Shipping has a plan to go green, but will it work? With Jo Friedmann and Junlin Yu

*This transcript was generated using AI and may contain inaccuracies. * [Music] This is Let's Talk Energy, your go-to podcast for smart energy insights. I'm your host, Noah Brener. And each week, we're bringing you an inside look at the dynamics shaping global energy markets through in-depth conversations with our own Rystat Energy experts as well as some special guests. In today's episode, we look at the contentious and ever evolving plan to clean up the global shipping industry. Shipping is a vital part of the global economy with 80 to 90% of global trade traveling by boat in # 00:35 some way, but it's also a major source of emissions accounting for two to as much as 3% of the global total. And it's one of the hardest sectors to electrify. Now, shipping's governing body, the International Maritime Organization or IMO, has laid out an ambitious plan to incentivize ship owners to hit net zero emissions by 2050. But as with all of these proposals, the devil is in the details. The IMO is due to meet starting on October 14th to vote on the plan, but is coming under increasing pressure from the Trump # 01:10 administration, which opposes the proposal and has threatened an array of tariffs, port duties, and even visa restrictions on those countries that support it. So, will the IMO's plan, as it's laid out today, push the shipping industry into a greener future without adding too much cost for ship owners or consumers? Which fuels could be the winners in the race to provide lowcarbon alternatives? And how could ship owners choices impact the broader market for those fuels? And finally, can the # 01:41 proposal overcome US opposition to pass? And what happens if it doesn't? To help us find the answers to these questions and more, I'm joined from Oslo by two leading clean shipping experts in our analysis division, senior vice president Joe Freriedman and Vice President Jun Yu. Joe Shunlin, welcome to the program. Thank you, Noah. Thank you, Noah. Let's talk energy. So, in as few words as possible, what is the goal of this IMO proposal and exactly how does it propose to achieve that? # 02:15 The shipping is responsible for two to 3% of the global emissions already. Almost the entire fleet is still running on fossil fuels. So basically the purpose of this IMO nezero framework is to help shipping industries to reduce its uh greenhouse gas emissions with the aim to re uh achieve netzero uh emission targets by 2050. And then to be able to to make that happen and then the netzero framework has proposed a combination of technical measure and also economic measure. uh on the technical side and # 02:48 then it has a a it basically consists um two tiered compliance system that has a direct compliance target and also a base target. How this works is that uh if the fuse burned on your vessel has a a greenhouse gas intensity below the direct target then you are good you're complied with the regulation then you can also even potentially generate some surplus units but then if your uh greenhouse gas intensity is above the direct target that will incur some remedial units and this is when the economic measure comes into place then # 03:25 that means you need to pay penalty for those remedial units. And the reason why they want to have this penalty is basically to make those fossil fuels more and more expensive and financially forcing ship owners to uh switch to cleaner fuels such as green ammonia or green methanol. And uh what we also should remember is this framework is not just about penalizing uh conventional fuels but it's also about incentivizing the adoption of clean fuels. Um so how that works is the penalty they collected # 03:56 they will form a nezero fund and then partial of this fund they will use that to reward those clean fields but then of course they have set up some standard for those clean fields who should be really qualified to receive those rewards and they haven't really determined how they exactly reward will work yet but uh but many ship owners producers are looking forward to have more clarity on on that. I know both of you have been crunching the numbers on this and and so what do we here at Ricead Energy think about this and how # 04:29 maybe do our views differ from from consensus from what else is out there? Decarbonizing the maritime sector is a ecosystem challenge and in many ways the the pace of the shipping transition will be very much dependent on the pace of the global energy system. How fast can the global energy system move from using fossil fuels to renewables? Uh and therefore we think that you know we in riser energy we're quite in a unique position here to analyze the impact of the IMON net zero framework. you know we # 05:03 have a a large um analyst organization that covers you know all the primary energy sources and we look at how this trickles through to all the different end sectors which gives us then the ability to look at the shipping transition in the context of the broader energy transition. Um just to give an example currently in the ton miles in shipping 40% of that is related to energy shipping and over time and this this means that um you know those vessels that transport crude oil products coal over time that tone mile # 05:38 demand has to go down with the global energy transition. However the pace of it will it will depend on the on the how fast the global uh energy transition is happening. But on top of that there's many other moving uh targets and you need kind of data and analysis to look at that and for instance the production capacity of bofuels or synthetic fuels or what is the shipping uh the sector competition shipping is facing from other types of industries such