The challenge of financing green shipping

Daniel Metzger,
External Doctoral Candidate,
Hamburg School of Business Administration & Helmut Schmidt University,
Germany

Associate,
Aquila Clean Energy EMEA,
Germany

Orestis Schinas,
Dr-Ing, Professor of Shipping and Ship Finance,
Hamburg School of Business Administration,
Germany

Founding Partner,
HHX.blue,
Germany

Rising sea levels and recent extreme weather events made global warming visible for everyone and put the fight against climate change on the agenda of international politics. In the past, the majority of the members of the United Nations (UN) committed themselves to treaties, such as the Kyoto Protocol and the Paris Agreement, while the latter explicitly excludes maritime shipping. The Member States of the International Maritime Organization (IMO), a body of the UN, agreed on their own emission reduction goals and a strategy to achieve those. According to a study prepared for the European Parliament in 2017, shipping is projected to account for approx. 17% of the global carbon budget available in 2050, if no material counter measures are applied. This makes the maritime sector essential for the fight against climate change.

The IMO strategy foresees to half the greenhouse gas emissions by the sector in 2050 against 2008 levels. In the light of expected global economic growth, these goals are ambitious and inter alia require substantial investments into new technologies, new ships, and retrofitting of existing ships.

Some of these technologies require further research, such as ammonia and hydrogen, while other technologies, such as innovative wind propulsion devices are ready for deployment and have already started to gain momentum. Depending on the wind-assisted technology installed, the annual emission reduction potential of CO2 ranges from the encouraging 8-14% to the promising of 30-35%. Considering that North Sea and Baltic regions have abundant wind potential, the WASP (Wind Assisted Ship Propulsion) project, funded by the Interreg North Sea Europe Programme, part of the European Regional Development Fund (ERDF), aims at bringing together researchers and the industry with the goal of testing in actual conditions and of promoting wind-assisted technologies to lessen the carbon footprint of local sea trade.

While many feasible technologies are ready for installation, the access to financial resources became increasingly difficult since the top 40 lending banks decreased their shipping position by c. 34% from 2010 to 2019 while the world fleet was growing. Consequently, the industry needs to find alternative financing sources.

One solution could be to charge a greening premium on top of the usual charter rates (Solution A). This way, customers with the respective environmental awareness would finance the additional costs for greening technologies. However, market experience suggests that the customers are yet not willing to pay for such a green shipping premium. Another solution would be to use export credit agencies to accelerate the installation of greening technologies by way of technology-linked financing (Solution B). This way, States fill the financing gap, which would not only accelerate the greening of shipping but also support innovative companies that develop greening technologies. Hence, a shipping company that acquires a technology developed in, say, Norway, would get access to the respective financing by the Norwegian export credit agency. Nevertheless, export-credit based solutions have usually limited visibility in the international market.

The third solution are financing schemes that build on sharing economy models (Solution C). These models foresee that the economic benefits as well as risks of a capital-intensive investments are shared. The Pay-as-You-Save Model for green shipping technologies is presented in the literature and considered in actual business cases. This approach assumes that the economic benefits of a greening technology are shared between the shipowner, and the technology provider, or another party who provides bridge finance. Thereby, the shipowner carries 20-30% of the upfront costs (technology costs) while she gives away a certain percentage of the profits for a negotiable period of time. The profits achieved by the respective technology are fuel savings and carbon offset revenues minus maintenance costs, while the carbon offset revenues depend on the pricing of carbon emissions, which is expected to come in the next years. As a side effect, the incentives of buyer and supplier are further aligned since the majority of the supplier’s remuneration depends on the performance of the respective technology. The model can be customized to fit for special needs of supplier and ship owner as well as various technologies.

Afterall, if the banks’ appetite for shipping does not increase, the greening of shipping depends on alternative financings solutions such as the ones presented. Most likely, the optimal solution is a mix between premiums paid by the ultimate customers (Solution A), national support such as export credit schemes (Solution B) and innovative sharing economy schemes (Solution C). Whatsoever the solution will look like, if the targets set under the Paris Agreement shall be met, there is not much time left for the shipping industry to substantially decrease its carbon footprint.

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