Determinants of the Price Premium for Eco Vessels

Abstract

As regulations regarding shipping decarbonisation and greenhouse gas emissions in general are becoming increasingly strict, ship owners have been facing the trilemma of investing in a cheaper but much more polluting conventional vessel or in a more expensive but eco-friendly one or postponing their investment decision. This paper quantifies the price premium paid for eco-friendly cargo-carrying vessels and examines the determinants of it. Weekly data from January 2019 until December 2023 indicates that eco vessels trade at an average premium of close to 25% compared to their conventional counterparts. However, the corresponding income premia are on average between 9% and 15%. Our findings further suggest that the price premium is time-varying and highly dependent on the prevailing market conditions; in expansionary freight markets, it is significantly lower than in normal/recessionary ones. Empirical estimation using non-linear threshold autoregressive models indicates that recent price premia and changes in the fleet supply are strong drivers too with fuel costs and market liquidity having ambiguous effects. However, the magnitude and significance of these drivers vary based on the market state and segment. Finally, the paper documents the adverse effect that the current technological and regulatory uncertainty has on investment in newbuilding vessels. Our findings have important implications for industry participants, policy makers, and regulators.

Keywords: Asset Pricing, Sustainable Shipping, Maritime Decarbonisation, Vessel Prices, Net Zero Shipping, Price Premium

JEL Classification: C13, G11, G12, R40