Instead of a meaningful carbon levy, the International Maritime Organisation (IMO) recently agreed on an inadequate hybrid scheme combining a fuel standard with weak carbon pricing. Despite its climate failings, IMO member states must strengthen this compromise against further efforts to water it down.

The recent 83rd meeting of the Marine Environmental Protection Committee (MEPC) was meant to agree on mid-term measures to chart a course for the decarbonisation of international shipping, in line with the IMO’s greenhouse gas (GHG) strategy.

The mid-term measures were to contain a technical element, in the form of a GHG fuel standard requiring cuts in the GHG Fuel Intensity (GFI), and an economic element, in the shape of a scheme pricing greenhouse emissions. The intention was to amend Annex VI of the International Convention on the Prevention of Pollution from Ships (MARPOL), ratified by over 100 countries.

Competing camps

With several competing proposals on the table, the negotiations saw at least two camps emerging. One favoured a fuel standard (with or without a flexibility compliance mechanism) accompanied by a separate GHG levy acting as the economic element. Another supported a fuel standard with a flexibility compliance mechanism deemed to act as the economic element instead of a levy. The latter would allow ships and fleets to trade emission credits with each other: for example, an overcomplying fleet could sell surplus credits or units to undercomplying fleets.

The first camp was composed of a broad group of countries, yet with divergences. A group of Pacific and Caribbean island states supported a fuel standard without flexibility and a GHG levy of $150 per tonne of carbon dioxide equivalent (CO₂eq). EU member states, joined by Japan, supported a fuel standard with a flexibility compliance mechanism and a separate GHG levy of $100 per tonne of CO₂eq. The Bahamas, Liberia and the International Chamber of Shipping (ICS) supported a fuel standard with a flexibility compliance mechanism and a separate GHG levy at an indicative level of $18.75 a tonne of CO₂eq.

The second camp comprised emerging economies, such as China, Brazil, Russia, India, Argentina, Chile, as well as other South American countries. Norway and Angola were also a part of this group.

Bridge over troubled waters

In the run-up to MEPC 83, during the intersessional working group meetings on GHG emission reduction (ISWG-GHG 18 and 19), many more countries, not least from Africa, joined the pro-levy group.

Despite gaining majority support in terms of country count and fleet size, the levy did not make it through.

The chair of ISWG-GHG, Sveinung Oftedal, decided to use a so-called bridging proposal from the Singaporean delegation. This suggestion consisted of a hybrid scheme fusing elements of the levy into the architecture of a fuel standard that integrates a flexibility compliance mechanism. This move by the chair and secretariat implied a decision not to use a levy architecture as the basis for the compromise. This raised “deep disappointment” and frustration with the process from small island developing states, among others, which had spearheaded the campaign for a levy.

Drifting off course

With the decision to move forward with this hybrid scheme as the basis for negotiations, many key parameters still had to be defined in very little time during MEPC 83. Being a two-tier system (two emissions reduction trajectories), emissions reduction factors (aka ‘Z factors’) for both the less ambitious Base greenhouse gas fuel intensity (GFI) curve and the more ambitious Direct Compliance curve had to be defined. This would not only determine the speed of emissions reductions but also the crucial size of the space between both curves (Band B or Tier 1), where emissions would be priced. 

The final deal (called the IMO Net-Zero Framework) provides that less than 15% of emissions from compliant fleets from 2028 until 2035 would fall into that space. Compliant with the minimum reduction level of GHG fuel intensity (Base GFI) required by the fuel standard, these fleets would still have to pay for ‘soft’ Remedial Units (RU) at $100 per tonne of CO₂eq, which represents a form of partial carbon pricing. 

If the ship fleet complies further and reaches Direct Compliance (Band C), no carbon price or Remedial Unit is due. In that case, fleets can generate Surplus Units to trade with undercomplying ship fleets. The latter are those above the Base GFI (Band A or Tier 2) and do not comply with the standard. To remedy this, they can either buy the mentioned Surplus Units sold by overcomplying fleets or pay a penalty as ‘hard’ Remedial Units at $380 per tonne of CO₂eq.

Proceeds generated by the purchase of Remedial Units accrue to an IMO Net-Zero Fund, meant to support the uptake of zero and near-zero (ZNZ) fuels and technologies (to include green marine fuels) and the just and equitable transition for the most vulnerable and impacted countries. 

