A new report from UCL’s Energy Institute Shipping and Oceans Research Group assesses the financial risks to the shipping industry from stranded assets due to stricter greenhouse gas regulations, possibly due for adoption at the International Maritime Organization (IMO) this year, in combination with the ongoing global transition to a low-carbon energy system. The report finds the shipping sector faces substantial supply-side risks linked to carbon-intensive vessels becoming obsolete and demand-side risks linked to decreased fossil fuel demand.
The report finds that over 40% of ships globally transport fossil fuels, and nearly all ships are fossil-fuelled. To align with shipping’s estimated share of the carbon budget of 9.6 giga tonnes, ships representing over one third of the existing and ordered fleet value would need to quickly transition to zero-emission technologies or face premature scrapping. The transition away from fossil-fuels in the wider economy creates further risks of oversupply for fossil fuel carrying ships. In particular, liquefied gas tankers look likely to face the highest exposure to this risk, with 26–32% of fleet value at risk around 2030.
Dr Nishatabbas Rehmatulla, principal research fellow at the UCL Energy Institute, said: “Our research to date consistently shows that the majority of the shipping stakeholders, particularly investors including shipowners and financiers, are not anticipating an ambitious transition. This research shows that an investment strategy that is based on watch and wait is a risky strategy, it could lead to rapid unanticipated write-downs and losses from forces within and outside the sector.”
Retrofitting and repurposing ships would reduce the amount of stranded assets but can still be a costly alternative, the study suggests.
Dr Tristan Smith, professor of energy and transport at the UCL Energy Institute said: “IMO set its direction in 2023, and therefore clarified the supply-side risks discussed here. That strategy’s ambition is close to that of the 1.5°C scenario used in this analysis. With evidence from earlier this month that further momentum is building behind a universal GHG price and package of IMO mid-term measures that can strongly incentivise transition, there will be further crystallisation of that risk this year. But perhaps a key point from this analysis is that at the point when it is beyond doubt that fossil fuel technologies, including LNG as a fuel and cargo, face rapid contraction, it will be too late for many to take corrective action.”
