The shift in the global business towards a sustainable future is undoubteldy positive and green finance is a part of this change.
Achieving sustainable development will certainly have profound challenges as the equation becomes more complex with the shift to a long-term focus being undermined by the short-term orientation of the current financial instruments.
Regardless, the "business as usual" of today will not be the same in a few years’ time as focus shifts towards a sustainable economy.
So how do we move from A to B?
In short, we set goals, identify opportunities and challenges, and smooth the path for adoption.
In short, there are two main goals of green finance according to the Green Growth Knowledge Platform. Firstly, to internalise environmental externalities - this refers to the "economic concept of uncompensated environmental effects created by the production and consumption that affect consumer utility and enterprise cost outside the market mechanism."
The second is to "reduce risk perceptions in order to encourage investments that provide environmental benefits."
In the first part of our interview with Gavin Allwright we discussed the technology, trends, adoption, and finance, with regards to wind-assist and primary wind propulsion solutions. (Read part one here)
In part two of our interview with Gavin, we speak to him about the effect of social and legislative changes and assess the opportunities and challenges of green finance. Gavin also shares the 5 P’s for the successful adoption of sustainable development and improve adoption of wind-assist and primary wind propulsion solutions.
Q: Is there anything you believe which could help adoption?
Gavin Allwright: There are the 5 P’s. Price, policy, people, providers, and perception.
The price of fuel is artificially low. There are low taxes, no carbon levies there. Pretty much fossil fuels are subsidised. Now that may not be a direct subsidy necessarily but certainly an indirect subsidy by most governments.
There is an uneven playing field when you are trying to bring in renewables into the industry.
There is an uneven playing field when you are trying to bring in renewables into the industry. The price is increasing though, we’ve seen the sulphur cap pushing prices up and that is going to take some time to stabilise, but VLSFO and MGO will be in more demand
HFO possibly - as that becomes less popular as the carriage ban comes in - we may see that increasing in price. I cannot say for certain. Refineries turning over to the low-sulphur fuels as a more profitable area is another possibility, but I don’t have a crystal ball.
The critical thing is that wind if free and I don’t need a crystal ball for that.
There is no cost when this renewable energy is delivered to the ship today, and there will be no cost when it is delivered to the ship on the last day of its life. This creates predictability for possibly up to 25-33% of your fuel requirements for a wind assisted vessel, locked in at no cost for the life of the vessel. It is savings in the bank. That wind energy is delivered to the point of use; thus, it also requires no new infrastructure, no additional refinery capacity, no land or sea transport to deliver it and no port storage facilities.
From a facilitation perspective, if you are reducing your bunker, you are reducing the storage capacity onboard that is required. More cargo could be loaded and possibly less power will need to be used on the vessel. This will also help to facilitate the uptake of the new, more expensive, and less energy dense alternative fuels which are low carbon.
With regards to policy, we’re not seeing as much uptake with regards to wind propulsion with policy makers and other pathways to decarbonisation as we are seeing with their engagement with longer-term alternative fuel development. I believe there needs to be an increased realisation within the IMO, EU, national states and flagging states that wind propulsion is a critical contributor, or tool in the toolbox, for decarbonisation.
The realisation that currently there is no single solution is important. Quite frankly, to get to the goals we have, we need to develop a hybrid solution and I think that most shipping companies are now seeing that. There is currently no silver-bullet fuel which is going to come along and be widely available at a reasonable price for all vessels in all ports for the next two or three decades.
Wind propulsion needs to be seen as a future, highly automated, data-driven solution which uses the latest materials and techniques which have been developed and that are practical for the 21st century. Not taking the perception that wind propulsion is taking us back to the 19th century.
People is a very important factor. We are seeing a very big change in the boardroom and amongst policy makers, but we need to find the business models that work. The new generation of business leaders get the environmental challenge, they are increasingly understanding that a primary renewable that requires virtually no supply chain and delivers on a substantial portion of their emissions reduction commitment, such as wind propulsion should have a part to play. The trick is figuring out how can they can get these systems affordably on to their vessels so they can justify that expense to their shareholders.
