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In this episode, we discuss potential zero carbon bunker fuels for shipping, their development implications, the investments and regulatory incentives that may be needed.
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Transcript:
Roumeen Islam: This is the World Bank’s infrastructure podcast. In today's episode, we discuss how maritime transport may be decarbonized, reducing the shipping industry's dependence on fossil fuels.
In 2019 around 65 million metric tons of iron ore were exported from Australia to Japanese steelmakers by ship, according to a recent publication by the getting to zero coalition in collaboration with others. These voyages, using many ships, led to over one and a half million metric tons of carbon dioxide emissions.
Now, using less than 40% of the number of ships used with zero-emission fuels, it would be possible to decarbonize all iron ore trade between Australia and Japan. It sounds good, but there's a catch. Analyses show that by 2030, such a scenario with vessels running on green ammonia, which is a zero-emission fuel though possible, would still costs a lot more.
Most of the difference is due to the higher cost of the fuels themselves, yet even with the higher cost of zero carbon fuels, pilots are underway, just to see how possible such a scenario might be. And according to the International Renewable Energy Agency, a Japanese container transportation and shipping company has just done a successful trial using biofuel to power a vessel. The biofuel used is essentially free from sulfur oxides and can reduce life cycle carbon dioxide emissions by up to 90% in comparison to conventional fossil fuels.
So how can shipping make the transition to zero carbon fuels on a large scale? Let's find out how. Good morning and welcome I am Roumeen Islam, host of tell me how and my guest today is Dominik Englert one of our experts on maritime transport. Dominik will be speaking today about decarbonizing shipping. Welcome Dominik.
Dominik Englert: Hello Roumeen, it's a pleasure to be with you.
Roumeen Islam: It's a pleasure to have you, Dominik, let me start with asking you why it's important to decarbonize shipping. For example, how important are current emissions from the shipping sector?
Dominik Englert: 70% of all goods in your office, by value and 80% of all the goods by volume, that we use on a daily basis are carried by ships.
Yet at the same time, the shipping sector is a significant and unfortunately growing contributor to global climate change. Producing around 3% of global greenhouse gas emissions. If shipping was a country, it would be the sixth largest greenhouse gas emitter worldwide, ranking between Japan and Germany.
Roumeen Islam: I'm so glad you put it in those terms because it helps us understand when you put it in the terms of how much a country emits.
Dominik Englert: People really underestimate the percentage of 3% but when you compare it with annual emissions of major emitters like Japan and Germany that I've mentioned, the orders of magnitude become clear, but greenhouse gas emissions are only one part of the problem. Additionally, we have air quality problems in the shipping sector and that is due to the predominant fuel use, heavy fuel oil. Shipping has a very negative impact on air quality, it produces 15% of the world's major air pollutants. In 2015, for instance, 60,000 premature deaths alone were attributed to air pollution from ships. This means we talked about sulfur emissions or nitrogen oxides.
Roumeen Islam: So, could you talk a bit more about these fuels, these heavy fuels, what are they?
Dominik Englert: These heavy fuels, we call them bunker fuels in the shipping sector. So basically, any fuel that is used by a ship is bunker fuel. And with a market share of around 80% heavy fuel oil is by far the most widespread bunker use today in the shipping sector.
If you saw it in front you, would describe it as being almost like tar, it looks like a black substance, which is so thick and sticky that you need to heat it up before you can pump it into any ship’s engines.
Roumeen Islam: Goodness.
Dominik Englert: It is a highly toxic substance that has a detrimental impact on human health and animal wildlife. Then they'll have a few other fuels. There is Marine gas oil or liquified natural gas, two other fossil fuels which make up for the rest of the global bunker fuel market.
Roumeen Islam: All right. So, as we're going to be talking about decarbonizing shipping. Let me ask you what are zero-carbon bunker fuels and why are they so urgently needed? So, how would you make a decarbonized bunker fuel?
