existing ammonia producers should move beyond traditional demand applications and build supply capabilities to support the increasing need for ammonia from shipping. Similarly, shipbuilders will need to develop ships capable of running on ZEFs as part of their product portfolio. Stable and predictable policy frameworks will be required to create these new markets, build sustained demand and reduce the risk of stranded assets for early movers.

With growing customer emphasis on climate considerations, decarbonized shipping is gaining popularity as a viable alternative. Industry leaders are actively promoting their offerings to meet this demand. For instance, Maersk ECO Delivery, using fatty acid methyl ester (FAME) biofuels, provides CO2-saving certificates.¹⁰⁵ Hapag-Lloyd’s Ship Green enables “climate-friendly container shipping” to reduce ocean shipment emissions. The FMC shipping members have committed to ZEF targets by 2030,¹⁰⁶ with fleet operators pledging 5% of deep-sea shipping and cargo owners committing at least 10% of goods volume via ZEF-powered vessels.¹⁰⁷ These commitments across the value chain have the potential to drive global demand for decarbonized shipping.

To enhance consistency and comparability of GHG emissions data, the industry should adopt standardized quantification and reporting, exemplified by the introduction of ISO 14083 in March 2023.¹⁰⁸ Standardized reporting empowers industry players to strategically target GHG emissions collectively while also creating stricter policies to encourage low-emission fuel adoption, further boosting market demand. The implementation of IMO regulations, Energy Efficiency Design Index (EEXI) and Carbon Intensity Indicator (CII) is anticipated to improve vessel performance transparency and further stimulate the demand for decarbonized shipping.

The global shipping industry operates under selected flag states subject to international regulations led by the IMO. These regulations are bolstered by supporting regional policies that regulate ships entering territorial waters.

To meet IMO targets, regional policies should incentivize ZEF adoption and improve operational efficiency. Key measures include carbon pricing, fuel standards, green corridors, fiscal incentives for low-emission fuel infrastructure, bunkering standards and performance standards.

In the shipping industry, retrofitting the current fleet and upcoming ships orders with ZEF propulsion technology necessitates an estimated $450 billion in investment by 2050.¹²⁸ This breaks down to an annual extra cost of $17 billion for fleet owners.¹²⁹ Given the current annual CapEx for shipping firms, which stands at approximately $36 billion, this represents an added 47% investment load annually.¹³⁰

Recent data suggests the business case for zero-emission shipping investment remains weak due to high costs and uncertain returns. Current industry profit margins of around 32%¹³¹ and WACC of 8-10%¹³² suggest the industry is not positioned to absorb additional costs and generate sufficient returns solely from internal cash flows.¹³³ Fortunately, with the expansion of technology and the realization of economies of scale, it is anticipated that the financial demands for investment will diminish.

Historically, commercial bank loans have served as the primary source of financing for the shipping industry. Nevertheless, for the sector to achieve its net-zero objectives, there is a growing need for increased involvement from the public sector. This involvement can take the form of direct subsidies or blended finance mechanisms, both of which are designed to incentivize private sector engagement in sustainable shipping initiatives. The International Chamber of Shipping (ICS) set out a Fund and Reward proposal to the IMO for shipowners to make mandatory contributions per tonne of CO2 emitted to create a new IMO fund to be established by 2024, which will reward uptake of low and zero-carbon fuels and provide billions of dollars of funding annually for alternative fuel production and bunkering infrastructure in developing countries.¹³⁴

Approximately 50% of large publicly traded shipping companies consider climate change as a key consideration for their strategic assessment and integrate it into their operational decisionmaking.¹³⁵ Meanwhile, 19% of companies are building basic emissions management systems and process capabilities. Finally, 27% of companies acknowledge climate change as a business issue.¹³⁶