The IMO has agreed draft amendments to MARPOL Annex VI which will insert a “Net-zero framework” of regulations to take international shipping to net-zero emissions by 2050. These are the mandatory requirements on ships resulting from the 2023 IMO Strategy on Reduction of Greenhouse Gas Emissions from ships.
What does this entail?
Each ship shall reduce its GHG intensity of fuels used annually in accordance with a set of tiered trajectories. The baseline the 2008 level of 93.3 gCO2eq/MJ on a Well-to-Wake basis.
The upper tier (base target) reduction rate for 2028 is 4%, increasing annually to 30% by 2035.
The lower tier (direct compliance target) reduction rate for 2028 is 17%, increasing annually to 43% by 2035.
All reduction rates are measured from the baseline 2008 level of 93.3 gCO2eq/MJ.
GHG intensity (GFI) is much like the concept used in the FuelEUMaritime regulation. The system works in the way that a ship’s attained annual GFI is calculated, and this value is compared to the upper and lower requirements of the base and direct compliance targets. Attained GFI values above the base target is priced by calculating the differential to the base target and multiplying this by the total energy use for the year and the price of 380 USD/ton of CO2eq. This is called buying remedial units (tier 2 RU).
Furthermore, a ship shall also comply with the direct compliance target. This target is met by multiplying the gap between the base and direct compliance target with total annual energy use and a price of 100 USD/ton of CO2eq. This is called buying remedial units (tier 1 RU).
Obviously, a ship can choose to comply with both the upper and lower target by using a low emission fuel, or even a zero or near zero GHG emissions fuel (ZNZ). Overcompliance with the direct compliance target earns surplus units (SU) which can be spent above the base target, be banked for a limited time (2 years) or sold (transferred) to other ships (but only once per unit).
Use of ZNZ fuels with an initial GFI below 19 gCO2eq/MJ is intended to be rewarded by compensation payments from the funds collected (RU sale) in the IMO Net-zero fund. The amount of reward is not yet established.
As is evident from the above, many elements are comparable to those of the FuelEUMaritime regulation. However, the IMO system is more complex with two tiers of compliance and the differentiated cost of remedial units based on the tiers. The system is set-up to allow SU trade between ships, whilst at the same time limiting the trading to once per SU. This is intended to prevent speculation.
The intention with the differentiated RU price above the base target is to make it more expensive to pay than use a compliant base target fuel.
Conversely, the direct compliance RU price is set to make it less expensive than the use of direct compliance target fuel.
As fuel price is volatile in the market, both for fossil fuel and sustainable fuel, the intention is to recalibrate the RU prices every three years to retain the intended more expensive/less expensive comparison to compliant fuel price.
There is naturally much more detail to this and BIMCO will be expanding on this both in relation to commercial implications and general understanding of the system, which is due to be adopted by the IMO in October this year.
Once adopted, the “Net-zero framework” will enter into force by 2027, with a first monitoring year of 2028.
