Pressure is growing from multiple directions for the shipping industry to decarbonise. Alternative fuels do exist to reduce or remove all emissions from fuel use, but they are not yet competitive with fossil fuels, and face a range of barriers to entry. Calls for policy support for decarbonisation are increasing, but it is not yet clear what such support should entail. 

Our analysis looks at the feasibility of applying a policy instrument known as a ‘

’ (CfD), which has seen previous success in driving down the costs of renewable energy generation technologies in the electricity sector. We explore the application of this policy instrument to the decarbonisation of shipping, unpacking the important design and implementation decisions with feedback from a wide range of stakeholders, and provide initial legal documentation based on our findings, drawn up by legal experts Pinsent Masons. 

The heavy transport sector is moving to the centre of attention for decarbonisation efforts. 

Pressure is increasing on governments to decarbonise all forms of transport – road, airborne and waterborne. The International Maritime Organisation (IMO) has agreed to reduce total GHG emissions from shipping by at least 50% by 2050 (from 2008 levels) and consultations are currently under way for the inclusion of shipping in an expansion of the European Union Emissions Trading Scheme. The shipping industry is looking to decarbonise with some major shipping firms, notably, Maersk (the world’s largest container shipping line), announcing zero-carbon targets. Calls for policy support in this effort are increasing.

Marine transportation accounts for an estimated 2.9% of global greenhouse gas (GHG) emissions.

 Even accounting for the COVID-19 pandemic, shipping emissions are expected to stay steady or increase significantly, with the IMO predicting that the sector’s emissions could reflect 90-130% of 2008 levels by 2050 for the most plausible pathways identified in its Fourth GHG study (2020). As shown in ES- 1, the emissions gap between the range of projected shipping emissions and the requirements of the 1.5C pathway under the Paris Agreement are daunting. 

Several potentially viable technologies for decarbonising shipping exist, with each at different stages of maturity in innovation and implementation.

 Options include batteries, biofuels, hydrogen-based fuels, carbon-based synfuels, nuclear, and wind power – although not all can meet the fuel energy density requirements of larger deep-sea vessels. 

Technological advances have reduced the cost of clean fuels but still more progress will be required for zero-emissions shipping to become economically viable. 

As shown in ES- 2 the costs of clean fuels, such as green hydrogen and green ammonia are more than double their fossil fuel counterparts, even with a modest carbon price of US$40 per tonne. The key barriers to large-scale private investment and adoption of such clean fuels are well-known and include high perceived technology risks, lack of supporting infrastructure, lack of a project pipeline, lack of stable and scalable fuel supplies, and perhaps most importantly their costs in the absence of carbon pricing (or its equivalent) on existing fuels.

Cost obstacles have been dealt with successfully in other sectors in recent years. 

Most notably, in the UK offshore wind industry, a renewable obligations scheme, followed by three rounds of contract-for-difference (CfD) auctions has seen the ‘strike’ price of wind-derived electricity reduced to a third of its pre-CfD value and to a price below current base-load electricity prices (ES- 3). This remarkable result has been achieved at least partly by using CfDs to promote private sector investment and thereby stimulate technological progress and accelerate learning rates.

This report investigates the design and implementation of CfD mechanisms for international shipping to support the sector’s decarbonisation.

 The purpose of such schemes is to incentivise investment in emerging technologies, to accelerate deployment and reduce costs to the point where they become economically competitive without support. 

Incentivising private investment is key to the necessary scaling and adoption of clean shipping fuels.

 In its basic form, a CfD can help achieve this by allowing a public sector entity to meet the difference between the market price for a fuel or technology (the ‘reference price’), and the ‘strike price’ required for its financial returns to be sufficiently attractive to developers and private investors. When the strike price is higher than the reference price, the scheme in effect subsidises the producer of the fuel or technology the difference. When the reverse is true, the producer repays the subsidy. 

The viability of any incentive mechanism depends on both legal and economic feasibility as well as appetite for uptake by relevant stakeholders.

 Any CfD solution must be sensitive to the needs of the shipping community and providers of supporting infrastructure. Consequently, a key focus of the project was a stakeholder engagement process aimed at understanding the myriad viewpoints from shipping and energy industries, government and regulatory bodies, financial institutions, researchers, and civil society. In designing the CfD we strove to strike the right balance between stakeholder needs, political and practical feasibility, the need for technology neutrality and a level playing field, and the need for specificity in the policy mechanism. 

The different technology options for shipping can be characterised as being either zero-carbon or net-zero-carbon fuels (ES- 4).