Dominik Englert: Very good question, Roumeen. These zero carbon bunker fuels are those shipping fuels, which can provide a climate friendly alternative to the predominant fossil fuels currently used. A distinction is usually made between those zero-carbon bunker fuels, which are effectively zero. That means where the fuel is produced from zero-carbon electricity, for instance, this can be hydrogen produced from solar or wind power. Or the second option could be net-zero fuels. That is the case where the production of fuel removes a quantity of carbon dioxide from the atmosphere that is equivalent to the amount of carbon dioxide emitted during combustion. These are biofuels for example, and these zero carbon banker fuels are the only way by which the shipping sector can fully decarbonize. Improving energy efficiency in the shipping sector is also critically important, but it will not be sufficient to cut emissions substantially because the demand for shipping is expected to grow further and also therefore the demand for these fuels.
Roumeen Islam: Dominik, could you explain why energy efficiency is important to limit carbon emissions? When actually you're going to zero carbon bunker fuels, there will be no carbon. So, could you explain that a bit?
Dominik Englert: Of course, with pleasure, it is important for two main reasons. First energy efficiency helps us to bring down shipping emissions instantly. So, this means if we use wind power on ships, for instance, today, the emissions will fall tomorrow. We don't have to wait until we get these new fuels, these zero-carbon bunker fuels that are currently under development. But the most likely the even more important point is energy efficiency helps us to make the energy transition from the fossil fuel bunker fuels to the zero-carbon bunker fuels more affordable. These zero-carbon bunker fuels are likely going to cost three to five to seven times more than what we currently pay for shipping fuels and with energy efficiency, we can reduce the amount of zero carbon bunker fuels, we can minimize the amount that is going to be needed to run the shipping sector without any greenhouse gas emissions.
Roumeen Islam: And does the international maritime organization regulate any of this or have a say?
Dominik Englert: That is correct. The International Maritime Organization, the IMO, which is a UN specialized agency that has the mandate to regulate international shipping, is the key regulator for the entire sector and that organization in 2018, set itself a target.
It seeks to reduce greenhouse gas emissions from ships by at least minus 50% by 2050 compared to the 2008 levels. And nowadays many stakeholders at the International Maritime Organization, even call for completely zero emissions by mid-century.
Roumeen Islam: Now when you're considering the zero carbon bunker fuels, are you considering lifecycle emissions from the whole process? You know, shipbuilding, etcetera, or are you just considering the use of bunker fuels during shipping?
Dominik Englert: When we look at the zero-carbon bunker fuels, we usually look at the well-to-wake emissions. So, from extraction to distribution, to combustion in the shipping engine. We don't look at the emissions that are embodied, for example, in the steel that is needed to construct the vessels, that is a slight oversight. On the other hand, when you look at the entire emissions that a ship produces over its life cycle, 94% of the greenhouse gas emissions come actually from the combustion of the bunker fuel and only 6% on average are these embodied emissions that were produced while the ship got constructed or will be recycled later on.
Roumeen Islam: Could you now talk a bit about how you went about identifying zero-carbon bunker fuels?
Dominik Englert: We wanted to understand what are the most promising zero carbon bunker fuels term to date? How did we do this? We looked at existing studies on the topic, we tried to assess all the advantages and all the drawbacks of three main groups of potential zero carbon bunker fuels. We looked first at biofuels, second at hydrogen and ammonia and third at synthetic carbon-based fuels. And then we assessed these three different fuel categories against a set of environmental, economic, technical, and safety criteria. What we did in particular, we looked specifically at indicators such as the potential greenhouse gas impacts and along the full life cycle, about the scalability of these fuels, how quickly could they be upscaled and made available around the world, but also any unintended consequences of these fuels, for example, will they compete with food production, for example, or will they have other environmentally harmful effect that we didn’t consider. And of course, what is very important. We talked about ships. We talk about seafarers working on these vessels and looked at the technical and safety considerations that are very relevant in the sector. And what we've ultimately found in our assessment was that green, hydrogen and green ammonia, which can be produced from green hydrogen are currently the most promising options that we have to decarbonize shipping.
Roumeen Islam: And for the two fuels you focused on, ammonia and hydrogen. Could you speak about some of their advantages? Why were these two chosen?
