Joe BettlesMarket Analyst
Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping
Denmark
joe.bettles@zerocarbonshipping.com
The maritime industry is at a pivotal moment. As the world’s economies strive to reduce greenhouse gas (GHG) emissions in line with the Paris Agreement, the cost gap between conventional and sustainable marine fuels leaves the sector without a commercial case for going green. While efficiency improvements can lower fuel consumption, achieving net-zero GHGs will ultimately require ships to use sustainable energy sources. Without government action to address this cost gap and boost the supply of clean energy, investments in sustainable ships and infrastructure could be delayed, locking in fossil fuels for decades.
The EU has risen to meet this challenge with new policies that, for the first time, create a business case for sustainable marine fuels. The Baltics, already a center of green energy, will benefit from new EU incentives that create more demand for sustainable fuels. Data from Eurostat shows that in 2022 the Baltic Sea Region accounted for 37% of the EU’s GDP in 2022 but 46% of the total installed wind and solar capacity. As a leader in the transition to green energy, the region is poised to turn new policy-driven demand into greater production of sustainable fuels.
Demand for green shipping in the EU has been stimulated by the introduction of two landmark maritime policies: the EU Emissions Trading System (EU ETS) for shipping and the FuelEU Maritime Regulation. Starting in January 2025, the FuelEU mandates ships sailing to ports in the European Economic Area to reduce the annual GHG intensity of the energy used onboard. By setting increasingly stringent limits on GHG intensity, it drives companies to replace bunker fuel oil with sustainable alternatives. Flexibility measures further incentivize the use of the most sustainable fuels, such as those made from hydrogen produced with renewable energy, by allowing companies to sell surplus compliance to other ships. Selling compliance has been a key revenue source for electric vehicle companies like Tesla, which sell credits to automakers unable to meet fuel standards in the US, China, and EU.
Sustainable fuels are further incentivized by the EU ETS, effective from January 2024. The policy extends the EU’s cap-and-trade program to the maritime sector, requiring ships to buy allowances equal to the tonnes of GHGs emitted. With prices ranging from 50 to 100 Euros per tonne in 2023, the EU ETS incentivizes efficiency and the transition to sustainable marine fuels, which are not taxed under the scheme.
Incentives for sustainable marine fuels are well-aligned with green industrial policies in the Baltics. A study by the Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping on Northern European & Baltic Green Corridors highlights how ports like Gdynia, Roenne, and Gothenburg are positioning themselves as green fuel hubs. However, to make these hubs a reality, fuel producers need contracts with customers before large investments can be made. With the FuelEU and EU ETS, companies can be confident that sailing green will lower costs and generate revenues, increasing the appeal of such contracts. We see this dynamic playing out with two of the first shipping routes to fully operate on methanol produced from renewable energy, both of which are container vessels on feeder routes in the Baltics. These vessels entered into agreements with a fuel supply company, ensuring a reliable supply of green methanol while helping to build a new green fuel industry.
Policy-driven offtake, combined with efforts to support production, can scale new green fuels at a critical point in the transition. Since green fuels are not yet widely used, each new production plant improves economies of scale and learning-by-doing, driving down costs. For the Baltics, expanding fuel production hubs diversifies energy sources, builds new industries, while helping to close the cost gap between fossil and sustainable fuels.
The Baltic region serves as a powerful example of how targeted government policies can stimulate the development of green industries and drive the energy transition. With the FuelEU and EU ETS creating a business case for sustainable marine fuels, the Baltics can align green industrial policies with a policy-driven market for clean energy. This not only serves the region's priorities for clean and secure energy but also positions it as a leader in the global effort to decarbonize shipping.
As the International Maritime Organization (IMO) considers measures to achieve net-zero emissions by 2050, the lessons from the Baltics can guide global climate action. By showcasing how government incentives can effectively drive demand that aligns with efforts to increase supply of sustainable fuels, the Baltic economies can influence the adoption of strong international regulations that further support green industries. This has benefits for the regional economy while accelerating the pace at which the world achieves climate ambitions.
For detailed insights on how the FuelEU is influencing the decisions to go green, explore our series at www.zerocarbonshipping.com/fueleu/