Op-Ed: Is decarbonization driving unintended consequences?

Peter Soles

By Peter Soles, Principal, Business Development at Glosten 

In recent years, the messaging around alternative fuels and zero emission vessels in marine industry magazines, online forums, news websites, and social media has been a steady stream, bordering on a wide-open fire hydrant. As a result, many in the U.S. maritime community—me included—are experiencing what I’ll term “decarb fatigue.” And it’s not just because we’re jaded old-timers. 

Pretend for a moment that you’re new to the industry, reading through this daily press on vessel decarbonization. The buzz might lead you to believe that a fast-moving green wave is sweeping across the commercial vessel market, with everyone racing to adopt zero-emission technologies and begin modernizing their fleets. This may be true elsewhere, but in the US, this is not at all what’s happening—it’s more like total paralysis. The stagnation is driven by four interrelated challenges: high CapEx/new construction costs in the U.S., coupled with high financing costs; regulatory “gray areas” on alternative fuel and electric vessel design and the absence of clear direction on air emissions requirements; immature decarbonization technologies (including alternative energy supply and infrastructure) and associated operational risks; and significant barriers to accessing grant funding and other incentives that could make adoption commercially feasible. 

Before diving further into this topic, when we talk about practical candidate vessels for decarbonization—i.e. relatively short-range craft—it’s important to draw a distinction between those that are publicly funded and generally operated by public entities, and those that are funded by private enterprise and operate in the for-profit space. The distinction is necessary because these two groups operate under vastly different business models, with disparate business opportunities, challenges, and constraints. This article focuses on the latter and includes all manner of workboats as well as privately operated passenger vessels and excursion boats. These vessels, which I’ll characterize as Commercial Harbor Craft (CHC), are owned and operated by businesses that must remain profitable, or they cease to exist. They face obstacles like competition, market shifts, and economic downturns that publicly operated vessels are largely insulated from. Having spent half my career working for private operators, I see clearly why the rapid uptake of alternative fuels and other low and zero emission technologies is stalled in the US CHC market; and unfortunately, given the current state of the CHC newbuild market in the U.S., I believe this will persist for a while longer. 

To be fair, there have been some novel low- and zero-emission vessel designs and refits within the last five years that deserve a shout out, including, most notably the Crowley e-Wolf, Amogy ammonia tug conversion, and Maritime Partners’ Hydrogen One, currently under construction at Intracoastal Iron Works in Bourg, La. These breakthrough projects showcase the technical feasibility of alternative propulsion systems on marine vessels. Even if they’re not yet commercially feasible without subsidy, they’re crucial for informing both industry and policymakers about the costs, operational challenges, and environmental benefit of adopting these technologies. However, in the U.S., these pioneering projects are few. Over the same five-year period, the overwhelming majority of CHC operators across the U.S. have deliberately avoided big moves on decarbonization or, frankly, building new vessels at all. 

Because the data is readily available, let’s examine the harbor assist tug market as a case in point. Since 2015, the number of commercial (non-government) harbor assist tugs delivered annually in the US has been on a precipitous downtrend. Between 2015 and 2020, sources show an average of 12 to 17 delivered each year, with one source reporting more than 20 new assist tugs in 2017 alone. However, from 2020 to 2024, that average drops to somewhere between seven and nine—a roughly 41% decrease. In 2022, we saw the fewest number of assist tugs delivered in the last 20 years, with one source reporting just two delivered, according to the WorkBoat Construction Survey. And 2023 saw between eight and 13 delivered while, 2024 saw between seven and 11.   

It doesn’t take an economist to postulate on the causes of the downtrend. The pandemic triggered supply chain disruptions and inflation, leading to the highest inflation rate in decades. To counter this, the Feds raised interest rates, which remain high today. For vessel operators looking to build, this means high financing costs—at least for those that don’t have immediate access to, say, $10-20M. Meanwhile, construction costs at U.S. shipyards have surged since the pandemic and remain exceedingly high in the eyes of vessel owners. Both are cause for owners to think twice about any plans for new vessels.   

Another factor that’s like kryptonite for most people’s new vessel aspirations is regulatory uncertainty—particularly as it pertains to adopting new technology. Alternative fuel and low/zero-emission technology for decarbonization is advancing at a rate that the USCG is struggling to keep pace with. Adopting any novel technology for which there is not yet an established ruleset requires an owner to enter into a Design Basis Agreement (DBA) with USCG. Presently, this would include both hydrogen and methanol fueled vessels, which are two of the leading alternative fuels being investigated for use in the commercial market. The DBA process puts the burden on the vessel owner, or their contracted designer, to prove an equivalent level of safety to that established by applicable regulatory standards. It can be a lengthy and onerous process, and the outcome and requirements are unknown until late in the project. My experience with CHC owners is that they are generally loath to invest hundreds of thousands in a project when there is no assurance of an acceptable outcome. For companies on the smaller end of the scale, this is unthinkable. 