 These solutions each need very different, and potentially expensive infrastructure, which means it is potentially undesirable for all to exist at scale simultaneously. Certain technologies have a clear advantage for international shipping, but technology-neutrality is important to ensure the best long-term solution succeeds. There is however a trade-off between technology neutrality and the complexity of the CfDs, given the need to cater for the many and varied segments of the shipping industry.

We develop a framework for designing CfDs for international shipping, based on implementation of this instrument in other sectors, the specific features of the shipping industry, and stakeholder views.

A “Fuel-only” CfD, which is the simplest and most popular solution among stakeholders, providing shippers with zero-carbon emission fuels at the same price as Marine Gas Oil (MGO) but may not cover 100% of the costs of switching from to zeroemission shipping or necessarily provide support for infrastructure and retrofitting costs. This CfD can be applied equally to all shipping segments but does not help promote ‘nonfuel’, highly capital-intensive options like nuclear-powered or wind-assisted ships. 

A “Total Cost of Ownership” TCO-based CfD, which covers all costs associated with building and running a zero-carbon emission ship. This option is administratively much more difficult to manage and would likely require many variants to cover all shipping segments but is more technology-neutral, and potentially better for fostering competition, and for making progress on the cost of non-fuel components required to build and operate zero-emissions ships.

To provide industry stakeholders with a tangible legal product for use in taking the concept forward, the report concludes with draft “Heads of Agreement” for each of the two CfD options. 

These documents were drawn up by experienced law firm Pinsent Masons, based on the findings of the report. They are concise framework documents that can be used to outline an agreement in principle between parties and counterparties, laying out how each CfD would work and under what terms it would operate. They are intended to provide readers with an understanding of how the CfD might work in practice and enable industry stakeholders to see the concrete details of a basic CfD contract, locate points of agreement, and uncover issues that may require further negotiation. 

In summary, this report provides readers with an in-depth understanding of the difficulties facing a shipping industry looking to decarbonise as well as a potentially powerful solution to enable it to do so.

 It is our hope that readers take from this analysis the belief that a zero-emissions shipping future is an economically viable possibility.

Zero-Emissions Shipping: Contracts-for-difference as incentives for the decarbonisation of international shipping

" report of the Smith School of Enterprise and the Environment, the University of Oxford, co-authored by:

Alex Clark, Matthew Ives, Byron Fay, Ronan Lambe, Johanna Schiele, Lukas Larsson, Jessica Krejcie, Leah Tillmann-Morris, Peter Barbrook-Johnson, and Cameron Hepburn

Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.

Most major climate mitigation models produced for the IPCC and the International Energy Agency have continually underestimated cost trends despite these trends being consistent and predictable. By incorporating cost trends into a simple, transparent energy system model, the authors produce new climate mitigation scenarios that provide a contrasting perspective to those of standard models. 

A rigorous analysis of the historical cost trends of energy technologies shows that the decades-long increase in the deployment of key renewable energy and storage technologies (e.g., solar, wind, batteries, and hydrogen) has gone hand-in-hand with consistent steep declines in their costs. For example, the cost of solar PV has declined by three orders of magnitude (more than 1000-fold decrease) as it has become more widely deployed over the last 50 years – declining so much that the International Energy Agency recently declared solar PV in certain regions “the cheapest source of electricity in history” (IEA, 2020). Such cost reductions are the consequence of experience gained in design, manufacture, finance, installation, and maintenance – and the overall pattern of development is hence known as the ‘experience curve’.

In contrast, non-renewable energy technologies have seen no significant deployment-related cost declines over the last 50 years. The cost of electricity from coal and gas has largely remained steady, fluctuating by less than an order of magnitude. The average cost of nuclear electricity has even increased over this same period, partly in response to safety concerns.

These long-term technology cost trends appear to be consistent and predictable (Farmer & Lafond, 2016; McNerney et al., 2011). Alongside advances in the technologies themselves, we have seen advances in our understanding of how technological change unfolds in the economy more broadly and of the characteristics that fast-progressing technologies have in common with each other (Wilson et al., 2020). Several new methods that are statistically validated and firmly grounded in data have been developed for forecasting technological progress (Nagy et al., 2013; Way et al., 2019).

Incorporating technology cost trends into a simple, transparent energy system model has produced new climate mitigation scenarios that starkly contrast to those currently produced for the IPCC and the International Energy Agency (IEA). It may come as a surprise that in most major climate mitigation models, such as the IPCC’s Integrated Assessment Models (IAMs), the costs of energy technologies are not handled very transparently. They assume unsubstantiated limits to cost declines and often contain out-of-date data (Jaxa-Rozen & Trutnevyte, 2021; Krey et al., 2019). We use an alternative approach to explore the implications of these discrepancies and have found an exciting new decarbonisation scenario we have named the Decisive Transition in recognition of the commitment to a clean energy system that this scenario represents. This scenario is created by selecting deployment rates for new energy technologies, based on their historical trends, and allowing such trends to continue for around a decade before tapering off. Technology costs are then simulated hundreds of thousands of times to generate probabilistic forecasts based on the methodology published by Farmer & Lafond (2016). These probabilistic cost forecasts are generated for the various key technologies to model a lower cost evolution of the energy system that has yet to be explored by the major mitigation models of the IPCC and IEA.

