Déjà Vu At IMO
Can the impasse be broken?
By the time you read this article the outcome of IMO’s Marine Environment Protection Committee (MEPC 84) taking place in late April will be known. Ahead of that meeting we have seen new proposals submitted to amend the draft IMO Net-Zero Framework (NZF) which if taken forward have significant implications for both the content but also timeline for implementation. Those proposals are considered below along with the implications of the current impasse. It remains the case that there is the distinct possibility the current impasse will continue as even if the current NZF were to be adopted later this year the latest proposals suggest successful implementation could soon run into problems. How the lack of global rules is impacting investment decisions, not just in alternative fuels but even between different shipping sectors due to their differing commercial risk profiles, is also considered.
Two of the submissions propose significant differences. One by Argentina, Liberia and Panama and another by Japan. Both these two proposals seek to address the key issues where there is a lack of consensus including the imposition of a “global carbon tax” and its impacts on economies especially consumers, and that the draft GHG fuel intensity targets and time limit on validity of surplus units de facto eliminated the potential use for compliance of certain alternative fuels such as LNG and sustainable biofuels.
The proposal submitted by Argentina, Liberia and Panama (remember Liberia and Panama flag over 30% of the world fleet by gross tonnage) goes furthest in restructuring the framework. It removes remedial unit pricing, keeps the surplus unit trading architecture, replaces the fixed reduction trajectory with one derived from commercial fuel availability, fuel scalability and fuel cost limited by affordability criterion whereby the price does not exceed 15% above the current market average for standard marine fuel e.g. VLSFO.
Provisional analysis of this proposal appears to indicate that fossil LNG is currently the only option for meeting the proposed affordability criterion. Finally, and most significantly, the proposal eliminates the IMO Fund.
In effect the Liberian paper seeks for the market to drive the decarbonisation of shipping in that decarbonisation would follow the availability and scaling of alternative fuels, assuming that this would bring about cost reduction for those fuels, rather than the primary driver being regulatory compliance which increasingly strengthened marine fuel GHG intensity reduction requirements as set out in the draft IMO Net-Zero Framework.
The Japanese proposal seems a more concerted attempt to find a compromise as it is more aligned with the IMO Net-Zero Framework architecture but with one major difference, that is, it also suggests that compliance now be achieved with “A new scheme without the IMO Fund” based on trading surplus units alone. Rather than paying fees for non-compliance, and to address concerns about the impacts of the targets and feasibility, the framework would initially have weakened GHG marine fuel intensity targets until mid-2030’s that ships would primarily comply through obtaining surplus units from compliant ships. The suggestion that if there were insufficient surplus units available then ships would donate to maritime related projects seems unlikely to be accepted and leaves open whether surplus units could be obtained from out of the sector?
Removal of the IMO Fund has significant implications as it would mean no resources to “reward” use of zero or near-zero fuels, technologies and energy sources, nor to support efforts in developing countries to decarbonise their maritime sectors, which is politically significant and for many IMO Member States what they perceive as their “reward” for supporting the IMO framework.
At this moment in time there is no clear way forward for the simple reason that the key decision at the session will be whether to accept any of the new proposals? If accepted, then the implication is that it would require the current draft text to be re-opened for negotiation. If the text is re-opened for re-negotiation, then this is likely to further delay adoption of the framework, as no doubt opponents would argue that the text would need to be re-approved which at the earliest could be at MEPC 85 in November this year, for the mandatory 6-month circulation period before adoption at MEPC 86 next year. The consequence is clear, adoption would now be in 2027 (at the earliest), and this would mean that the IMO requirements could not come into force much before 2029.
The US has made clear its staunch opposition to the IMO’s GHG Fund in which monies are raised from the purchase of remedial units to comply with annual GHG fuel intensity requirements when compliant fuel is not used. The US will not be compromising on its position, not least because the US always had this position on a ‘global levy’ even before the approval of the IMO NZF in April 2025, and it is just that the stated position has been amplified by the current US administration.