as uh road transportation and aviation and # 06:08 also how are the cost of these alternatives uh alternative fuels evolving over time is uh important. So we try to take all of this into consideration to evaluate the the imon zero framework could be some some uh challenges of meeting the IMO emission trajectory towards 2050 and there can also be some kind of unwanted consequences of of doing so. One thing people tend to overlook in the market is about the fleet readiness. So basically except the bofuels you do need actually vessels that equipped with # 06:43 those specific engine to run on those fuels and that's people tend to forget that and to to be able to build those vessels it will take time investment and also yard capacity. So from for example our yard analysis site we see that the most of these advanced shipyards in South Korea and China are already over 90% utilized and then it also take a couple of years to build those vessels. One more thing is also about engine side from the engine manufacturing or till all the shipyards get the license to be # 07:15 able to build they need to test and test it properly everything works then they can scale the production. So that process also take one to two years and our maritime energy transition we see that by 2035 if you want to achieve net zero to try to follow this net zero trajectory it would take around 50% of the global fleet to run on those clean fuels and then that means we know also know that the bofuels are a bit limited so the majority of those fuels or vessels needs to be equipped with those engines given this time frame from now # 07:50 to 2035 will really the yard capacity to be able to build that many vessels is a is a big question uh also in the in the market. So I mean there's both an ecosystem of the shipping industry that needs to evolve as well as a broader energy ecosystem that that needs to enable that as well. Um so can the proposal achieve its goals do you think? I mean what are the strengths and where might there be maybe some some weaknesses? I guess the the one the one main strength here is that the shipping industry has one # 08:23 global regulator which is the IMO and the net zero framework it gives the whole industry a very clear direction that you know if you continue to use fossil fuels you know it will be expensive it should come a cost of polluting and I think also the framework already has quite a broad uh kind of a broad backing and the industry sees that you know it's the decarbonization is gaining momentum uh we see you know new technology ology developments. We see infrastructure rollout. We see companies that are reducing emissions either by # 08:54 root optimization. They invest in uh emission reduction technologies or they have already started to use alternative fuels. I think many of the companies that or many of the countries that are voting for the regulation they realize you know it's not a perfect uh regulation. It is kind of understood that this can be refined over time and uh also kind of realizing that not adopting the net zero framework can maybe just add on uncertainty and uh the uncertainty will then grow further and then the whole transition will be 09:25 postponed. One other strength I want to highlight is is what Julian also mentioned that you know there is a um a thinking here there should be some revenue distribution. So, so the IMO fund will collect penalties and revenues and then allocate this some share of it at least to developing countries making sure that developing countries can take part in the transition because there will be some additional uh trans transportation cost of this as well because the fuels will get more expensive. Give a little bit of context. # 09:53 We have looked at our kind of house view scenario. We have also looked at the uh what if the IMO trajectories are met. So we have like a net zero um uh trajectory that we looked into as well and and then we have identified some some weaknesses I guess in in both scenarios when you look at the data and how we did we really stress the test different scenarios we do see some some risks from this nezero framework. So the first one is if the nezero trajectory is followed that means if there are enough actually # 10:24 fuels to supply to the shipping industry ready for the shipping companies to use but then that also means they will have a lot of surplus units in the market. So know I remember in the beginning I mentioned about if you are complied with the targets you can generate some surplus units. So the the trick here from the framework is that it allows the ship owners if they are they have the this remedial tier 2 remedial units they can purchase surplus units from the market to offset these uh remedial units ## 10:53 without paying penalty to the regulation. So then from what we see is in this scenario there will be enough surplus units to almost completely offset this remedial uh this tier 2 remedial units. Then if of course of course if we assume the market is operated at the full efficiency and then the consequence of this is that it will be only tier one penalty will be collected and that number is less than 10 billion USD per year and based on the amount that is really used uh with this clean fuels used is not enough to reward # 11:27 those fuels. So this is a very key message that then that means this framework is contradicting to the nezero goal they have set if you want to achieve that and you want to reward but the penalty mechanism you have set up is not enough to really reward those fuels and we know that nowadays is this production cost of those especially synthetic fuels are really high. So um you would still need the reward to bridge the cost gap between those um fuels and the fossil fuels even