Assessing impacts of EU and US policies on accelerated deployment of alternative maritime fuels

The international shipping industry faces the daunting challenge of achieving net-zero emissions by 2050 and 5-10% uptake of alternative fuels by 2030. High costs and uncertainty pose significant hurdles for the investment needed in alternative fuels to reach these goals.

These challenges may be overcome on transatlantic routes, where US and EU policies can narrow the cost gap through subsidies on alternatives and penalties on conventional fossil fuels. Furthermore, the FuelEU pooling mechanism has the potential to provide time-limited first-mover rewards, which could overcome the incentives to delay investment.

This report examines the significant potential impact of the US and EU’s evolving climate policy landscape on maritime decarbonization. We investigate the investment implications of three pivotal policy developments:

1. The subsidies in the US Inflation Reduction Act (IRA) that can reduce alternative fuel costs.
2. The EU Emissions Trading System (ETS) and the FuelEU Maritime Regulation which progressively raise
   the costs of conventional fossil fuels.
3. The FuelEU pooling mechanism designed to reward early investment in advanced green technologies.

While EU and US policies will drive a range of behaviors including energy efficiency, this analysis is focused on the uptake of the alternative fuels identified in the Maritime Decarbonization Strategy as key pathways to reaching net-zero targets.

We first evaluate the impacts of each policy on key alternative fuel pathways, and then look at the combined impacts for transatlantic routes where both EU and US policies overlap and create opportunities for the shipping industry to test and scale alternative technologies. We provide actionable insights aimed at fuel producers, shipowners and operators, and cargo owners, and highlight where existing policy can drive near-term action.

Key takeaways

Forward thinking companies in the maritime value chain can strategically position themselves in an evolving policy landscape to take advantage of new incentives for alternative fuels. For cargo owners, the results translate into an opportunity to accelerate upstream emissions reduction targets for cargo traded between the US and the EU.

Fuel producers, meanwhile, can make a more convincing case for shipping companies to engage in offtake agreements to ensure supply on transatlantic voyages within the timeframe of FuelEU pooling incentives. Finally, for shipping companies operating in the North Atlantic, new policies with substantial first-mover rewards may shift the prevailing mindset — from the risk of action on the green transition to the risk of inaction.

We find the following key takeaways:

• Different policy approaches in the US and EU offer complementary solutions to scale up the production and consumption of alternative fuel. The IRA can provide benefits that significantly reduce alternative fuel production costs, while EU regulations increase the demand for alternatives through additional costs on fossil fuels.

• The EU ETS and FuelEU can double the cost of conventional fuels by 2030 and increase the cost of Low Sulfur Fuel Oil (LSFO) by more than 5x in 2050.However, the cost of compliance with the FuelEU emissions intensity mandate is highly sensitive to uncertain biofuel availability.

• The FuelEU pooling mechanism can provide significant time-limited benefits for alternative fuels from 2025 through 2044, incentivizing near-term investment.

• Transatlantic voyages will be impacted by both EU and US policies. The results from our analysis of container voyage costs show that the combination of EU and US policies could close the gap between LSFO and alternative fuel cost in 2030.