The Shipping Industry Faces Financial Risks from Stranded Assets Due to Greenhouse Gas Regulations

A new report from UCL’s Energy Institute Shipping and Oceans Research Group highlights the financial risks faced by the shipping industry due to stricter greenhouse gas regulations. These regulations, possibly set for adoption at the International Maritime Organization (IMO) this year, coupled with the global transition to a low-carbon energy system, pose significant challenges to the sector.

The report emphasizes the potential for stranded assets in the shipping industry, with supply-side risks arising from carbon-intensive vessels becoming obsolete and demand-side risks stemming from reduced fossil fuel demand. Currently, over 40% of ships globally transport fossil fuels, and nearly all ships rely on fossil fuels for propulsion.

To align with shipping’s estimated share of the carbon budget of 9.6 gigatonnes, a substantial portion of the existing and ordered fleet value would need to transition quickly to zero-emission technologies or face premature scrapping. The shift away from fossil fuels in the wider economy also poses risks of oversupply for fossil fuel-carrying ships, with liquefied gas tankers facing the highest exposure to this risk.

Dr. Nishatabbas Rehmatulla, a principal research fellow at the UCL Energy Institute, warns that many shipping stakeholders are not prepared for an ambitious transition. He cautions that an investment strategy based on a “watch and wait” approach could lead to unforeseen write-downs and losses within and beyond the sector.

The study suggests that retrofitting and repurposing ships could mitigate the impact of stranded assets, but these measures come with significant costs. Dr. Tristan Smith, a professor of energy and transport at the UCL Energy Institute, notes that the IMO’s direction in 2023 clarified the supply-side risks and emphasizes the need for proactive measures to address the impending challenges.