Dominik Englert: When produced from renewable energy, green ammonia or green hydrogen, as I had mentioned, strike the most advantageous balance of favorable features relating to their lifecycle greenhouse gas emissions, the broader environmental factors, the scalability economics, but also the technical and safety implications compared to the others zero-carbon bunker fuel that we considered. And here, Hydrogen and ammonia are so attractive in particular, because they can first be produced at very large scale. They are also second likely to be the most cost-effective fuels that the sector can tap into. And third, they offer enhanced flexibility in their production process. For instance, ships could either use green hydrogen or ammonia, but they could also use blue hydrogen or ammonia.
Roumeen Islam: Dominik. Can you explain what the difference is between blue and green hydrogen? And also, I didn't quite understand why it's necessary to make ammonia from hydrogen. If hydrogen can be used. Why do you need both?
Dominik Englert: Let's first look at the difference between green and blue hydrogen, or ammonia. As I said, hydrogen and ammonia can both be produced from renewable energy. We talk about wind power there. We talk about solar power, tidal power, geothermal, anything you could imagine, but this renewable energy, this renewable electricity production needs to be scaled up around the world.
And that may take some time. So, there may not be enough renewable electricity available in the beginning. In this case, we have an alternative option with hydrogen and ammonia. And that is producing blue hydrogen and blue ammonia, which can be generated, manufactured with natural gas in conjunction with carbon capture and storage.
This means that we use natural gas to produce hydrogen, but at the same time, we make sure that the carbon that gets released during the production process is sequestered out of the air and securely stored underground.
Roumeen Islam: And that's going to be rather expensive.
Dominik Englert: That is an additional step that needs to be done.
On the other hand, nowadays, natural gas is a more mature technology and is still more affordable than scaling up the whole renewable energy supply chain.
Roumeen Islam: And what about ammonia?
Dominik Englert: Ammonia is so attractive to the shipping sector for a very simple reason, that is energy density. Hydrogen itself could also be used as a fuel in ships, but if ships care about one thing, then it is storage space.
They want to transport cargo. They want to transport passengers and hydrogen, using up much more storage space than heavy fuel oil for instance. If we want to reduce these advantages, these storage space requirements, we can take advantage of ammonia, which has got a higher energy density than hydrogen.
Roumeen Islam: I understand. Now, I'd like to understand better how much adjustment would be needed to use these fuels, hydrogen and ammonia. How much adjustment in the ships or in other areas?
Dominik Englert: I will say that in general, hydrogen and ammonia can both be used in modified internal combustion engines, as we find them currently on all ships which run on heavy fuel oil nowadays, and thereby only minimal modifications to existing engines are required.
And the two main ship manufacturers around the world that is Wärtsilä and MIN. They have already announced that the first commercial ammonia engines and also retrofit kits for existing engines will be ready by 2024. So, it is a mission possible.
Roumeen Islam: Aren't there other changes that will be needed for the shipping industry. I mean, to get ammonia to them. I mean, I don't know, I'm asking you what other changes might be needed.
Dominik Englert: Of course. I mean, we must set up supply chains for hydrogen, and ammonia, so that ships can refuel around the world.
Roumeen Islam: That's what I thought.
Dominik Englert: The good thing about setting up the supply chains is that some of them are already in place.
Let's take ammonia for instance. Ammonia is already a globally traded commodity. It is a key product, for instance, in the global fertilizer industry, which itself has shown a great interest in working with the shipping sector to produce, procure, and also use green ammonia on a large scale.
Roumeen Islam: That’s interesting that the fertilizer industry would be working together with the shipping industry.
Dominik Englert: We may see a very interesting alliance there. Exactly. You're right. And what I don't want to deny is that the ammonia or hydrogen supply chains around the world need to be ramped up. This means increased production, more bunkering and related port facilities.
But what I always try to convey to the people that I talk to, in the shipping sector, but also outside the shipping sector, is we can cope with this transition. We can cope with these changes. Let's just remember that shipping has already undergone two major energy transitions in the past. We moved ships from wind to coal and later on, we moved them from coal to oil. Why wouldn't we be able to transition a third time, this time to zero carbon bunker fuels?
