New study calls for subsidies for e-fuels coupled with a GHG levy

Pressure for the International Maritime Organization (IMO) to put a levy on GHG emissions continues. In the latest contribution to the debate, a new study from UCL Energy Institute Shipping and Oceans Research Group and UMAS sees “significant risk” in some of the options (including a GHG levy) that IMO is considering, for enabling shipping’s energy transition. The analysis comes as IMO prepares for key negotiations in February and April 2025 to finalize the mid-term measures for reducing GHG emissions.

Using the total cost of ownership (TCO) approach, the study models a 14,000 TEU container vessel with different technology and fuel options to evaluate the effects of policy combinations (including a GHG Fuel Intensity (GFI) requirement, flexibility mechanism, and a levy and subsidy/reward mechanism) currently under discussion at the IMO. It builds on previous modeling by DNV for the IMO’s Comprehensive Impact Assessment but incorporates more conservative estimates for bioenergy costs and CCS capture rate.

The TCO analysis illustrates how fuel prices and technology cost and performance determine optimal outcomes in response to different policy scenarios and how adjustments to those assumptions can drive materially different outputs to the results presented in the IMO’s Comprehensive Impact Analysis. Changes to the most competitive technology and fuel combinations can then fundamentally shift the expected energy mix. Adjusting the biofuel costs and CCS capture rate in line with recent studies produces significantly different outcomes in all scenarios relative to those derived by DNV, shortening and reducing the viability of these two options (albeit with them still providing compliance at competitive costs early in the transition). Ammonia (blue and then e-ammonia) becomes the most cost-effective fuel/technology choice from the mid-2030’s. Across the wider range of fuel types, e-fuels have the least cost of compliance through the 2040s, i.e. they are the key for minimizing the long-run cost of operation.

The study finds that a fuel standard (the GFS – Global Fuel Standard) in combination with a flexibility mechanism, even with a multiplier that ‘boosts’ the credit given to e-fuels, is unlikely to start an e-fuel transition before 2040.

It says that only policies with targeted incentives for e-fuels, such as a subsidy/reward which can be derived from the revenues generated by a GHG price or levy, can effectively bridge the gap between e-fuels and low-cost early compliance options, such as LNG, biofuels, carbon capture and storage (CCS), to promote shipping’s energy transition in the critical 2027-2035 period. Without such measures, the study finds, the industry risks becoming locked into alternatives that could make long-term decarbonization goals more difficult and expensive to achieve.

This finding is consistent with work done last year by DNV for the IMO in its Comprehensive Impact Assessment, which identified the lowest cost energy transition occurred in the scenario with a combination of a GFS and a high universal GHG price (levy).

Analysis shows that GHG pricing starting at $150 per tonne of CO2e, could generate sufficient revenue to support both the energy transition and ensure a just and equitable transition for affected communities. GHG pricing starting at $30 per tonne of CO2e, looks unlikely to provide certainty of support to enable the energy transition to start and scale through the 2027-2035 period, and certainly would be unable to additionally support a just and equitable transition.

“The IMO’s fuel standard is critical for the longer-term certainty of demand, and longer-run investment,” said Dr Tristan Smith, professor of energy and transport at the UCL Energy Institute. “But under this policy alone, this new analysis shows that the market will struggle to make an e-fuel business case before 2040, and therefore e-fuels such as green ammonia will not be available for shipping’s use in any volume. Some suggest that the role of a GHG levy is only for addressing equity, this study shows that it is not the only role, it is also a critical enabler of shipping’s energy transition and for minimizing the long-run costs to trade.”

The study’s analysis directly relates to the viability and costliness of IMO’s Revised Strategy targets. With such little time for an energy transition, unless the policy is able to immediately start the transition to e-fuels, the sector can easily lock into a vicious cycle – lack of clear business case will undermine investment and prevent learning, cost reduction, supply chain development and e-fuels will remain scarce and expensive, depriving the sector of sight of its transition pathway. Conversely, say the study’s authors, “a clear signal from the IMO’s mid-term measures can unlock long-run investment, stabilize returns and asset values, and unlock myriad co-benefits, including in the context of a just and equitable transition.”

• Download the full study HERE