after the penalty after the surplus units # 12:01 trading revenue. So then then if the that part is not there then that means fuel even the fuel is is enough ship owners will feel like okay it's too expensive for me to use and because regulation is not really helping me to bridge the cost then maybe we will not really adopt it. So that's that's the first risk and the second risk is also from our house view when we look at it from more realistic scenario that Joe mentioned in the beginning with the whole energy system so many factors # 12:29 influencing this and then we see that it will be a quite slow transition in the beginning then that means the amount of clean fuels is not as much as in the nezero scenario and then the penalty being collected from those non-compliant fuels will be quite substantial. So that's like started from around 12 13 billion um USD in 2028 already and then uh reached to over 90 billion USD in 2035. So that's quite big numbers and if decided to to say reward 300 USD per ton of CO2 equivalent to those clean fuels # 13:06 uh every year then our calculation shows that the cumulative fund balance in 2035 can already reach to 160 billion. to just give like a context of this fund size and it's already already equivalent to a small country's GDP. So that means we don't want this Nazer framework suddenly ending up like a money collector to just collect a lot of money on hand without really rewarding to to to the industry because it's just a very niche sector or those f manage to receive that especially with a with a # 13:39 requirement they have set on those u uh few who qualify to receive the reward. So really we need to make sure that we align the the rewards and the penalties in such a way that it actually enables and incentivizes clean fuels use rather than just being a kind of a a penalty system that that ship owners maybe pay into but don't actually shift shift the choices that they're making with regards to their fleet. Um now we've talked a little bit about the house view. I just wanted to let all our listeners know if # 14:06 you'd like to know more about that. We did talk about our overall house views um in an earlier episode. So, please check out uh our episode list um after this program. But I want to ask I mean if you could make a recommendation about how to to make this proposal better, what what would you recommend? What what should the IMO do to make sure that that those rewards and penalties do actually lead to to change? It's a very very difficult questions and IMO have to really consider so many things. So but but we can of course uh # 14:36 from our research we can provide some views what we see from uh the current framework. So the first thing what we have observed is the ship owners are really cautious to make investments. Now for example to invest some some uh new alternative fuel dual fuel uh vessels or go to local long-term fuel agreements to with some uh fuel producers. Especially compared to the year in 2023 that the momentum was really high and now is actually ship owners are very cautious and at the same time fuel producers also # 15:09 struggle to really get the long-term firm offtake agreement from the ship uh shipping companies. The main reason for this is actually there are so many uncertainties for regulations and the different policies and mozzar framework uncertainty is a very large uh factor here. uh for example how the reward mechanism is actually going to work how bofuels is going to be adopted will it be book and claim or will the mass balance mechanism there's a lot of uncertainties and then the industry is waiting for clarity to to take actions # 15:43 so then I would say the first recommendation is IMO should maybe try to reduce uncertainty as much as possible to give more clarity to the market so people can actually start to take uh take some actions instead of slowing down the transition and also the second one is IMO maybe should do more realistic assessment on just say how how how possible it is to achieve its target just given all this yard capacity constraint bunker infrastructure constraint fuel supply constraint so it's like many of these factors so just # 16:19 try to make make a little bit more realistic target uh otherwise you could ending up either you become a money uh collector or it become it's like not really enough incentive for the shipping industry to offtake those green fuels. That's like the the main recommendations that we we we have for for ammo so far. Let's talk in a little bit more depth about those fuels. We've mentioned them um a few times and there there are a number of them and so what are the implications for fuels here? You know, # 16:50 could the decisions of the shipping industry actually have ripple effects for the producers of these these cleaner fuels? whether it's bofuels, e-ules as you've mentioned. Um what could could some of the the outcomes there be? If this regulation is being passed then then it will have major implications on the on the fuel market within shipping and the adoption of alternative fuels like ship owners has the tendencies to pick whatever is cheapest. So without any regulation you know I guess it will # 17:16 be kind of status quo and continue on fossil fuels. uh but this sector is is currently burning around 300 million tons of uh fuels per year. So it's quite substantial and it's mainly fossil fuels. We now expect to see a more clear shift towards uh alternative fuels uh and that will of course have a ripple effect uh for the whole fuel market and hopefully it will unlock uh some of these green fuels investments that you know the shipping industry is looking for. Many classify shipping as a # 17:46 hardware bait sector. I think we would argue that shipping is uh actually