The maritime industry faces the risk of “premature scrapping” for a significant portion of its fleet, potentially valued at over $400 billion if a rapid transition to decarbonization occurs. This is because many existing vessels may not be able to comply with the increasingly stringent GHG regulations and the broader energy transition without costly retrofits, potentially making them economically unviable, reports UCL Shipping and Oceans Research Group.
Financial Risks
A new report from UCL’s Energy Institute Shipping and Oceans Research Group highlights the financial risks to the shipping industry stemming from stranded assets due to stricter GHG regulations and the global transition to a low-carbon economy.
The report identifies significant supply-side risks associated with carbon-intensive vessels becoming obsolete and demand-side risks linked to decreased fossil fuel demand. The report emphasizes the need for investors 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 reveals that over 40% of ships globally transport fossil fuels, and nearly all ships rely on fossil fuels. To align with the shipping sector’s fair share of the carbon budget of 9.6 gigatonnes, over one-third of the existing and ordered fleet value would need to transition to zero-emission technologies or face premature scrapping. The transition away from fossil fuels in the wider economy poses further risks of oversupply for fossil fuel-carrying ships. In particular, liquefied gas tankers face a significant risk of oversupply, with 26-32% of fleet value potentially at risk around 2030.
Retrofitting Vessels
Marie Fricaudet, PhD Student at the UCL Energy Institute, highlighted the importance of retrofitting existing ships with zero/near-zero emission technologies. This would mitigate the risk of stranding assets and incentivize investors to invest in retrofittable ships. However, she acknowledged that even with retrofitting, some asset devaluation is expected as the mid-term measures become more stringent.
The report suggests that shipowners and financiers are not fully anticipating a highly ambitious transition. This lack of anticipation is evident in their investment decisions, where transition risks, such as those related to policy, litigation, and technology, are not adequately factored in. This “watch and wait” strategy could lead to rapid and unanticipated write-downs and losses. Dr. Nishatabbas Rehmatulla, Principal Research Fellow at the UCL Energy Institute, emphasized that research consistently indicates a lack of anticipation for an ambitious transition among most shipping stakeholders, particularly investors. This approach, she warned, could lead to significant financial risks.
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Source: UCL Shipping and Oceans Research Group
