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Top Asian economies well positioned to capitalize on shipping decarbonization
Top Asian economies may need to spend the most decarbonizing shipping, but industry experts say they are well positioned to create business opportunities from these climate efforts.
Taking a look at China, Japan, and South Korea, which together account for roughly a third of the world's CO2 emissions, ING analysts concluded the countries' mid-century net-zero pledges will cost them at least $12.4 trillion in the transportation sectors alone.
Of the massive bill, $4.38 trillion is estimated to be devoted to shipping, $3.08 trillion to rail systems, $2.73 trillion to road transportation, and $2.22 trillion to aviation.
The three countries are among the world's top 10 maritime trade nations by volume, and ING analysts assumed their seaborne cargo would be all carried by vessels running on ammonia generated from renewable energy.
"Marine transport looks tricky. Ammonia looks on paper to be the best bet, but it requires a lot of energy to make," according to the Dutch bank's Asia's Race to Net Zero Carbon report. "This could be expensive."
The scope of ING's study is limited to the capital costs in building sufficient electricity generation capacity that can power the three countries' transportation sectors. To simplify the calculations, spending on other parts of the supply chain is not taken into account.
For now, green ammonia is produced from hydrogen generated from an electrolyzer powered by solar or wind power, and nitrogen separated from the air.
"The most likely alternative fuel source we know about today is ammonia," ING analysts wrote. "When burned, it emits no CO2."
The analysts stressed the methodology is based on their preferred sectoral approach and admitted other abatement means—such as purchases of carbon offsets, and carbon capture and storage technology—are also likely to play a role in the transportation sectors.
"While net zero is a credible target for the whole economy, for sub-sectors such as transport, there seems little justification for trying to calculate the costs of only a partial adjustment first," the ING report said.
The study also assumes airlines would fully adopt sustainable aviation fuel (SAF) produced from zero-carbon electricity, and that all vehicles and railways will be electrified.
Counting the numbers
China, Asia's largest economy and the world's second-biggest, has pledged to achieve carbon neutrality by 2060. Japan, Asia's No. 2 economy, and South Korea, the fourth-ranked economy by size in the region, have both committed to the same goal by 2050.
According to Norway-based DNV, one of the world's largest ship classification and certification societies, the countries' transportation sectors emit 3% of all GHG emissions globally.
China will need another 433 GW of renewable generation capacity at a capital cost of $3.68 trillion to create green ammonia for its seaborne freight in the next 40 years, ING analysts estimated. "It is extremely costly to shift completely…to green ammonia" from LNG and the oil-based fuels that shipowners are currently using, they said.
ING also forecast another $2.92 trillion will be required to build 344 GW of capacity to supply green power to China's rail system, and $2.02 trillion to be spent on the 6.23 million GWh/year in producing SAF for airlines.
However, for passenger cars, the country is expected to just need $516 billion for another 61 GW of generation capacity.
"This surprisingly low result stems from the inherent efficiency improvements of BEVs [battery plug-in electric vehicles] compared to the current fleet and additional efficiency gains for BEVs by 2060," ING said.
ING analysts separately calculated that $588 billion is required to invest in an additional 216 GW of capacity to create green ammonia for Japan's maritime trade, even if more efficient, hybrid H2-enhanced engines are used.
In addition, the country's aviation sector needs another 62 GW of capacity with a capital cost of $168 billion, and 60 GW that will cost $150 billion for its rail segment. Japan's passenger cars will only require 20 GW, implying a cost of $54 billion.
As for South Korea, ING estimated $109 billion needs to be spent on 44 GW of generation capacity to decarbonize its seaborne trade. Its aviation sector faces a bill of $31 billion for 17.4 GW of capacity.
The country's rail network, already 85% electrified, only requires $5 billion in capacity expansion costs.
Is it that clear?
Tristan Smith, reader in energy and shipping at UCL Energy Institute, agreed that land transportation could be cheaper than shipping to decarbonize due to direct electrification.
"This is because you do not have any of the losses first with turning electricity into hydrogen/ammonia and then converting the hydrogen/ammonia back into mechanical and electrical energy onboard the ship," he told Net-Zero Business Daily.
"Because of the efficiency differences in primary energy use, sectors unable to directly electrify will require more investment per unit of energy use," he added.
But Smith questioned whether it would actually cost less to reduce emissions from air transportation than its maritime counterpart, with SAF in the form of synthetic hydrocarbon fuels produced from renewable energy not expected to be commercially available until 2030s. Analysts believe airlines will have to use crop- or waste-based biofuels for the near term.
"There has been a sustained narrative that aviation will need SAF, when in practice the same availability and sustainability constraints [as in the past] will either severely limit the potential of SAF, or make it very expensive," said Smith.
He contrasted it with shipping, for which he said hydrogen-derived fuels are more advanced.
