Key regulations affecting demand from the maritime sector
Having started in 2024, the maritime sector is being gradually included in the EU ETS. Emissions from the maritime sector are constituting a growing share of EU ETS emissions, as the decline in emissions in the maritime sector is estimated to be slower than emissions in other sectors such as the power sector. The EU’s Clean Industrial Deal (CID) is expected to influence the maritime sector, especially with the production of alternative fuels. A transition from conventional fuels to hydrogen-based fuel is seen as one of the key strategies for decarbonising the maritime sector. Lower energy prices and the establishment of the European Hydrogen Bank, could help bolster supply of hydrogen-based fuels. If successful, it can provide more supply side certainty within Europe, but a lot of detail remain.
The Fuel EU Maritime regulation, which applies from 2025, aims to lower greenhouse gas intensity in maritime fuel, but it only mandates a 2% reduction by 2030. Also, the ability to bank and trade compliance surplus to comply with the Fuel EU Maritime regulation will provide flexibility for shipowners. As regulatory stringency increases significantly from 2035 and onwards, the role of these flexibility mechanisms will become even more important.
Under the Fuel EU Maritime, compliance can be achieved by conventional fuels, LNG and some biofuels to 2035. From then onwards, near-zero or zero carbon fuels will be necessary. The inclusion of maritime emissions in the EU Emission Trading System (EU ETS) puts a carbon cost on emissions thus incentivising emission reductions, but does not require a technological shift.
Globally, the International Maritime Organization (IMO) is considering a basket of mid-term measures when they meet for the IMO`s 83rd Marine Environment Protection Committee (MEPC 83) in April.So far, discussions have revolved around a greenhouse gas fuel intensity standard with a flexibility mechanism, and, possibly, an emission pricing mechanism. The IMO aims to approve the mid-term measures at MEPC 83, with adoption in the fall of 2025. Any levy or emissions trading system being implemented by the IMO could significantly impact global compliance costs.
How is the global fleet transitioning to meet emission regulations from the EU and possibly from the IMO? In this analysis we look at the fuel use of the current fleet, and the vessels that are being launched in the next years.
Current fleet composition and compliance
The current merchant fleet in operation almost exclusively consists of vessels that run on fossil based bunker fuels. Around 97% of ships use conventional fuels like very low sulphur fuel oil (VLSFO), marine gas oil (MGO), and high sulphur fuel oil (HSFO) with scrubbers. The remaining 3% of vessels, which constitute 5% of the tonnage, are fuelled by liquefied natural gas (LNG).
While these fuels are compliant with current EU regulations, additional measures are required to meet steadily tightening regulations. Two key compliance strategies today are the use of biofuels and pooling of ships. Drop-in biofuels are one of the most accessible and technically viable options. Biofuels such as hydrotreated vegetable oil (HVO) and fatty acid methyl ester (FAME) can be blended with conventional fuels without requiring costly engine modifications. However, the price of biofuels is significantly higher than conventional fuels. In addition, scalability and availability remain a challenge as it competes with demand from other industries.
As mentioned, the ability to comply with the FuelEU Maritime regulation as one in a pool of vessels rather than on individual basis, provides flexibility and enables shipowners to transfer any surplus from one vessel to another. As for the EU ETS, this means that the fleet as a whole could reduce its emissions, while most ships have about the same emission intensity as prior to 2025.
Orderbook insights and the future fleet
To understand the maritime sector’s state of transition to alternative fuel it is useful to look at the ships ordered for delivery over the next years. The Fleet observer shows the orderbook for the next four years, based on data from SSY. These ships will continue to sail for the next decades, beyond 2040 and 2050, hence the technology chosen today will impact emissions long into the future.
Figure 1 shows that fossil fuels remain dominant, with conventional fuels accounting for 60%, LNG at 16%, and LPG at 3%. Alternative fuels currently have a smaller share, represented by methanol, ammonia, and hydrogen accounting for about 6% % of the maritime fuel mix.
Figure 1: Ordered vessels by fuel
Shipowners in an increasing degree now opt for dual-fuel engines capable of running on both LNG and conventional fuels. While LNG provides emissions reductions over the life-cycle, often referred to as well-to-wake emissions for shipping fuels, methane slip can reduce the emission reductions significantly depending on engine types.
The first-movers into the use of ammonia and methanol as alternative fuels are also implementing dual-fuel options. Major engine manufacturers such as Wärtsilä and MAN offer methanol-based engines they claim to be commercially viable. Slightly less mature, ammonia-fuelled engines are inching closer to being commercially ready. Important to note is that many of ammonia-fuelled engines do not run on pure ammonia, but rather a blend with conventional fuels.
These orderbook trends indicate that initial adoption has started, but a real transition to methanol, ammonia, and other alternatives remains beyond the 2028 horizon, as these fuels are still in the early stages of infrastructure development and cost competitiveness.
Despite increasing regulatory pressure, many shipowners continue to place orders for conventionally fuelled ships. Many shipowners are pursuing compliance through operational efficiencies, biofuel blending, and pooling mechanisms rather than committing to alternative fuels.
The merchant fleet is about to start its transition
The merchant shipping fleet short-term decarbonization strategy is, based on the orderbook, for most shipping companies based on being compliant rather than a fundamental fuel shift to alternative fuels.
The dominance of drop-in biofuels, LNG newbuilds, and credit mechanisms ensures that most of the fleet will remain regulatory compliant with the Fuel EU Maritime until at least 2035, somewhat reducing the urgency for a rapid transition to alternative fuels. That said, the ships being ordered today will be sailing past 2050, and ship owners need to look at the possibility of either being able to use alternative fuels or retrofit in the future.
For carbon market stakeholders, this means sustained demand for compliance allowances for the next years as the transition to greener fuels currently is more costly than using conventional fuels.
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