Still, many key issues such as the definition of ZNZ, the development of life cycle assessment methodology for GHG emissions, the reward scheme for ZNZ and the exact boundaries for revenue use, are yet to be defined, most of it through guidelines, in the following months and years. This is not to mention the need to determine Z factors and RU prices after 2035.

However, it is already clear that the scheme will not trigger enough emissions reductions: about 10% by 2030 according to Transport & Environment (T&E) and the UCL Bartlett Institute, compared with the base target of 20% and the aspirational target of 30% set by the IMO GHG Strategy. 

The hybrid system will not price enough emissions: for ships complying with the GHG fuel standard, less than 15% of emissions will be priced, whereas a universal levy would have priced them all. Considering the tiny share of priced emissions, the carbon price applied through Remedial Units is certainly not high enough to provide a sufficient incentive to switch to truly clean propulsion means (green hydrogen-based fuels and wind propulsion) and generate enough revenue. As far as money is concerned, the scheme is expected to raise only $11-12 billion per year until 2035, far from what is needed to support green marine fuels and technologies and the just and equitable transition, given that $12-24 billion per year are required only for the former, according to the UCL Bartlett Institute.

The member states’ waltz

A hybrid scheme based on the Singaporean proposal could still have been ambitious in emission reductions and revenue generation, had the Pacific islands’ proposal to set Direct Compliance to zero or near zero – effectively imposing a levy – gathered more support. 

The EU and its member states were originally staunch supporters of an ambitious universal levy of $100 a tonne of CO₂eq. After having already caved in to a fuel standard architecture instead of a levy, though, they were also shy on imposing a carbon price on a higher share of emissions, higher RU prices, and faster decarbonisation trajectories in talks with levy opponents like China and Brazil. This and the unhelpful lobbying from biofuel-rich countries like Indonesia and Malaysia, putting aside the blocking attitude of a number of OPEC+ countries, led to a watered-down deal. 

The coalition led by Pacific, Caribbean and African states that spearheaded the campaign for greater ambition is a highly welcome development in these negotiations and will have hopefully sowed seeds for future milestones. The pro-levy support from Panama and Mexico and the leadership attitude from the United Kingdom have most likely helped improve the outcome of these talks.

The United States, absent from most negotiations, tried to shipwreck talks in the last hour by sending a threatening document to the London embassies of countries participating in IMO negotiations, according to a media leak. With 175 other IMO member states negotiating, this fortunately did not stop countries from finding a common agreement. The US, which represents 4% of the world population and nearly 25% of global GDP, is a major player in the global economy, and hence heavily reliant on shipping. 

Despite that, as a flag state, the US represents only 0.6% of the world’s total fleet size (in deadweight tonnage). This is relevant because, on top of country count, deadweight tonnage share plays a role in IMO decision-making procedures. Equally important, if a ship coming from the US or flagged in the US wants to call at a port in a country applying the IMO deal, it will have to comply with the IMO’s Net-Zero Framework too. Conversely, if a ship flies the flag of a country that signed up to the framework (such as EU countries), then the country will impose compliance with the framework on that ship, even if the ship calls at a port in a non-signatory country. 

Greener horizons?

The deal the IMO settled upon last month, while being a step forward for diplomacy, is a defeat for the climate. Only a quarter of a century away from 2050, a time when the world is supposed to have achieved carbon neutrality, approving a scheme that falls far short of the Paris Agreement objectives and even the shipping sector’s own less ambitious targets simply cannot be deemed good enough. 

The scheme is not a levy like most countries, including some of the most vulnerable ones, wanted to see emerge. The IMO’s Net-Zero Framework will not reduce emissions fast enough nor raise enough revenue because it does not price enough emissions nor assign a fair price to them.

However, now that a framework is in place, imperfect as it is, it can serve as a start. Countries must approve it in October and work together with maritime stakeholders to develop guidelines that maximise the deal’s impact, given the basis we have. In this process, it will be key to hear the voices of civil society organisations, to ensure the policy isn’t watered down further. 

Looking further ahead, governments must begin planning for the post-2035 period to align it with the Paris Agreement’s targets and bridge the ambition gap. Additionally, the EU and other regions must work regionally not only to implement the IMO deal but also to compensate for its gaps by deploying emission-cutting schemes and incentivising the industry to undertake bolder action more quickly.