Roumeen Islam: Yes. I hadn't thought of it that way. The historical perspective is very important. Now, you mentioned biofuels and synthetic carbon-based fuels, but you sort of dismiss them as alternatives. Why is that?
Dominik Englert: I wouldn't say that we dismissed them. We don't rule them out. We just don't prioritize them as highly as we do hydrogen and ammonia for very simple reasons. They also have a high technical potential to be used as zero carbon bunker fuels in the future. However, biofuels are unlikely to be available in the amount that we will need for the shipping sector, biofuels need to grow.
Roumeen Islam: You need land, right?
Dominik Englert: You need land. And when we talk about land, we talk about food production. We talk about food supply and there will always be a conflict of interest between these two competing demands.
Roumeen Islam: Well, when we talk about land, we're also talking about solar energy. For example, if you've got solar panels on land. So that would be another issue.
Dominik Englert: That is correct. On the other hand, the amount of land that you need for biofuels is even larger than the amount of land that you need for solar panels to produce the same amount of energy. But another reason is super simple. There will be other sectors that are interested in biofuels, like the aviation industry, for example. For them, energy density met us to a very great extent, so they may be more willing or to pay more for these biofuels than the shipping sector, for instance, and thereby also drive-up prices. And when we talk about synthetic carbon-based fuels, we simply came to the conclusion that there will be less cost competitive than hydrogen and ammonia due to a dependence, for example, of direct air capture for CO2 inputs. That's a technology that's not fully mature yet and still very, very costly.
Roumeen Islam: Let’s think about where the ammonia and hydrogen would come from because there are certain areas in the world where we get fossil fuels from. So, what types of countries would most likely be able to produce these zero carbon bunker fuels?
Dominik Englert: From our analysis, these countries that are best positioned to produce green hydrogen or green ammonia are the ones with abundant, renewable energy potential and that are very close to major shipping routes. What we expect in the future is a much more inclusive and a much more decentralized bunker fuel market in the shipping sector. In the past, you needed large oil reserves if you wanted to supply bunker fuels to the shipping sector. And that has led to a world where we see only few major bunkering hubs, such as Singapore, Rotterdam Fujairah, for example.
However, in the future, you will not need oil anymore. You’ll need lots of renewable energy resources, and that makes the much more inclusive bunker fuel market globally. And this market will also be much more decentralized. Because of the lower energy density of ammonia and hydrogen compared to heavy fuel oil, for instance, these ships will necessarily be required to refuel more often in many more countries than in the past.
Roumeen Islam: How did you assess the potential of each country? You mentioned that the distribution of resources that is, you know, fuels for shipping would be different because we're using different fuels in the future, under this scenario, right? So how did you measure the potential of each country?
Dominik Englert: We basically looked at five key criteria to assess a country's potential.
We looked first at the energy resources required. So, we wanted to understand what does the country offers in terms of renewable energy potential, or natural gas and carbon capture and storage potential that could be leveraged, that could be used to produce these fuels in the future.
Second, we also looked at the shipping volumes. So how many ships are already at the country's ports today and could be leveraged for initial demand for example. In the third step, we looked at the geographic location because this is also important. So how close is the country to major international shipping lines or to bunkering hubs that it could supply fuels to in the future? Fourth, we looked at the current and the projected regulatory framework, or to make it super simple how ambitious is the country already in terms of climate? And in the final step, we are also interested in the existing infrastructure, hydrogen and ammonia infrastructure in the country that may be there already and that will just need to be extended and scaled-up.
Roumeen Islam: How did you weight all these criteria? Did you weigh them equally?
Dominik Englert: That would be simplistic or over-simplistic. What we did is we looked at must have and nice to have criteria. And when we make this distinction, we clearly know that the energy resources required, in particular, the renewable energy potential, is a must have criteria. Without this you basically don't even have to get started to produce zero carbon bunker fuels. This is why we gave it the effect of 50% in the overall score.