This new perspective suggests a reassessment is due regarding the potential cost and pace of the global energy system’s transition. At present, policymakers usually assume that the transition of the energy system to a Paris-compliant emissions pathway will be expensive; that it will require a net reduction in the provision of energy services or economic growth; and that it will rely critically on technologies that are currently expensive, unproven, or potentially controversial – such as carbon capture and storage (CCS), second-generation biofuels, and new nuclear energy designs (e.g., small modular reactors).

In this report, we present two contrasting scenarios that illustrate how properly accounting for technological cost trends can challenge common perceptions regarding the costs and benefits of a Decisive Transition to clean energy technologies. The modelling presented in this report contrasts two very different scenarios: a Stalled Transition, in which total demand for energy services continues to grow at its historical average of 2% per year, but with the ratios of the different energy technologies frozen at their current values. This scenario provides a useful ‘worst-case’ baseline and a counterfactual for estimating relative costs. The second scenario is a Decisive Transition in which current exponential growth rates in clean energy technologies continue for the next decade, then gradually relax back to the low systemwide rate. Here we see that within 25 years, fossil fuels are displaced from the energy sector, with all essential liquid fuel use replaced by “green” hydrogen-based fuels. Solar and wind provide most of the energy; transport and heat are mostly electrified; and reliable electricity is maintained using batteries and chemical-based energy storage technologies. To provide a like-for-like comparison with the Stalled Transition, useful energy also grows at 2% per year, a rate much higher than in other deep decarbonisation scenarios.

Our Decisive Transition achieves almost all the reductions in greenhouse gas emissions necessary to match the most ambitious IPCC scenarios. Figure 1 presents the global warming associated with the Stalled (orange) and Decisive Transition (purple) scenarios compared to three key IPCC warming scenarios. Our Stalled Transition scenario is most closely aligned with what is regarded as the ‘worst-case’ IPCC scenario (SSP5 RCP8.5). The Decisive Transition is most comparable to the SSP1 RCP2.6 high mitigation ambition “Taking the Green Road” scenario. This is a remarkable outcome because, in contrast to the high ambition IPPC scenarios (SSP1 RCP1.9 and SSP1 RCP2.6), the Decisive Transition scenario achieves this result without reducing non-energy-based emissions; without any significant deployment of nuclear, carbon capture and storage, or energy-saving technologies; and without requiring a reduction in energy demand or economic growth. It is merely a result of extending the current high growth rates in deployment of clean energy technologies for another decade.

The Decisive Transition is significantly cheaper than the Stalled Transition. The modelling show-cased in this report suggests that a clean energy system could be trillions of dollars less expensive to engineer than continuing with the current system based on fossil fuels (Way et al., 2020). This is even without factoring in pollution and associated morbidity and mortality (Vohra et al., 2021), or the multitude of additional physical climate costs likely to result from higher levels of global warming (Arnell et al., 2019).

In the short- and medium-term, situations may arise where renewables cannot cheaply meet the energy demands of certain regions. In these situations, arguments might be made for investment in interim fossil-fuel-based solutions, such as natural gas. However, it should be kept in mind that such investments may not contribute to the final transition and can instead lead to carbon lock-in and create additional transition risk. Foreign aid should be aligned to enable developing states to instead “leapfrog” to electrification and new clean electricity generation, load balancing, and storage technologies.

Unlike most other ambitious scenarios, the Decisive Transition scenario does not rely on underdeveloped technologies, such as carbon capture and storage (CCS) and Bioenergy with CCS (BECCS). This raises questions about whether we should continue channelling investment towards technologies like CCS and nuclear fusion for energy provision. Neither may mix particularly well with renewables and will detract investment away from driving down costs in renewables and storage technologies.

It is still vital that we counter institutional and social barriers to a Decisive Transition, that financial stability is maintained, that gender and social equality is maintained or improved, and that job losses in the fossil fuel industries are addressed. The IEA has shown the potential for renewables to provide far more jobs than other energy-related investments (IEA, 2020), but these jobs may not be created in the areas where coal mines are being closed. Industrial strategies will therefore need to be developed to counter such transition risks. Efforts to maintain or improve gender and social equality should be prioritised now to avoid perpetuating existing gender inequalities (Pearl-Martinez & Stephens, 2016). Social equity concerns also go well beyond the implications for coal miners and include communities tied to coal-fired power stations and communities linked to oil extraction and refinement (Carley & Konisky, 2020). Countries with high reliance on coal-fired energy will also require international support in establishing grid balancing, storage, and efficient power markets to enable higher renewable penetration.