"If a more balanced appraisal of the respective roles of hydrogen and biofuels were applied, the investments for decarbonizing aviation could likely be of a greater magnitude than those associated with decarbonizing shipping," he added.
When looked at from a different time frame, land-based transportation modes also needed significant capital investments to decarbonize as well, classification society Lloyd's Register's Decarbonisation Programme Manager Charles Haskell suggested.
"There may be certain applications where road transportation could be seen as cheaper to decarbonize, and the transition could also be simpler [from now on], given the industry has had significantly more investment over the past 10 years in comparison to shipping," he said.
However, the analysts agreed that the large investments required to decarbonize shipping would actually generate more business and employment opportunities in the three countries.
"All this spending is actually business and government investment. It contributes to GDP," ING said. "One firm's cost will be another firm's revenue. Aggregate activity could well rise rather than fall as a result."
China, Japan, and South Korea produce more than 90% of the world's ocean-going cargo carriers. IHS Markit said Chinese shipyards held a 43.3% share of the global shipbuilding orderbook as of early October and are on track to make 45% of the world's ships this year.
"The volume of shipbuilding business will increase very rapidly in future, and low- or zero-carbon ships will occupy a rapidly expanding part in their output," said Martin Stopford, a director at consultancy MarEcon. "Of course, the shipbuilders and equipment manufacturers need to get the ships into the market, but there is much activity in both sectors at the moment."
Others pointed out that the move to zero-emission shipping would lead to positive changes across the energy and maritime supply chains.
"There shall need to be a large-scale investment in renewable electricity generation, production technologies, and infrastructure for storage and distribution, and this is not just limited to shipping," Haskell said. "Many of the skills and competencies lie within shipbuilding."
While the decarbonization drive will create new, growing markets, Smith said governments should step in to mitigate the transitional pains. The number of jobs related to oil-based marine fuels is expected to fall.
"I do not see the scale of shipping's decarbonization as a downside—even if it may be daunting, it is a lot of new jobs and opportunity," he said. "But that has to be carefully managed to ensure that retraining and employment in one sector is not unfair relative to new opportunities in another."
"Most importantly, it needs clear signals and policy clarity—otherwise employment and investments cannot be planned, and [this risks] unemployment and assets becoming stranded and causing economic damage," he added.
The Chinese, Japanese, and South Korean governments have all unveiled policy measures to support their shipbuilders in constructing vessels with zero emissions later this decade. Beijing and Seoul are willing to provide financial incentives, while Tokyo is focusing on coordination among domestic yards.
A successful move into zero-emission shipping can win more clients in the overseas market too. Government-run China State Shipbuilding owns Switzerland-headquartered Winterthur Gas & Diesel, one of the few companies in the world currently capable of developing marine engines running on zero-carbon fuels.
"Due to China's national GHG targets, we are seeing an increasing number of large state-owned companies investing in decarbonization, and who possess a clear ambition to be leaders in this field," said Tore Longva, principal consultant with DNV's maritime division.
"Beyond the international shipping sector, we expect an emergence of more pilots and initiatives geared towards the decarbonization of domestic shipping in China, which will also serve to boost the uptake of alternative fuels and energy efficiency technologies by international fleets," Longva added.
Multiple fuel solutions
Since International Maritime Organization member states agreed on a target to halve GHG emissions from cross-border shipping by 2050 compared with 2008, debate has been ongoing over which zero-carbon fuel will power ships in the future.
There has been growing interest in ammonia due to its high energy density and existing supply chain. In June, Japanese trader Itochu launched a joint study with Trafigura, Equinor, Anglo American, and some other parties on the usage of ammonia as a marine fuel.
However, no ammonia-fueled ships have been built to date. Many shipowners have for now opted for a switch to LNG from oil-based fuels, onboard energy-saving devices, and voyage optimization to reduce emissions. DNV data shows 615 LNG-powered ships are currently in operation or under construction.
Unless there is sufficient production of zero-carbon synthetic natural gas later on, experts do not expect the prevailing approach to meet the mid-century target. Some countries have even called for zero emissions from shipping by 2050.
"Safety, finance, and the environment are all considerations which need more time—hopefully before 2030—for fuller investigation before shipping can arrive at a limited set of definitive fuel solutions," Longva said.
"The cost of producing and distributing fuels and onboard technologies will reduce over time, but still, we expect the cost to stay significantly above today's costs," he added.
Shipowners' efforts in exploring the best zero-carbon fuels could actually pay dividends in the long run, according to Smith.
"Generally, a period where there are many options being considered, as long as they are genuine options, is helpful and can increase innovation and help to reduce costs for the transition," he said. "As long as these options are being discussed and assessed in a robust way with lifecycle emissions and scalability fully transparent and considered, there is not a problem with this."
"The need for rapid ramping up of investment in shipping's energy production and supply chain is greater towards the middle and end of this decade, but it will then rapidly need to scale…Shipping has a bit of time to have a more open exploration before it needs to finalize," Smith said.
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