New fuels to decarbonise the shipping industry

The shipping industry aims to reduce its total annual GHG emissions by at least 50% by 2050 from 2008 levels, according to a strategy adopted by 173 nations in 2018.¹ Reaching this target will be crucial: if business continues as usual, the International Maritime Organization (IMO) forecasts that emissions from shipping could soar by as much as 130% over the next three decades.²

The IMO has announced new mandatory technical and operational measures that are due to start in 2023. Existing and new ships equal and above 5000t Gross Tonnage need to gradually reduce their carbon intensity. An annual carbon intensity rating will measure emission performance relative to the previous year. Corrective actions will be needed for low-rated ships.

Along similar lines, in its “Fit for 55 Package”, the EU has unveiled several proposals based on the polluter pays principle. These will have a significant impact on ship operators. For example, by including the maritime sector into the Emission Trading System and by newly taxing bunker fuel, operators of carbon-intense ships will be impacted more than ships using low-carbon alternative fuels.³ Expectations of all stakeholders involved in facilitating the transition – including insurers – are on the rise. Several insurers have signed the Poseidon Principles for Marine Insurance and committed to assess and disclose the climate alignment of their hull and machinery portfolios. This is one the first concrete actions targeted as measuring the carbon intensity of underwriting portfolios.⁴

With the anticipated growth in shipping activity over the coming years, it is estimated that a 50% cut in absolute emissions is equivalent to a real-world reduction of about 85% in operational CO₂ intensity.⁵ The key to decarbonising the shipping industry will be to switch to low-carbon fuels that can be produced in sufficient quantities and at a reasonable price. While zero-emission vessels must enter the market by 2030 at the latest, at the current point in time, alternative fuels with most potential such as green ammonia, green methanol and green hydrogen, are not yet readily available.⁶ Switching to these new fuels on a large scale will require adaptation of both the ships themselves and the associated refuelling infrastructure, and ramping up supply of the chosen fuels. To advance the transition, insurers need to prepare to cover the risks involved with the introduction of the associated new fuels and technologies.

Take refueling, as one example. Refueling of cargo vessels, referred to as “bunkering”, at present poses known risk. Refueling with alternative fuels such as hydrogen could pose new challenges and dangers that insurers would need to consider.⁷ In the case of hydrogen, tanks needed to store hydrogen must be strong enough to withstand intense pressure. Hydrogen is highly explosive. While the risks are new, insurers will have limited loss experience and data points for the alternative fuels in the sector.

The transition of the shipping industry and related infrastructure will present new opportunities along the entire insurance sector value chain. However, insurers will have to carefully consider the associated changes in the risk landscape. Contributing to the understanding of advantages and risks of individual new technologies will also advance the industry’s emission reduction efforts.