Then for the other factors, shipping volumes got 20% because it clearly helps when you already have lots of vessels coming to your country that you could supply the fuels to, and geographic location and regulatory framework both got 12.5%. It is important, but it is more a nice to have thing, something that a country can overcome, if it isn't there at the moment. And the same is true for hydrogen ammonia infrastructure that we only gave 5% because the fact that you are not producing hydrogen ammonia yet doesn't mean that you can't produce it at large scale in the future.
Roumeen Islam: Yes, that's absolutely right. And what types of scenarios did you look into? Did you consider that all the countries are producing green hydrogen only, or blue hydrogen? Or how did you do it?
Dominik Englert: Overall, we developed three distinct scenarios that we applied to 218 countries that we analyzed around wrong the world.
The first one was a blue scenario, as you've just mentioned. The blue scenario means that these countries produce blue ammonia for shipping only. The second scenario was a hybrid scenario that we call the “first blue, then green” scenario, where countries start with the production of ammonia, but then very quickly move to the production of green ammonia.
Roumeen Islam: And this may be the more reasonable scenario for many countries actually.
Dominik Englert: That could be a scenario that gets kick-started in the energy transition, you are right. The third scenario then is the green scenario where countries produce green ammonia for shipping only. And the interesting thing is that our results showed that in the rankings, many developing countries appeared among those countries with high or promising potential to produce these zero carbon shipping fuels in the future, and even more promisingly, the greener the scenarios, the more developing countries appeared among those well positioned for production.
Roumeen Islam: Dominik, you just said that developing countries are well positioned for this transition. And could you explain this a bit more? How would they benefit from the switch?
Dominik Englert: These developing countries would benefit from producing zero carbon bunker fuels for the global shipping sector, because it would allow them to take advantage of a unique investment opportunity, a unique investment opportunity that is huge. It is estimated to be more than $1 trillion.
And this creates an opportunity for many of these countries to shift from currently being energy importers, to becoming energy exporters and to reap several business and development benefits on top of this. For instance, we expect that by producing zero carbon bunker fuels, these countries can also achieve their overall decarbonization and their overall infrastructure modernization more flexibly and at a lower cost.
Roumeen Islam: But what about the pure investment costs of developing these fields? Who's going to bear those?
Dominik Englert: It is estimated that the costs are going to be around $1.4 to $1.9 trillion to fully decarbonize the shipping sector by 2050. Out of these investments, 87% are likely going to go into land-based infrastructure. This means hydrogen production, ammonia synthesis, storage, bunker facilities and so on.
Only 13%, we need to be spent on the vessels. If you want to get a concrete example, these development or infrastructure costs are certainly going to vary from country to country. But in our analysis, we looked for example, at the production of green ammonia through solar energy in India.
And in order to enable India to supply a 10 to a 27% of the global shipping demand for green ammonia by 2050, an estimated capital expenditure of $150 to $400 billion would be needed.
Roumeen Islam: That’s a lot.
Dominik Englert: It is a lot, but we are looking at a very important sector here.
Roumeen Islam: Do you have another example?
Dominik Englert: We, for example, also looked at Malaysia where we applied the scenario where Malaysia first leverages is its natural gas and its carbon capture and storage potential to produce blue ammonia in the beginning, and then quickly shift to green ammonia later on. And if Malaysia wanted to cover, for example, one to 10% of the global demand for ammonia by 2050, the investments needed would be within the range of $20 to $140 billion.
Roumeen Islam: Dominik, you just mentioned some very large numbers. Let's speak about the risks faced by different parts of the industry. You've got the risks faced by ship builders, the engine manufacturers, fuel producers. So, could you speak about these a bit?
Dominik Englert: I don't want to deny that there are going to be risks to the shipping sector.
For example, the fuels uncertainty is one of these risks. We've talked a lot about ammonia and hydrogen Roumeen. However, the final fuel mix in the shipping sector that we're going to see in 10, 15, 20 years is not fully certain yet. So, what happens if, for example, some ships run on biofuels, or some others may run on synthetic carbon-based fuels such as methanol?
There's a certain demand risk for fuel producers and ship owners alike. If they invest in the wrong or in the non-dominant fuel, that is ultimately not going to be the most important one in the sector. On top of this, we've got regulatory risks as well, because so far, we don't have a regulatory framework yet that clearly defines which fuels are going to be used in the future.