The absence of clear direction on air emissions regulations has a similar chilling effect on new vessel procurement. At the state level, all eyes are on California, where the California Air Resources Board (CARB) has introduced controversial new emissions standards that are raising questions. Will the so-called “CHC rule” stand?  Will it ever be enforced? More importantly, will other states follow California’s lead and impose similar rules that go beyond what’s required at a federal level? These uncertainties leave owner/operators hesitant to recapitalize at all, let alone invest in emerging technologies, fearing obsolescence or future regulatory misalignment. Owners are asking themselves, “If I build a compliant vessel today, how long will it remain compliant before the rules change on me again?” I know what I’d do in this situation. I’d repower my old boat and throw it back in service. If I were hoping to grow the fleet, or satisfy the requirements of a new service contract, I’d lease. 

Setting these regulatory and economic market conditions aside for a moment, alternative fuels and emerging low/zero-emission technologies for decarbonization efforts are exciting to most of us. They offer more than just pollution and CO₂ reduction—they provide businesses with opportunities to evolve, improve environmental performance, and compete in new markets. Companies can attract customers and talent, qualify for tax credits, or even sell allowances through participation in a cap-and-trade program. Low- and zero-emission technologies hold a lot of promise.  

But they’re called emerging technologies for a reason. Many of them are still under development, and many are untested in marine applications. While some have been proven in other industries, they’re not yet marinized or certified by regulatory bodies like the USCG. Owner/operators have legitimate concerns about committing to these technologies and installing them, semi-permanently, in one or more of their working assets. What assurances do they really have that the manufacturer will still be in business down the road, and that their first-generation installation will remain supportable? They also worry about infrastructure, service models, crew training, and reliability. Without assurance of consistent fuel supply and technical support, and with clients unwilling to pay higher rates for a greener footprint, the business risk often outweighs the potential benefits.   

If you accept my basic argument that high construction and borrowing costs, unclear regulatory guidance and direction, and the unproven nature of new marine technologies are slowing the rollout of many alternative fueled or zero-emission CHC in the US, and that any change to these factors is something that would happen gradually, then what is it going to take to spur some movement? Barring the introduction of some sweeping legislative mandate, the answer is clear: money. As private, for-profit businesses, CHC owners need financial incentives to offset the business risks of decarbonization. These incentives could take the form of government subsidies (like grants or tax incentives) or forced rate increases on the end users of CHC services, which could have negative impacts on port competitiveness. 

At a state level, grant programs that are accessible for private, for-profit business are few and limited in nature. Most require the primary applicant to be a municipality or quasi-public entity, like a port authority. To my knowledge, California’s Carl Moyer Program is the only grant program that allows an operator to seek direct funding without an associated public or quasi-public partner. Unfortunately, this program is structured to encourage engine replacements and vessel retrofits, not new construction. It doesn’t provide practical avenues for owner/operators to do more than repower with higher-tiered diesel engines.   

At the federal level, the Inflation Reduction Act of 2022 provided US EPA with $3 billion to fund zero-emission port equipment and infrastructure as well as climate and air quality planning at U.S. ports, which became the EPA Clean Ports Program. The program’s goals were aimed at reducing local area air emissions (i.e. port districts), improving community health, creating jobs, and advancing clean technologies. It was not structured to award funds to individual companies. Like many state grant programs, accessing the funding required close collaboration with a public sector applicant and took years to access. It wasn’t a pot that CHC owners could tap into to replace one or two boats. Furthermore, the program is now closed for applications, and the Trump administration is unlikely to keep the program alive with another round of funding.  

Will there be other grant programs to incentivize CHC operators to adopt renewable or alternative energy technologies for decarbonization? Certainly. The real question is, when (during this administration)? Will funding be accessible to private sector applicants or will the process be mired by public sector bureaucracy? Most importantly, will the incentives be compelling enough to encourage CHC owners to take bold steps toward decarbonization? 

Right now, the U.S. is lagging behind Europe in decarbonizing marine vessels. For CHC operators, the market forces I’ve outlined have them in a pretty tough spot. Meanwhile, the push toward decarbonization intensifies—not just through daily messaging on the subject, but also through public opinion and local or state regulation. While these efforts may be well intended, they can also be misguided or harmful, putting both mariners and commercial marine businesses at risk.   

I feel that this brand of pressure is having just the opposite of the intended effect on the CHC community—it’s creating blowback. Yes, we have seen some very cool early adopter projects.  These are good for us all, and they will continue in onesie-twosie fashion. But from where I’m sitting, CHC owners are increasingly reluctant to invest in new low- or zero-emission vessels, fearing any number of different forms of financial loss. Sadly, many CHC operators in the US are inclined to do something more to reduce their environmental footprint than just meet EPA Tier 4 standards, but the risks are too great. In this climate, the responsible move, from a commercial perspective, is to defer the design and construction of 30-year assets. Instead, operators are getting creative. They’re choosing to extend the service life of their existing vessels, leasing equipment—even if that means paying premium lease rates—or picking up vessels off the secondary market and making conversions. But by-and-large, this segment of the industry is waiting it out and sticking with diesel. Until these owners have a commercially viable path forward, the momentum for change will remain stuck in neutral.