Economic incentives for sustainable shipping?

Elina Kari,
Specialist,
Wega Group Oy,
Finland

Hermanni Backer Johnsen,
Seconded Expert,
Northern Dimension Partnership on Transport and Logistics (NDPTL),
Finland

The recent 26th UN Climate Change Conference of the Parties in Glasgow highlighted again the pressing need to reduce greenhouse gas (GHG) emissions from transport, including international shipping. The share of shipping emissions in global anthropogenic emissions is about 3% and the emissions are predicted to increase in a business-as-usual scenario. This figure appears small but corresponds to nearly six times the combined total emissions of the Nordic countries of Denmark, Finland, Iceland, Norway, and Sweden – countries with a high standard of living and a total population of 27 million people. In 2018 International Maritime Organization (IMO) agreed to reduce the total annual GHG emissions from shipping by at least 50% by 2050 compared to 2008 levels.

The European Commission launched in July 2021 the ‘Fit-for-55 package’ of proposals to reduce the EU’s total GHG emissions by 55% by 2030 as a step towards the full EU decarbonization by 2050. As a part of the package, shipping will face new stringent EU regulation and there will be an ambitious target to cut emissions. Shipping is proposed to become subject to the European Emission Trading Scheme (ETS) from 2023 onwards. The new FuelEU Maritime regulation drives decarbonization of international shipping as well as fuels and energy sources used onboard. Alternative Fuels Infrastructure Regulation will require onshore power supply in the ports. Further, the ongoing revision of the Energy Taxation Directive is proposing to remove the tax exemption for conventional fuels. Reaching these targets will require investments in innovative technologies and alternative energy sources in maritime transport.

Within our own Baltic Sea region, the maritime traffic is intense with further growth predicted – but here, the industry is also the world leader in sustainability. Despite increasing shipping activities, the CO₂ emissions have, according to research, decreased by more than 6% during the past decade. This increase in energy efficiency of the Baltic Sea fleet indicates that the actors in the maritime transport sector of the area are motivated to reach the emission targets. The positive developments in the Baltic Sea region are also the result of the relatively diverse palette of economic incentives for sustainable shipping available in the region. A broad definition of such economic incentives includes governmental and EU support for environmental technology development and deployment as well as environmentally differentiated operational fees (e.g., reduced port or fairway fees, taxes, and emission trading).

A key role of economic incentives is to secure R&D funding and financing for new environmentally advanced ships. While operational measures and retrofits have a significant role in reducing emissions of existing ships, the overall environmental impact of maritime transport is mainly determined by the choices made at the design and commissioning phase. As ships tend to have long life spans (25-35 years), it is crucial to incentive the most efficient choices to be able to meet the global environmental targets. When incentivising the decarbonization of maritime transport, the focus should be on long-term solutions, such as on new innovative and more sustainable propulsion systems of newbuilds.

The deployment of innovative technology on a large scale requires investing in solutions which may be promising but high-risk for financiers. Investment risk is often defined as the probability or uncertainty of losses rather than expected profit from investment. Business operators, as well as commercial banks and international financing institutions tend to view these profits and losses purely in terms of monetary value. However, regulators should also see risks of investments to modern ships in terms of how likely they are to deliver the desired policy outcomes, such as reaching the Fit-for55 targets.

The current EU Multiannual Financial Framework 2021-2027 provide several funding programmes to support the R&D, innovations, and investments in sustainable shipping. For example, the Horizon Europe is the research and innovation framework programme, the Connecting Europe Facility supports the trans-European networks and infrastructure and the Innovation Fund, with a budget coming from ETS, focuses on the demonstration of innovative low-carbon technologies. Regional funds such as Interreg or the NDPTL Support Fund provide opportunities for preparatory steps and pilots.

Major transitions in the history of shipping (sail to coal/diesel, containerization) have required substantial leaps of faith. In our times the field of EU, regional, and national co-funding for maritime transportation should look beyond modulations of old ways of doing things – by testing innovative concepts in practice.

Expert article 3112

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