IMO GHG Strategy Revision: How Investors Can Push the Needle
by Deanna Coleman and Dana Rodriguez
Maritime shipping occupies a central position in the global supply chain: nearly 100,000 commercial vessels move 11 billion tons of goods each year, accounting for about 90% of global trade volume. Responsible for approximately 3% of global GHG emissions, the maritime industry is currently not on track to play its part in achieving the Paris Agreement target of 1.5 degrees Celsius. However, the critical discussions at the International Maritime Organization’s (IMO) 80th Session of the Marine Environment Protection Committee (MEPC) have potential to turn the tide, accelerate the sector’s energy transition, and unlock opportunities for the industry and its investors.
“Chicken and Egg” Dilemma
The decarbonization of the sector rests largely on the commercialization of zero-carbon fuels and technologies for ships. However, the sector currently faces a “chicken and egg” dilemma: shipowners won’t invest in clean ships without sufficient fuel supply, but the industry is reluctant to invest in zero-carbon fuel production until a significant number of ships have been ordered. Robust policies and stringent regulations incentivizing the use of cleaner fuels have the potential to solve this dilemma.
A key to solving this dilemma lies with the IMO seeking to strengthen its Initial Strategy on the reduction of greenhouse gas emissions from shipping, through negotiations at this summer’s MEPC. The successful adoption of a revised Strategy has the potential to level the playing field for fuel producers and ship owners interested in accelerating the uptake of zero- and near-zero carbon fuels and technologies. The finance community currently has an opportunity to help push the needle and shape the outcome of the negotiations and accelerate the sector’s decarbonization.
Heading into IMO Negotiations
The upcoming negotiations at IMO’s MEPC 80 are an opportunity to address this dilemma, stimulate demand for cleaner fuels, and significantly reduce the sector’s emissions through the adoption of policies and regulations that include ambitious decarbonization targets and the procedures to achieve them, through operational as well as mid- and long-term measures.
To ensure the maritime shipping sector is both aligned with the Paris 1.5°C goal and stimulates the clean energy transition, the IMO must agree on the following:
- The full decarbonization of the maritime shipping industry by 2050 at the latest. It must also develop practical and cost-effective pathways for the maritime sector to be in line with a pathway that limits global warming to no more than 1.5°C.
- Ensuring the adoption of 1.5°C-aligned1 interim targets for 2030 and 2040 to motivate investment in low- and zero-carbon fuels. This also reduces ambiguity and increases the uptake of existing efficiency measures promoting a first-mover market that can stimulate the energy transition.
- Explore adoption of a robust policy, including a market-based measure (MBM). While IMO member states are unlikely to agree on the detail of these measures at MEPC 80, it can set a clear path towards a strong MBM (such as a levy) and a technical element (a fuel standard) which will work together to reduce the cost of decarbonization and increase confidence in the required investment into zero-carbon fuels over the next couple of decades.
- The adoption of a full life-cycle approach to emission policies that offer a path to truly sustainable fuels. Full life cycle, or ‘well-to-wake’ emission accounting ensures that both the upstream (production, processing, and delivery) and downstream (on board) emissions of fuels are accounted for in regulations. Current regulations only consider emissions that occur on board (‘tank-to-wake’). By adopting a life-cycle approach to emissions accounting, regulations can identify and promote the use of only the cleanest fuels, providing clarity and confidence for investors and industry in what will be the fuels of the future, all while minimizing the risk of the shipping industry’s further negative impacts on the climate.
Opportunity for Finance Sector
As Member States agree on a Revised Strategy, investors are key to help push the needle for more ambitious decarbonization policies. Shipping is a capital-intensive industry, and most maritime shipping providers rely on external capital obtained via loans, equity, or bonds, providing investors and lenders with an opportunity to encourage action toward a transition.
The following are examples of how investors can take action ahead of IMO’s revisions:
- Prepare for new, upcoming regulation. There could be implications for investments in shipping companies and those that rely on shipping services, potentially affecting the way the market values them. Likewise, companies that are relatively well positioned could benefit from more ambitious regulations.
- Weigh in on Member State position. All Member States have an equal voice at IMO, this means that every country speaking in support of ambitious action will have a positive impact on the Revised Strategy. Member states need to hear that there are investors who can unlock finance if IMO were to agree on high-ambition targets.
- Encourage portfolio companies to be ready for these changes. Engaging with these companies – maritime shipping providers and maritime shipping users included – may help them develop strategies that reflect the revised ambition from the IMO.
- Direct investments toward clean shipping. This will indirectly give a signal to policy makers on the finance potential to stimulate the industry. Promoting the emerging alternative fuels and technology industry will provide a clear indication of the shipping industry’s future.
The finance community has an important role to play in supporting industry-wide decarbonization. Strong policies are critical to accelerate the production and use of zero-carbon fuels. By supporting IMO’s efforts to revise its Initial GHG Strategy with ambitious market-based measures and technical fuel standards, the finance community can help the shipping sector escape the “chicken-egg” cycle and realize value from the clean energy transition.
1 Interim targets defining a pathway of GHG reduction consistent with avoiding temperature rise above 1.5 degrees Celsius by 2100: https://www.un.org/sites/un2.un.org/files/high-level_expert_group_n7b.pdf