Of the proposals put forward there is no doubt the Liberian proposal most closely aligns with the US red lines. If this were the case, then this would also be important on the issue of how the adopted amendments are “accepted” under international law before the rules can enter into force. The US has called for the framework to be accepted under the “explicit” amendment procedure (as opposed to the usual tacit acceptance procedure) that requires governments to formally notify IMO of their acceptance of the amendment. Even IMO acknowledges on its own website “This process is very time consuming and most of the amendments adopted this way never entered into force”! It may be that if the Liberian proposal is supported the US would remove its objection to the use of the tacit acceptance procedure thus providing significantly greater certainty on the entry into force date of the provisions and therefore when they would start becoming effective at signalling demand to the market.
Importantly, unlike several other UN bodies, the US has not withdrawn from IMO and last November was re-elected to the IMO Council. As such the US remains committed to IMO as the regulatory body for international shipping and so no doubt wishes to achieve a satisfactory outcome with a global measure if only as it would put pressure back on countries that already have in place regional/national measures or are considering doing so.
To gain a consensus there will need to be concessions made. Last October the US was quite exposed as an opponent (being that whilst it has significant shipping interests it does not have a large international registry) but with the new proposals coming forward from Liberia, Panama and Japan there is clearly now a significant minority that cannot be ignored. For me it would be utmost folly if governments sought to force the issue against those interests.
Indeed, in the wake of the failure to adopt the draft NZF during last October’s extraordinary session of the MEPC, there has been an increased focus on regional regimes like FuelEU Maritime, the EU and UK ETS, and potentially other national GHG measures that would impact the global maritime industry. Each regional/national scheme presents a compliance risk for ships trading internationally and adds to administrative burden for the shipowner and flag State. Ultimately, they each present a barrier to global trade and risk the introduction of distortions to the shipping market. It should be noted that rules set by a regional/national body can only be readily enforced by that regional/national jurisdiction. As such their impact is that they amplify the importance of a global agreement being made by IMO to reduce risks of market distortion but also reduce the uncertainty about the adoption of alternative fuels.
The commercial realities and bottlenecks in the marine energy value chain IMO continues to develop the regulatory framework for alternative fuels and technologies especially for safety. Also, recently, the lack of a regulatory framework for the liability of alternative fuels has been highlighted. Work will continue on these issues to support international shipping’s energy transition and address risks associated with alternative fuels and technologies. As confidence grows more owners are likely to invest in alternative fuels but until there is a global agreement this is likely to be on the basis of seeking to address risks for a specific sector or route.
Shipping demands a lot of fuel but for future clean fuels shipping will be a user like many other sectors and so in many respects the decision about availability at scale will depend on those sectors and their demand for the fuels. Clear demand signals for alternative fuels will remain primarily related to cost both actual (spot market) and, increasingly, net when you take into account compliance costs. In many respects this is why there is talk of quoting prices in terms of energy supplied rather than per tonne to ensure there is greater transparency when decisions on which fuel to purchase/invest in are being made.
In April 2025 IMO strengthened the Carbon Intensity Indicator (CII) requirements for ships of 5,000 gross tonnage and above such that the Reduction factor for the CII relative to the 2019 reference line will increase from 11% in 2026 to 21.5% by 2030. Whilst CII remains under “soft” enforcement, with requirement only being to produce a corrective action plan, the costs of compliance with EU and potentially other requirements are increasing and so CII is considered as providing a greater incentive for focusing on operational energy efficiency technologies such as wind. Furthermore, there is no doubt the recent significant spike in fuel cost due to geo-political issues and concerns about availability is making companies reassess their long term strategies both in terms of energy efficiency but also fuels they will look to use in the future.
Shipping is also often talked about in terms of a single transport sector but in actual fact there are over 10 different sectors/business models operating in the maritime industry and each has a different perspective on pricing the risks that need to be mitigated and as such perspective on the returns on any investment that may be made.
The clearest distinction is between the liner and tramp shipping trades, the largest emitting sectors of the market, where the difference is the split incentive. Whereas owner operators prevail in the container shipping sector, and as such direct investment decisions are based on the strategy of that operator and its investors and as such returns are tangible, in the tramp trades the connection between investment and return is broken as it is the charterer who pays for the fuel. As such decisions about investments are based on different sets of criteria and certainly whilst we do not have global GHG regulations for international shipping one of those criteria will be “do we have to do this to comply?”. If the answer is no, because the ship will not be subject to regional/national GHG rules, then there is no incentive to invest.
Wishing you safe seas and a fair wind.
Edmund Hughes