quite easy to decarbonize because you have so many fuels to choose from. So you mentioned some of them, right? But uh yeah, the synthetic fuels, there's a lot of talk about uh those also referred to as e- fuels because they have very low uh carbon footprint. So of course they get a lot of media attention and that's like e- ammonia, e-methanol, elg. Um but currently these are maybe around three to five times as expensive as # 18:14 conventional fuels. So what what we see in our analysis is that that maybe the IMO will not be able to reward uh what is needed to to bridge the cost gap between these e- fuels and conventional fuels in the near term. However, a little bit more in the longer term when you see the increasing penalties will penalize fossil fuels more and also you will will see the production cost of these uh synthetic fuels come down due to learning curve, economies of scale etc. There will be a point where where # 18:43 these fuels will be competitive but we maybe see that more in like in the 2040s rather than you know very soon. Um but then you have as you mentioned bofuels you have um different types there as well biodiesel biomethanol biog and we see that those fuels under the current framework and under certain assumptions actually can be very price competitive with conventional fuels already from 2028. Uh so then the limitation there is more about can we actually get access to these fuels because there will be some # 19:17 limitations. For instance for biodiesel you will have uh the feed stock availability will always be a concern uh and then you will have very strong sector competition particularly from aviation and road transportation. So even though boules can be a great solution for shipping we see that you know it it can be a little bit limited on how large share of the fuel mix they will they will make up. Uh then you have um conventional LNG um can also be a competitive solution in the IMON uh framework uh with some risks around the # 19:51 fuel. But uh um when we're looking at the the current order book of what companies are ordering u and for those that are dual fuel then we see that LG is by far the most popular uh option. And within those alternatives, perhaps an evolution, not necessarily, you know, proposal passes, flip a switch, things change, but but perhaps an evolution of of what would be most most competitive. So, you know, we've talked about um we've talked about some risks, we've talked about the evolution needed within 20:19 the market, but you if I'm a ship owner, what is it that that would keep me awake? What is it that I'm laying in bed wondering about um with this regulation? uh as we run up to to the meeting the main three things we have observed is first is to see okay the ship owners will think should we act or not and it requires so much investment and then what should we do because then they are waiting so the the first question is should we act or not and then the second question is you see some ship owners # 20:49 maybe already plan to take some actions but then like okay what should we do should we stick to bofuels should we uh go for ammonia dual fuel vessels should we for methanol dual fuel vessels and then those are very expensive and then that will trigger the third question is like okay will there be enough really reliable supply for me in the market uh to for for my ships to run in the future will the regulation manage to actually help me to bridge the cost gap because you don't want to invest this into some # 21:20 heavy or um expensive vessels but then you don't have enough fuel or suddenly the fuel cost is very expensive that cannot really let you prof make any profit. Right? So that's like the main things that the ship owners are really uh concerning uh right now. That's that's what we see. So it sounds like there's quite a bit there to consider. Quite a bit to keep you up at night if if you're a ship owner, but what about consumers? I mean I we've used the term expensive a number # 21:47 of times throughout our conversation and and 80 to 90% of global trade is is touching the shipping industry um at some point in its transit. And so uh do consumers need to worry about costs going up? Global shipping already transport 80 to 90% of the goods. So it's a very efficient transportation um um logistic and then that means if of course it will be more expensive. It comes with a cost no matter if you go to go for clean fuse or fossil fuels with a penalty it will be some higher cost. But when you break # 22:20 that cost down to each product, for example, is your your sneaker or or your headphone, the cost will be very marginal. But of course, you will depend a little bit on the exact cargo. Uh maybe for some industries who are heavily relied on on this uh um shipping and then that's a big cost of the whole cost picture that might have some some impact. But I will say for end consumer related to for some retail goods you will not really have so much impact compared to the impact to ship owners to fuel producers or to bunker # 22:53 infrastructures. So ship owners probably will continue to lose a bit of sleep over this. Consumers you should rest easy. It's probably the least of our inflation worries at this point. But um Joe, you know, you mentioned earlier in the conversation that that this has pretty broad support. I mean the IMO's net zero framework the draft proposal was initially passed with I think it was 63 countries voting in favor um some of which are are major shippers um 16 countries voted no and then 24 abstained but we have seen this # 23:22 regulation um from US President Donald Trump um and he has actually threatened you know everything from port duties to to additional potentially tariffs um you know if countries support this