Posted: November 6th, 2023

Impact of Emissions Trading Schemes on Investments in LNG as a Marine Fuel

Impact of Emissions Trading Schemes on Investments in LNG as a Marine Fuel
Emissions trading schemes have the potential to significantly influence investments in liquefied natural gas (LNG) as a marine fuel. By placing an explicit price on greenhouse gas emissions, emissions trading aims to make lower-carbon options economically preferable over time compared to higher-emitting fuels. For LNG as a marine fuel, the inclusion of methane in emissions trading could affect both newbuild orders and the operational deployment of existing LNG-fueled vessels on routes covered by the scheme.
The European Union Emissions Trading System (EU ETS) is expanding to include emissions from maritime transport starting in 2023 (European Commission, 2022). Shipping will be phased into the EU ETS between 2023-2025, with an increasing share of emissions covered each year (European Commission, 2022). This progressive inclusion is expected to raise compliance costs for vessels using LNG as a fuel on European routes. Some analysts project the carbon price under the EU ETS could amount to around €70 per tonne of LNG by 2026 for ships’ CO2 emissions (S&P Global Commodity Insights, 2022).
While current high LNG transport rates may dampen the initial compliance cost impact, the long-term effect will be to internalize climate policy in future investment decisions involving LNG (S&P Global Commodity Insights, 2022). Shipowners considering an LNG-fueled newbuild may opt for an engine design featuring very low methane slip to minimize allowance needs under the EU ETS (The ICCT, 2020). For ships already using LNG, owners may deploy more efficient vessels on covered routes to reduce required carbon allowance purchases.
Overall, the EU ETS has significant potential to influence both newbuild ordering patterns and operational deployment choices for LNG-fueled ships. Investors will need to carefully evaluate regulatory risks and compliance costs of LNG over different timeframes and routes under emerging climate policies like the EU ETS (TradeWinds, 2022). Flexibility to adopt future low-carbon technologies may also help mitigate policy risks for investments made under current assumptions about LNG as a fuel.
In addition to carbon pricing under the EU ETS, the scheme’s proposed inclusion of methane could impact LNG investments. Methane, the primary component of natural gas, has a higher global warming potential than CO2 over a 100-year timeframe (IPCC, 2021). Including methane in the EU ETS from 2025 would for the first time regulate these emissions from LNG-fueled ships (S&P Global Commodity Insights, 2022).
Recent studies show LNG carriers and bunker vessels can emit significant quantities of methane through venting, leaks, and engine exhaust (ACS, 2022). Pricing these emissions could increase compliance costs, though the impact may be limited if methane slip rates from engines are low (S&P Global Commodity Insights, 2022). Still, pricing methane could factor into the investment case for LNG-powered newbuilds versus alternative low-carbon fuels with inherently lower methane emissions like hydrogen or ammonia.
Policy approaches to mitigate methane slip from LNG engines are also being explored. The European Commission and United States have proposed performance standards and methane number requirements to reduce slip rates from four-stroke dual-fuel engines (IOPScience, 2022). Adopting engines certified to very low methane emissions could help address regulatory risks from methane pricing for shipowners and investors.
Looking ahead, compliance with emerging climate policies like the EU ETS will be an important consideration in investments involving LNG as a marine fuel. While LNG remains the most established low-carbon alternative currently available at scale, pricing carbon and methane emissions increases both regulatory and financial risks over the long asset lifecycles common in shipping. Investors will need to carefully evaluate these risks and the potential for future fuel technologies to decarbonize further as policies strengthen over time. Flexibility to adopt alternative fuels could mitigate policy risks for investments made under current assumptions about the role of LNG. Overall, emissions trading schemes have significant potential to shape decisions around LNG as a marine fuel.
In conclusion, the inclusion of shipping in the EU ETS and proposed expansion to methane emissions creates both compliance costs and regulatory uncertainties for LNG as a marine fuel. While LNG remains an important transition technology, emissions trading highlights the need for investors to consider both near-term economics and longer-term climate policy risks. Flexibility, efficiency improvements, and emerging zero-carbon fuels may help mitigate some of these risks for investments made on current LNG assumptions. Emissions trading schemes overall are likely to influence both newbuild choices and operational deployment patterns involving LNG over time.

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