Transition risks are real and likely, given how rapidly technological trends are moving, but it must be remembered that, unlike physical climate risks, stranded assets are only a one-off cost. If we do not end climate change, the more frequent and damaging extreme hurricanes, floods, droughts, and wildfires are likely to cause far greater economic costs that will be constant, long-term, and potentially permanent. Our estimates show the costs of climate damages up to the end of the century from a Stalled Transition are at least ten times greater than any transition risk associated with the Decisive Transition.

In summary, the Decisive Transition scenario indicates that the decarbonisation of the global energy system:

• Is likely to be cheaper than commonly assumed.

• May not require any declines in economic growth.

• Can be achieved without large investments in unproven and potentially expensive technologies.

• Has the potential to save hundreds of trillions of dollars in physical climate damages.

This new perspective also suggests that renewable technologies like solar and wind can provide a steady and secure energy supply, rebutting common beliefs regarding the intermittency problems with renewables. There is a belief that the large-scale deployment of renewables in the global energy system will lead to energy supply failures and high grid integration costs in the future. Our model challenges these perceptions by coupling solar and wind deployment with the deployment of sufficient short-term storage (e.g., batteries) and long-term storage (e.g., hydrogen and ammonia) technologies to ensure high levels of energy security. This feature allows these storage technologies to also “ride” down experience curves of their own, reaching far higher deployment levels than are commonly anticipated. In doing so, the model demonstrates that it is economically feasible to create a carbon-neutral energy system which:

•Deals with the intermittency problem of renewables through the use of energy storage technologies.

• Allows key storage technologies, such as batteries and electrolysers, to continue their cost decline trends.

• Provides for high levels of energy security while enabling large-scale integration of renewables.

This research offers the opportunity to revisit thinking around the most financially effective speed to transition to a Paris-compliant world. We have found strong evidence to suggest renewable and energy storage technologies will continue their current decreasing cost trends. Most, if not all, of the major climate mitigation models informing decision makers, have continually underestimated these trends. For instance, most major climate mitigation models have minimal electric vehicle take-up in the next few decades. However, if electric vehicle costs continue on current trends, they could be cheaper to buy and run than internal combustion vehicles in less than a decade (Sharpe & Lenton, 2021). Somewhat counter-intuitively, this increased electricity demand from electric vehicles might actually drive down electricity costs (Lafond et al., 2020). This is due to the positive feedback dynamics that our model is designed to capture and that standard economic models do not. Increased adoption of electric vehicles will lead to more demand for electricity. If this increased demand is met with the deployment of more renewables, renewables will get cheaper, electricity generation will get cheaper, electric vehicles will become cheaper and more desirable... and the feedback repeats – provided that this new electricity demand is met with more deployment of renewables.

This research can act as a catalyst for governments to reassess their NDCs at COP26. This is especially true for nations looking to enact a “green recovery” programme or expects significant future energy demand growth and, therefore, are already considering new investment in energy infrastructure (Hepburn et al., 2020). We need a better understanding among national policymakers on what drives these renewable cost reduction trends and how a Paris-style collaboration on investment in renewables and storage for national targets could benefit all countries. COP26 offers a ripe opportunity for a Glasgow Accord on action. Renewables are clear “runners” in the technology race, and early investment will allow countries to capture more of the prosperity this green industrial revolution offers (Farmer et al., 2019).

After the turmoil and horrible cost of the Covid-19 pandemic, we cannot afford business-as-usual – it is too risky and too expensive. When coupled with storage, expanded transmission networks, and smart grids, renewable energy potentially provides a solution to the energy trilemma that a fossil fuel-based system simply cannot replicate – an energy system that is affordable, secure, and sustainable.

A new perspective on decarbonising the global energy system

Matthew Ives, Luca Righetti, Johanna Schiele, Kris De Meyer, Lucy Hubble-Rose, Fei Teng, Lucas Kruitwagen, Leah Tillmann-Morris, Tianpeng Wang, Rupert Way & Cameron Hepburn

Johanna Schiele is a McCloy Fellow and MPP scholar at 

, focusing on energy and climate regulation. She holds a BA in Economics and Philosophy from the University of Oxford and previously worked in energy market modelling at Aurora Energy Research and at the 

European Commission's Directorate-General for Climate Action

You can’t miss it!

Johanna Schiele

Johanna Schiele

A new perspective on decarbonising the global energy system

Recent publications

Readers also like

Want to know more about illuminem Voices?