What you need to know about the IMO’s new greenhouse gas pricing mechanism

The shipping world held its collective breath over the second weekend in April and set their gaze towards London, where the Marine Environment Protection Committee (MEPC) met for the 83rd time in what would turn out to be a very contentious session.

The main topic of the MEPC meeting was to decide on whether to implement a universal greenhouse gas (GHG) levy and/or a GHG fuel standard, both of which are aimed at hitting the International Maritime Organization’s green targets that push shipping to become a net-zero industry by 2050.

From the outset, it looked like a universal levy was unlikely to happen, and a compromised text included tiered GHG fuel intensity requirements was introduced instead. In short, one of shipping’s most important green gatherings ever was abandoned by the US, and its key part was already dropped for softer solutions. The mother of all bad starts.

When it was all said and done, MEPC delegates approved the GHG pricing mechanism proposal via an extremely rare majority vote instead of the usual consensus. It was passed with 63 in favour, 16 against, while 24 states abstained from voting. Those in favour included, among others, EU countries, the UK, and China, while Middle Eastern countries, supported by Russia and Venezuela, were against.

To get the new pricing mechanism approved, the proposal will have to get a two-thirds majority at the October meeting. If it goes through, shipping will be the first transport sector to implement internationally mandated targets to reduce emissions.

The proposal states that ships must reduce their fuel intensity by a base target of 4% in 2028 against 2008 levels. This increases over time to 30% by 2035. The text also defines a direct compliance target of 17% for 2028 and grows to 43% by 2035.

So, what does that mean financially? The Tier 1 penalty is capped, based on the greenhouse gas fuel intensity (GFI) gap between the two targets, which is fixed from 2028 to 2035. Penalties are paid into an IMO-administered fund. If a ship’s fuel GFI falls between direct compliance and base targets, it incurs a penalty of $100 per tonne of CO2e.

If the fuel’s GFI exceeds the base target, the ship pays the maximum Tier 1 penalty, and an additional Tier 2 penalty of $380 per tonne of CO2e for emissions above the base target.

Over-compliant vessels will receive surplus units equal to their positive compliance balance, expressed in tCO2e, valid for two years after emission. Ships then will be able to use the surplus units in the following reporting periods, transfer to other vessels as a credit, or voluntarily cancel as a mitigation contribution.

IMO secretary-general Arsenio Dominguez believes that the first revenues, set to be collected in 2028, will be around $11bn to 13bn. Also, according to figures from UCL Energy Institute, the carbon price will be $11 to $12 per tonne, or around $900 per vessel, per day.

“The weak measure approved means aiming for a low bar and dragging our feet to get there. It will neither ensure sufficient emissions reductions nor raise the revenues needed for a just and equitable transition. That many of these countries abstained from the vote shows the measures are far from what was needed to address the crisis,” says Emma Fenton, senior director of climate diplomacy at Opportunity Green.

This is seconded by Aoife O’Leary, founder of the SASHA Coalition, an NGO forging green links between aviation and shipping.

“The sector’s only credible path to net zero that doesn’t compromise biodiversity is green hydrogen e-fuels. Instead, delegates have agreed to a measure that may lock in the use of environmentally destructive biofuels and LNG,” she says.

Probably the biggest point of contention for experts, apart from the universal levy, is the fact that the sector has now strayed off the Paris Agreement 1.5 degrees Celsius temperature goal and the IMO’s own targets.

“This adoption is a first step in the right direction. However, with an expected fall in emissions of around 10% by 2030 compared to 2008, the level of ambition is largely insufficient to meet the IMO target of emission reduction, let alone to meet a 1.5OC trajectory,” states Marie Fricaudet, senior research fellow at the UCL Energy Institute.

Regardless, this transition is ultimately going to move fast, even if it starts slowly, according to Tristan Smith, professor of energy and transport at the UCL Energy Institute.

“The classic shipping business model of buying/selling on the cycle, which depends upon a technology risk-free residual value, will not work. The fact that this policy sends at least that signal clearly, can be expected to avoid some of the greatest risks of technology lock-in, such as to further expand LNG use. And it can be expected to now focus minds on how best to make the move to hydrogen-derived fuels,” Smith explains.

The two-tier penalty system is still deemed complicated by many, but the matter was somewhat helped by the Global Centre for Maritime Decarbonisation’s development of a free cost and compliance calculator to help contextualise the penalties.

However, INTERCARGO secretary general, Kostas Gkonis, reveals that he still has his concerns regarding the complexity of the measures and the disregard for a simpler approach.

“Despite these challenges, our association remains committed to supporting the IMO process and its implementation. We will make every effort to help the industry progress toward the fair and practical transition required for international shipping and the dry bulk sector,” he says.

Wilfried Lemmens, managing director of the Royal Belgian Shipowners’ Association (KBRV), is also a proponent of the simpler approach.

“The KBRV regrets that the IMO member states have not succeeded in agreeing on a global levy, as this would have been the simplest and most efficient way for the maritime sector to achieve the climate objectives. Nevertheless, we are pleased that an agreement has been reached at the international level that will benefit the global level playing field and which we can build upon,” Lemmens reveals.

The MEPC 83 meeting was also largely held in a closed-door setting for non-governmental organisations, even for sector associations such as the global tanker association INTERTANKO.

“[The IMO] ignored the vital contribution that the industry makes by bringing technical, practical and real-world analysis and information into the rule-making process. The IMO’s traditional rule-making process must now resume, and the industry’s input must now be taken into account in future diplomatic discourse,” claims Tim Wilkins, INTERTANKO’s managing director.

But the agreement does have its good sides, and, according to Maria Skipper Schwenn, director of environmental regulatory affairs at Bunker Holding, when geopolitical tensions and tariff disputes reign supreme, it is remarkable that a majority of the IMO member states agreed on the Fuel Intensity Standard.

“As the world’s largest marine fuel supplier, Bunker Holding has called for clarity and predictability, and we are very pleased that the Fuel Intensity Standard introduces reduction factors towards 2040, allowing us to plan our product portfolio to meet our clients’ needs. We also welcome the incentive schemes in terms of the price of not meeting the intensity targets, and not least the reward mechanism for investing in zero- and near-zero fuels,” she tells Splash Extra.

Schwenn believes that these are solid stepping stones for facilitating the transition of shipping towards net-zero in 2050.

“The MEPC83 agreement was historic in several aspects. It makes shipping the first global sector with binding GHG reduction requirements and establishes economic incentives for the uptake of alternative fuels. We now look forward to supporting a smooth and practical implementation,” she concludes.