and so what is the outlook for for passage uh at this meeting coming up here. Yeah, as you say know I mean the initial proposal almost had 80% uh support around 80% that voted in favor and US kind of pressure here um can add some uncertainty leading up to the MPC October meeting but uh I still think it's possible that this will you know be # 24:02 approved. So I I guess in general um many in the industry believes that this will be adopted and you actually don't only need twothirds uh of the countries voting for. So you have some kind of leeway compared to the last meeting. Um and I think what many are kind of uh realizing that it's better to have a global regulation uh it gives more clarity to ship owners, fuel producers uh to investors in general uh than to have a more like a fragmented u regulation for the shipping industry. So # 24:38 I still think it's positive even though you know the US has definitely add some additional uh risks before the the October meeting. You know, I I mean, I think you've obviously painted a picture of fairly broad support, but I mean, what happens if if this doesn't pass at the upcoming meeting? will most likely happen is that you know the the pace or the momentum of the transition that we have seen in the shipping industry already will slow down and uh I would add maybe even more uncertainty than we # 25:08 than the industry is already facing and then this can happen like for a prolonged time and as you pointed out that uncertainty one of the the key things that that's keeping ship owners up at night then that's preventing the investments that that are needed um but you know what about this as a framework I mean as we've said shipping is a difficult industry to electrify um and is you know oftentimes considered hard to abate but um could this be perhaps a framework for for other industries? Is is there # 25:36 applicability to to some of these other industries that that have uh struggled to electrify or maybe aren't right for electrification? the fact that this has a global scope targeting a whole industry and it's a international industry and then you have other industries that kind of are a little bit similar in the same way as aviation uh cement industry, steel industry, chemicals and then also the framework is uh kind of technology neutral. So you know we enforce some uh emission intensity targets and it's up to the # 26:07 industry to decide what is the best pathway forward. you don't try to enforce one one fuel or one solution on the industry which is something that can can also be applicable to other industries. I think we are also in the favor of this mechanism that you know the you collect uh money into a fund that can help developing countries to also uh embrace the transition. But the question is uh how easy this is to implement in other industries. I mean you have a global regulator in aviation but you don't have that in for instance # 26:38 in steel or in uh in chemicals. So then how do you kind of enforce it on a global level when you don't have a global regulator? I guess that is uh that is a bit more uh difficult even though there are some risks there are some maybe potential consequences with it but that's that's something that IMO should really sort of uh uh grounded to realistic assessments of those scenarios really stress test and to give the best way or best design this framework to really uh support energy transition or maritime decarbonization # 27:13 in practice not just in principle And also this is a really good initiative not just only for shipping to decarbonize it's a benefit of of everyone on the planet right so if we already have like a global regulator that's that's sort of a privilege almost for this industry to be able to enforce something uh like this well and it addresses what's been a major criticism of of the transition and the way that we've gone about it which is that it leaves behind those countries that are not as developed. Um, and so # 27:43 this is one interesting way to to try to remedy that. But Joe Jun Linn, it's been a really great conversation. Thanks for helping me unpack um a pretty complex issue. Thanks for joining us. Thank you. Thanks. Thanks for having us. Let's recap. Decarbonizing the shipping industry is possible. But it's not just about the ships. It's about the entire energy system. The transition depends on clean fuel production. It depends on infrastructure. And it depends on global coordination, not just new engines in # 28:12 the vessels. Second, the IMO's net zero framework is a strong step, but the design of it matters. If it's too rigid, it risks becoming just a system of penalties instead of actually driving clean fuel adoption. It needs to reduce uncertainty and incentivize investment if it's going to work. And finally, time, capacity, and clarity are the bottlenecks here. Ship owners are caught in uncertainty. Which fuel should they choose? When should they invest? Will the supply that they need be there if they do invest? # 28:46 And meanwhile, shipyard capacity and fuel production capacity need to scale up dramatically to meet these targets. Thanks for listening to Let's Talk Energy. This podcast is a Ryad Energy production produced by Lara Rodriguez Scog and Ba Oak. Check out the show notes for further analysis of the topics we've discussed today. And connect with us on social media. We're Ryaden Energy on all your major platforms. While you're there, click that like button, leave us a review, and subscribe. # 29:18 can also keep up to date on our website. And if you'd like to send us a question or have some comments about what we've talked about today, please reach out directly. We're podcastenergy.com. And most importantly, don't forget to join us next week for Let's Talk Energy.