Moody’s: Which Emissions Challenges Does Shipping Face?

Moody’s Ratings has delved into the complexities facing the shipping industry's decarbonisation, highlighting key challenges like fuel shortages, high costs and regulatory gaps.

With shipping contributing around 2-3% of global carbon emissions, the need for significant emissions reductions is growing.

However, Moody’s report shows that the sector’s transition to greener alternatives faces considerable obstacles, particularly when it comes to addressing indirect emissions, known as Scope 3 emissions.

The shipping industry’s role in global emissions is undeniable. Currently, it accounts for around 2% of the world’s carbon emissions and the push for decarbonisation is intensifying.

Yet, as Moody’s report shows, the path to greener operations is far from smooth and a major issue is the shortage of readily available sustainable fuels.

One clear example is Danish shipping giant Maersk’s decision to pivot towards liquefied natural gas (LNG)-powered vessels.

Initially sceptical of LNG as a viable long-term solution, Maersk found itself forced to order 50-60 dual-fuel ships capable of running on LNG.

This decision highlights the current scarcity and high costs of truly sustainable alternatives, such as methanol. According to Moody’s, "there is not enough [sustainable methanol] available currently to satisfy demand and will not be during at least the current decade, and possibly beyond that."

Moody’s figures show that, as of August 2024, nearly 90% of commercial vessels rely on traditional bunker fuel, with most of the remainder powered by LNG.

Orders placed for delivery by 2029 continue to favour fossil-based fuels, with more than 70% of ships expected to run on either bunker fuel or LNG. This signals a slower-than-hoped-for transition, leaving the maritime industry heavily reliant on fossil-based energy sources.

While LNG emits less CO2 than traditional marine diesel, it’s still a fossil fuel, meaning it falls short of being a truly sustainable option. The reduction in emissions from LNG versus traditional fuels remains a topic of debate, particularly when considering its full life cycle.

This reliance on older fuels complicates the industry's decarbonisation goals. If older vessels remain in operation, more than 90% of the global shipping fleet will still be running on fossil fuels by 2029.

Even newer vessels require costly and time-consuming upgrades to become methanol- or ammonia-ready, further delaying progress toward green shipping solutions.

Maersk’s LNG shift highlights the sector’s struggles

Maersk’s decision to switch to LNG is just one of the signs that the industry’s decarbonisation journey faces significant barriers.

The company’s original stance against LNG reflected its concerns about the fuel's long-term sustainability. However, the high costs and unavailability of sustainable methanol left the company with limited options.

As Moody’s points out, this shift was "primarily driven by the scarcity and high costs of sustainable methanol."

Maersk’s updated environmental goals include a 35% reduction in absolute Scope 1 emissions (which cover direct emissions from owned or controlled sources) by 2030 and a 96% cut by 2040.

However, the company’s need to resort to LNG highlights a key challenge: sustainable fuels are not yet available at scale, making it difficult to meet ambitious decarbonisation targets.

Moody’s also notes that the industry’s slow transition is further complicated by "the current high costs and long lead times associated with new vessel orders, a consequence of a post-pandemic surge in demand."

This backlog leaves shipping companies with few choices in the near term, pushing them towards fuels like LNG that do not fully align with long-term decarbonisation goals.

Shipping’s impact on Scope 3 emissions

The shipping industry’s efforts to reduce carbon emissions will have a broad impact on businesses that rely on ocean freight, particularly when it comes to Scope 3 emissions.

For many businesses, these emissions account for the bulk of their carbon footprint and shipping plays a crucial role in several Scope 3 categories.

Upstream transportation and distribution: Shipping companies’ investments in greener technologies and alternative fuels will lead to reductions in emissions associated with transporting goods from suppliers.

As these reductions take effect, companies that rely heavily on maritime shipping will see their Scope 3 emissions decrease.

Downstream transportation and distribution: Just as upstream emissions will be impacted, the shipping industry’s decarbonisation efforts will also reduce emissions related to product distribution.

Companies that depend on ocean freight to deliver products to customers could report lower Scope 3 emissions as the shipping sector adopts more sustainable practices.

Purchased goods and services: As shipping costs potentially rise due to investments in cleaner technologies, companies might reconsider their sourcing strategies, opting for more localised suppliers.

This shift could lead to changes in Scope 3 emissions related to the production and procurement of goods.

Use of sold products: For businesses that sell products linked to the shipping industry, such as marine engines or fuels, the shift towards decarbonisation will affect the emissions tied to the use of these products.

Manufacturers and suppliers within the maritime sector may experience significant changes in their reported Scope 3 emissions.

The decarbonisation of shipping will require businesses across industries to reassess and monitor their entire value chain emissions.

As the shipping sector evolves, companies may need to collaborate more closely with their shipping partners to achieve mutual sustainability goals and improve their overall Scope 3 performance.

Moody’s concludes: “As long as regulators remain focused solely on cutting emissions without enacting policies that stimulate demand and production of green fuels, the shipping industry will not be in control of its own decarbonisation path.”

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