Providers are also a key part to this equation. It has been really apparent that technology providers have continued working of these low emissions solutions throughout this past few years of historically low fuel prices, driven by the understanding that decarbonisation would be the main driver as we enter the 2020’s and that wind technologies are maturing to the point where we now have a whole raft of options. As we have a growing number of technology providers for different types of ships and situations, we are going from strength to strength.
Finally, possibly one of the most difficult things, is perception. Wind propulsion needs to be seen as a future, highly automated, data-driven solution which uses the latest materials and techniques which have been developed and that are practical for the 21st century. Not taking the perception that wind propulsion is taking us back to the 19th century.
There are of course traditional sailors and projects who are part of our association that are looking at traditional vessels that are niches in the smaller vessels market – absolutely, there is room for that. Indeed, there is great potential to have networks of small, versatile, virtually zero-emissions vessels in operation worldwide, using today’s proven technologies. We’re talking above about large commercial vessels and this is a 21st century solution for a 21st century problem.
Q: Green finance has been a hot topic and its growth has been significant with many finance institutions starting to get involved. Do you think shipping is seeing it's fair share of funding or are there particular hurdles that shipping companies must overcome?
Gavin Allwright: As far as I am concerned, all financing needs to be green.
We don’t need to call it green finance anymore because any black carbon or fossil fuel asset has a very limited life, and investments in those systems are running the risk of becoming stranded assets, and the very real risk of very high carbon levies being imposed in the near future.
Yes, we don’t know what the carbon levy will be but even if that followed the ICS’s opinion that a levy of $50 per tonne of carbon, would be an acceptable amount to start a carbon levy, that translates into over $150 per tonne of fuel, and on top of the sulphur premium we are seeing, we are then moving to a tonne of fuel into the $700/ 750 mark. That’s just with the starting carbon price, with a levy potentially coming into effect after 2023, but to be honest, I doubt it will come in that early and it will take a couple more years to come through, though I would be happily proved wrong on that.
The question that needs to be answered on this, is when will shipping plug into this carbon pricing? Should be this at a level that gradually increases or at a much higher level where this will lead to a price shock in the industry. We saw the EU Emissions Trading System in 2018 increase from $7 to $20 a tonne of carbon in one year.
Flipping around that argument, finance tends to follow sustainable returns rather than sustainability. I think that is a critical problem.
This is already approximately 65 Euros per tonne of fuel. That has carried on increasing but it has not continued such a dramatic increase. I think it is in the high 20s now.
And this is all being done before we really got to the true price on carbon, so the risk is there. Renewable energy, generally, around the world is coming in at lower prices than most energy produced by other means and the power generation technologies are decreasing in cost.
Shipping is a little bit different because of the density of the fuel because you have limited space on a vessel, but those pressures and trends will certainly be there.
Flipping around that argument, finance tends to follow sustainable returns rather than sustainability. I think that is a critical problem.
Also, long vs short term-ism. Currently we are looking at most investment being driven by economic requirements or business models, but it is not following a strategic pattern at all. I think that a lot more long-term de-risking of investments is important, for example having the larger innovation states or larger financial institutions like the European Investment Bank, underwriting longer-term, green investments in shipping is important.
In the blue economy we have seen a desire to really build this up and taking a longer view on those investments, all aspects of the blue economy are booming…
In the blue economy we have seen a desire to really build this up and taking a longer view on those investments, all aspects of the blue economy are booming, and we are becoming increasingly more dependent on the blue economy. Things like mining, fisheries, aquiculture, wind farms, etc. However, every single one of those developments is dependent upon shipping, but it isn’t attracting the same attention.
As we see a growth in ships, how are those ships fuelled? If we are building a ship today, we are pretty much locking it into fossil fuel for its lifetime, 20 to 30 years, because we don’t have the options available yet. Well, we do, and we don’t.
We are seeing a lot of investment going into the blue economy at present, but we are not seeing quite as much interest in putting the finance behind green shipping. My feeling is that the $2 levy the shipping industry is suggesting for research and development is a good start, but it will probably take quite long to come into effect given the relative cycle.
If we have a carbon levy coming in, I think that if it is ring-fenced and brought back into the industry – just as the Norwegian NOx fund was, which was highly successful from my understanding – we would be looking at really substantial funds coming into the decarbonisation transition.
