A rapid transition could lead to “premature scrapping” of over a third of the fleet, valued at over $400 billion, unless it undergoes costly retrofits to remain competitive in the wake of new greenhouse gas (GHG) policies and wider energy transition, a new report shows.
The report titled “Supply-side and demand-side stranded asset risks in shipping” and released by UCL’s Energy Institute Shipping and Oceans Research Group assesses the financial risks to the shipping industry from stranded assets due to stricter GHG regulations , due for adoption at 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. All investors will need to actively address these risks through strategic investment choices, energy efficiency measures, and proactive planning for the IMO’s mid-term measures and wider climate change policies.
The report finds that over 40% of ships globally transport fossil fuels, and nearly all ships are fossil-fueled . 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.
“If existing ships can be retrofitted to competitive zero/near-zero technologies, much of the fleet at risk of being stranded could be saved, and this is a strong incentive for investors to invest in retrofittable ships. However, even those retrofits would come at a cost, so we expect some asset devaluation as the mid-term measures become more material,” Marie Fricaudet , PhD Student at the UCL Energy Institute, said.
Growing evidence suggests that shipowners and financiers are not anticipating a rapid transition. In the short term, transition risks, such as those related to policy, litigation, and technology, do not appear fully credible to them. As a result, these risks are unlikely to be adequately factored into their investment decisions, thereby exacerbating transition risk, as shown in a separate study that revealed that a ship’s carbon intensity does not directly impact the cost of the loan for that ship.
“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,” Nishatabbas Rehmatulla , Principal Research Fellow at the UCL Energy Institute, explained.
Shipowners and financiers could manage or account for demand-side risks by avoiding investment in segments with uncertain future transport demand, investing in optionality for repurposing to other cargoes, and by factoring this risk into expected returns. Retrofitting and repurposing ships would reduce the amount of stranded assets but can still be a costly alternative. Uncertainty in future technology mix complicates planning but proactive management through optionality for example through dual-fueled vessels, of the supply-side risks of stranded assets remains necessary.
“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,” Tristan Smith , Professor of Energy and Transport at the UCL Energy Institute, commented.
As per the report, investing in energy efficiency provides a degree of resilience in all scenarios by enabling fossil-fuel-powered ships to comply with climate regulations and lower emissions for an extended period, allowing time for the fuel mix to stabilize and reduce the size requirements for tanks and engines while maintaining the same level of transport capacity, thereby enhancing operational flexibility and efficiency.