Roumeen Islam: Dominik, moving on to policy, how should countries proceed on decarbonizing shipping? What sort of regulatory steps would be needed?
Dominik Englert: Countries and actions by countries would be crucial, at least in the beginning of a shipping decarbonization. Policymakers can make a difference at two levels, both internationally and nationally.
Internationally, for instance, policymakers can call for clear and ambitious policy measures and give investment certainty to the shipping stakeholders. For example, one idea that is currently being discussed at the International Maritime Organization is the idea of putting the carbon price on bunker fuels, and thereby creating a level playing field with the upcoming zero carbon bunker fuels. In that regard there's for example, an idea that is being explored, where the carbon revenues that would come from such a carbon price could be strategically channeled back to developing countries who will have more difficulties coping with transitional challenges.
For example, these carbon revenues could then be used in developing countries to develop supply chains for these green fuels or to modernize and decarbonize developing countries overall energy and transport infrastructure in general. But also, at a national level, governments can become active and take concrete measures.
Several of them have already started now to proceed with first pilot and demonstrator projects and try and actively seek to support this strategically through, for example, providing guarantees, fiscal incentives, subsidies, or leveraging back green procurement power in order to de-risk the first movers that already exist in the sector.
Roumeen Islam: And what do you think would be the immediate next steps?
Dominik Englert: I think that moving forward we need to see progress on two major fronts, the ones that I've already outlined, the pilot and the demonstrator projects and the support to clear and effective policymaking. What we need is by 2030, we need, according to experts, 5% of the global shipping fuel mix to be zero carbon bunker fuels.
And in order to make this happen, in COP 26 in Glasgow, the big climate conference, 22 countries already signed up to the so-called Clydebank Declaration. They committed to establish at least six green corridors by 2025. But also, in terms of policymaking, we are actively looking at the potential of carbon pricing to disincentivize the use of fossil fuels, to facilitate the use of the zero carbon counterparts, and to strategically use these carbon revenues from such a market-based measure to enable a just and equitable transition in the sector where we can make sure that no countries are left behind.
Roumeen Islam: Thank you very much, Dominik. That was very informative.
Dominik Englert: A real pleasure. Thank you for having me.
Roumeen Islam: Well, listeners, what did we learn today? Firstly, there are a number of potential zero carbon fuels that can be used in shipping appear to be ammonia and hydrogen at this time. Secondly, there is uncertainty regarding the eventual fuel mix that will prevail. In this situation, fuel producers and ship owners maybe are hesitant about investing in one or another of the technologies.
Regulatory and financial incentives are maybe needed if countries wish to encourage investments in fuels, infrastructure and vessels using zero carbon fuels. Shipping has already undergone two transitions. First from wind to coal power and then from coal to fuel oil. This one promises to be the next one.
Thirdly, analysis indicates that producers of the new fuels are likely to be much more dispersed around the world. Many emerging and developing countries have the opportunity to become hydrogen and ammonia producers.
Finally, were the maritime industry to impose a carbon tax on shipping, it would be important to consider the distributional impacts of the transition and use revenues to support a just transition. Thank you and bye for now.
Roumeen Islam: Well, listeners, what did we learn today? Firstly, there are a number of potential zero carbon fuels that can be used in shipping appear to be ammonia and hydrogen at this time. Secondly, there is uncertainty regarding the eventual fuel mix that will prevail. In this situation, fuel producers and ship owners maybe are hesitant about investing in one or another of the technologies.
Regulatory and financial incentives are maybe needed if countries wish to encourage investments in fuels, infrastructure and vessels using zero carbon fuels. Shipping has already undergone two transitions. First from wind to coal power and then from coal to fuel oil. This one promises to be the next one.
Thirdly, analysis indicates that producers of the new fuels are likely to be much more dispersed around the world. Many emerging and developing countries have the opportunity to become hydrogen and ammonia producers.
Finally, were the maritime industry to impose a carbon tax on shipping, it would be important to consider the distributional impacts of the transition and use revenues to support a just transition. Thank you and bye for now.