An increased price of carbon and the proceeds being made available for decarbonising installations and subsidies for developing countries and small shipowners to help make the transformation. This allows for grants, soft loans, and for subsidies the least developed countries so they can transform their domestic fleets and have access to funding for the flag states too.
With about $100 billion spent on bunkering in a year, a 10% levy, we are already looking at $10 billion a year, which will go quite a way to making that change.
Q: Do you think that social and legislative changes will help propel changes to financing?
Gavin Allwright: I think that in a general sense, social changes are permeating the decarbonisation debate in shipping. Shipping is however pretty much an invisible industry to most people. I think social impact is indirect and will have a bit more of a splash effect. As shipping is an international industry that very few people use directly – unless it is a ferry or cruise vessel.
It’s very similar to aviation in patterns of international activity, but also very different, and we do need to come back to the point that shipping is the easiest, greenest - if I can use that term - way to move huge quantities of goods around the world.
Do we need to be moving all those goods though? That is another question.
If we are decarbonising on land, we will see a dramatic decrease in the amount of oil, and oil products, that are moved around the globe. I think that approximately 30% of the product that is moved around the world, is derived from fossil fuels - Oil, bitumen, or chemicals. If we decarbonise on land, the level of those products moved will be reduced dramatically.
I don’t think the social change movement will have a direct effect, but I think that shipping customers are demanding reductions in carbon as they are included in the Paris Agreement. As customers demand less carbon intensive products, the low-hanging fruit on land is pretty much being taken up and now they are looking to the wider supply chain and shipping is one of those areas.
I see policy and regulation as a leveler of the playing field. However, I see it as a signal for change, but I don’t necessarily see it as a main driver. I think the main driver will be the business models.
As shipping is tied to fuel and the prices of fuel, and fuel is tied to climate change. People say that shipping is one of the hardest sectors to decarbonise, and yet it probably has the greatest fuel cost dependency of any sector.
It makes business sense to reduce fuel to increase profit - reduce fuel, reduce carbon and greenhouse impact. In that sense, the equation is very simple.
We can get greener models working - like leasing of energy efficiency measures or utilising big data correctly.
We collect huge amounts of data, but we are not using it very well. Virtual arrivals, charter contracts - making those carbon or fuel charters rather than time charters. Training our crew to be more energy efficient and help operate our ships better. The integration of energy efficient measures and investigating how they impact the vessel as a whole system, and not just slapping on a solution independently.
I think the actual business argument of decreasing fuel use in shipping is almost a no-brainer but how we get there, that’s the challenge. So, the case for reducing fuel through wind propulsion systems should be an easy win-win-Wind one. Alternative fuels should be a less easy one to make – higher costs, same amount of fuel, new infrastructure but less carbon and other emissions.
We need to start working better together to effect this change. One of the arguments which I often encounter is that, “If we just wait, something will happen”, or “Why are we retrofitting old dirty ships, scrap the whole fleet and build a new one.”
Within our carbon budget, and shipping has an allocation within that budget, we must mitigate and reduce as much as possible.
I understand the appeal of waiting for a “wonder fuel”, but we have a finite carbon budget left based on current business-as-usual emissions, and that’s it. If we go to the end of this period - about 8 years to meet the 1.5 degree warming target (a few years longer for 2 degrees) - we head off the edge of a cliff and we have to go zero emissions on that day.
It has been well over a decade since the introduction of LNG and look at the slow adoption of that.
Within our carbon budget, and shipping has an allocation within that budget, we must mitigate and reduce as much as possible. Reducing the GHG emissions from the existing fleet will buy us more time and space to develop other aspects and get a grip on what needs to be done.
The problem is all that time we could very well see a growth in trade and demand for shipping, do we allocate more of the remaining carbon budget to shipping, or do we keep the budget as it is, and we just have to accelerate the decrease in the use of that budget?
Retrofitting wind propulsion is a significant part of reducing our impact, immediately giving us more carbon investment opportunities to invest that carbon in building a new resilient, sustainable fleet which uses wind propulsion in conjunction with other low carbon fuels and energy saving technologies.
We don’t have time to play around. We have a set allocation of carbon; how are we going to invest it?
Gavin Allwright joins our speaker list at Green Ship Technology (GST) in March! Read more on the agenda for the world's largest conference on green ship technology here.