Legal hands pilot launch of green shipping deal

When ships operated by Germany’s Hapag-Lloyd set off from Rotterdam en route for east Asia next year, they will outwardly look no different from the scores of other giant vessels that leave Europe’s busiest port every day. But many will be pumping out markedly different emissions, thanks to a groundbreaking initiative facilitated by a leading US corporate law firm.

The vessels will run on biomethane, a fuel produced from organic waste, like manure, that contributes at least 90 per cent less carbon than conventional marine fuels to the atmosphere’s carbon cycle. The extra cost of using the innovative fuel will be borne by the Zero Emission Maritime Buyers Alliance (Zemba), a group formed last year by ecommerce retailer Amazon, clothing brand Patagonia and German coffee shop and retail brand Tchibo. Another 29 mostly consumer goods companies are also now participating.

The group was established to accelerate shipping lines’ adoption of new, lower-carbon alternatives to heavy fuel oil, which has traditionally powered vast container ships like those operated by Hapag-Lloyd.

“The challenge boils down pretty clearly to the cost gap between these new fuels and conventional maritime fuels,” says Ingrid Irigoyen, senior director for ocean and climate at the Aspen Institute, a US-based foundation. It focuses on environment and social justice initiatives and first put forward the idea of an alliance.

Irigoyen says a range of low-carbon and zero-emissions fuels has been developed for the sector — but their much higher price means their adoption is slow. To her, the challenge is: “How do you close that cost gap?”

Jeff Merrifield, a Washington, DC-based partner at US law firm Pillsbury Winthrop Shaw Pittman, says he worked with the institute to put together a consortium of shippers — shipping line customers — seeking to encourage lower-carbon shipping.

“This group of entities came together and said: ‘We want to buy the services of maritime transport, and we’re willing to do it with a bit of a premium to incentivise the creation of the product’,” Merrifield explains.

Shipping lines are theoretically eager to reduce their share of global greenhouse gas emissions — around 3 per cent of the total. However, because customers are reluctant to pay the currently higher cost for non-fossil fuels, nearly all in the fiercely competitive market continue to use either traditional heavy fuel oil or, in some cases, liquefied natural gas.

The alliance was formed to generate the necessary mass of customers willing collectively to pay extra for cleaner fuels and make it worthwhile for a shipping line to use the cleaner product.

Hapag-Lloyd won Zemba’s first tender for low-carbon shipping services in May this year, which secured a commitment from members to buy 1bn container miles of low-carbon shipping powered by waste-derived biomethane. This will prevent an estimated 82,000 tonnes of carbon dioxide emissions over two years.

Zemba — whose membership now includes Ikea, Electrolux, Philips, Nike, Levi Strauss and Mondelez — plans to launch its second low-carbon shipping tender next year.

For commercial confidentiality reasons, the group declines to discuss how much more it is paying compared to using conventional fuels. However, an assessment earlier this year by S&P Global, the rating agency, suggested that biomethane cost around $21.03 per Gigajoule, against $11.90 for the same energy from normal liquefied natural gas.

Irigoyen says the alliance hopes that the new fuels’ commercial adoption will encourage policymakers to establish rules mandating cleaner fuels. The International Maritime Organization, the UN’s shipping organisation, is due to discuss establishing a mechanism obliging shipowners to expand the use of cleaner fuels in 2025.

“It’s both voluntary corporate action and policy support that could enable us to close that cost gap and will enable these fuels to come to scale,” says Irigoyen.

It’s voluntary corporate action and policy support that could enable us to close that cost gap

According to Merrifield, one of the professional challenges was navigating the competition — or antitrust — law aspects of the new association. Pillsbury Winthrop Shaw Pittman’s lawyers advised giving the group the form of an association while leaving the individual contracts between shippers and shipping lines in the name of the individual customers.

Merrifield says lawyers from across the firm — including experts on corporate law and outsourcing — helped with different aspects of the issue.

“We were able to engage with a maritime entity that was able to provide that initial tranche of cargoes [for the first tender],” he adds.

Zemba members will buy a set number of cargo miles on the greener, lower-emission ships but, under an innovative “book-and-claim” system, may use the miles to move cargo on other routes in other parts of the world. The cargo of other customers, paying conventional prices, may actually move on the cleaner ships.

Despite this complexity, Irigoyen says the initiative’s impact could be “significant”. Its second, larger tender will call for shipping lines to use e-fuels — made from a base of hydrogen produced by green electricity.

The aim, Irigoyen says, is to make a meaningful contribution to decarbonising ocean freight over the next few years.

However, Merrifield says the initiative will have truly succeeded when cleaner propulsion has become so widely used that its price has fallen below the level of traditional, dirty fuels. “The intention was to provide the initial incentive to get the shipping lines to provide these kinds of services,” he says. “I think the project has demonstrated that successfully.”

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