Each year, the shipping industry is responsible for roughly 3% of global greenhouse gas emissions. While the industry has been making strides toward decarbonization, more urgent action must be taken. At current growth rates, shipping could account for 10% of global emissions by 2050.
Within the industry, there is ambition to decarbonize, which is leading to untapped business opportunities. In July 2023, the International Maritime Organization (IMO) adopted the 2023 IMO GHG Strategy – a framework intended to reduce harmful GHG emissions from the industry and reach net-zero emissions from international shipping by 2050. The strategy introduces checkpoints, such as reducing emissions by 20% by 2030, and 70% by 2040.
While it’s difficult to estimate the volume of zero- or low-carbon fuels that will be present in the industry in the next few decades amid technological, regulatory and infrastructure uncertainties, alternative fuels are expected to be the dominant long-term solution. Despite the critical need for decarbonization, shipping has so far seen fewer investments in solutions compared to other climate verticals. Many made in the last two years have focused on energy efficiency, such as software solutions that help decrease emissions but don’t reach sufficient reduction targets. Alternative fuels are needed in order to fully decarbonize the industry, particularly for large intercontinental vessels like bulk carriers, oil tankers and container ships that produce the majority of emissions.
Such alternative technology solutions for long-distance vessels are critical, but they must have enough power to propel the ships around the globe, all while maintaining space and cost effectiveness. To accelerate decarbonization, the most promising and high impact solutions include renewable methanol, ammonia and carbon capture – areas ripe with investment opportunity.
Investment opportunities
The industry’s future will likely include a blend of fuel types. For large shipping vessels traveling long distances, zero-emission fuels such as green methanol and ammonia will likely dominate over the medium- and long term, with carbon capture a potential short-to-medium term solution.
Despite the continued expected prominence of fossil-based fuels, investment in onshore production of green hydrogen-based fuels is on the uptick, which indicates that alternative fuels could become both cost effective and available. The development of fuels with greater energy density than hydrogen, such as methanol and ammonia, is critical for larger vessels where space constraint is significant. The fuel must be able to carry the ship for long distances and refuel in all corners of the world. Batteries and hydrogen are starting to be used for ferries and other short-distance vessels and will likely continue, but will not be sufficient for longer-distance voyages.
In addition to being more energy-dense than hydrogen, ammonia and methanol are two promising examples of alternative and carbon-free fuels for long-haul shipping as they can reduce emissions by up to 100%, assuming a green production. The shipping industry also has experience transporting such fuels, making them easier to deploy. One of the market leaders in producing green ammonia is Amogy, a Breakthrough Energy Ventures-backed start-up whose technology breaks down ammonia into hydrogen and nitrogen at low reaction temperatures with high energy density. On the green methanol side, companies are working hard to create scalable and low-cost green methanol, ranging from large shipping majors like Maersk to start-ups like Oxylus Energy, a climate technology company developing low-temperature and low-pressure conversion of carbon dioxide into green methanol. Oxylus Energy recently raised a $4.5 million seed round, led by our firm Azolla Ventures and Toyota Ventures.
While early movers have made investments in vessels that can run on alternative fuels, especially green methanol, lack of sufficient regulatory incentives to close the gap between the price of gray and green is resulting in an expectation to continue to use fossil fuels and to invest in lower emitting fossil-based fuels, such as liquified natural gas. Given the continued use of fossil fuels, carbon capture technology presents itself as a strong contender for reducing carbon emissions in the short-to medium term. Carbon capture is the process of trapping carbon dioxide produced by burning fossil fuels as a way of reducing carbon dioxide emissions. One of the promising carbon capture technologies for shipping is post-combustion technology, due to its relatively lower cost and ability to be retrofitted to existing vessels.
Companies are striving to create safe carbon capture and storage solutions for the shipping industry, such as our portfolio company Calcarea, which uses a reactor based on the “Accelerated Weathering of Limestone,” a method of capturing and storing carbon. Another carbon capture start-up is Seabound, whose calcium-looping technology chemically reacts CO2 with calcium oxide to create calcium carbonate. Both Calcarea and Seabound have worked with Lomar Shipping. Assuming the logistics of storing and offloading the carbon captured onboard is managed, these green technologies present a promising investment opportunity, and the market is expected to experience an annual growth rate of 6.2% from 2023 to 2030.
The key to success: infrastructure investments
Ship owners are concerned about whether alternative fuels are effective for deep sea shipping, but a bigger question remains: How can these fuels be produced at scale and service all ships?
Nearly 90% of the capital investments required for shipping decarbonization are associated with infrastructure for producing alternative fuels. Some shipping companies have fixed routes between large ports, including large container vessels that are making the first moves in the industry to decarbonize, which facilitates investments in green fuel procurement and storage. However, over half of international maritime trade passes through smaller ports spread across the globe. All of these must be able to accommodate refueling needs for long-haul shipping decarbonization.
The good news: Some of these infrastructure investments will be made regardless of the shipping industry. Consider it a “chicken and egg” problem — the shipping companies need infrastructure in place to fuel the ships, but the infrastructure won’t be put in place until there are vessels that will consume the fuel. Significant investments are still required, as it seems unlikely that shipping companies will invest in vessels that run on alternative fuels until they are comfortable that their ships can be refueled.
Given that the current state of alternative technologies for shipping is still largely in an early phase, some technology risks will be assumed. Regulation in the space is also continuing to be established and defined, so investors and startups will need to be aware of and work with regulatory bodies and classification societies to shape future fuel requirements. The good news is that there are demand and incentives for decarbonized solutions, which creates an incredible opportunity for investors. We need all hands on deck to disrupt this hard-to-abate industry, and our money is on green methanol, green ammonia and carbon capture as the key shipping solutions for impact and scale.
Amy Duffuor is Co-founder and General Partner of Azolla Ventures. Alexandra Steckmest is a former Azolla Investment Fellow and Board Member of Wallem Steckmest & Co AS.
