In this sixth edition of the Countdown newsletter, we show results from our MTM Compliance Cost Calculator. With MEPC 83 on the horizon, it's crucial for industry leaders and negotiators to understand the impact of proposed IMO measures – including how the RU price affects the incentives to switch from fossil fuels to zero-emissions fuels or technologies. For readers who wish to further understand the impact of the MTMs under different scenarios, we also include a downloadable MTM Compliance Cost Calculator in Excel format.

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• Business case for ZNZ Fuels: Our analysis of compliance strategies shows that, under a plausible regulatory scenario, there is a competitive business case for investing in vessels that use representative zero- and near-zero-emissions (ZNZ) fuels and in the production of these fuels.

• Setting the Remedial Unit (RU) Price: The surplus market’s ability to drive the adoption of ZNZ fuels depends on the pricing of Remedial Units (RUs). Our findings suggest that setting an RU price below the additional cost of using ZNZs would limit the financial incentives for investment in ZNZs.

• MTM Compliance Cost Calculator: We developed a downloadable Excel tool that can assist policymakers in understanding the potential impacts of the MTMs on industry stakeholders. This tool allows users to assess the outcomes of different policy scenarios given a range of assumptions.

On the 17-21 February, delegations from IMO Member States will convene in London at the 18th session of the Intersessional Working Group on Greenhouse Gas Emissions (ISWG-GHG 18). The delegations will evaluate proposals for MTMs that aim to achieve the goals set out in the 2023 IMO Strategy on Reduction of GHG Emissions (2023 IMO Strategy), including reaching net zero GHG emissions “by or around" 2050. The MTMs will set international shipping’s decarbonization trajectory and ultimately determine whether the costs of sailing on fossil fuels outweigh the higher costs of using sustainable alternatives—in other words, if there is a business case for decarbonization.

The Global Fuel Standard (GFS) is a crucial component being considered as part of the IMO’s MTMs. A GFS sets an emissions intensity limit for energy used on ships, which becomes progressively stricter over time. A well-designed GFS could enable the international shipping fleet to achieve the goals of the 2023 IMO Strategy, as outlined in our ongoing Countdown newsletter series. Previous editions of this newsletter have presented results from our integrated assessment model, NavigaTE, that help us understand what values of Remedial Unit (RU) penalties and Z-factors in a GFS could support these goals, taking into account decision-making and constraints across the global fleet. In this edition, we shift the focus to commercial considerations from the perspective of an industry stakeholder.

Commercial stakeholders in the maritime industry considering different fuel pathways will base their investment decisions on a range of factors.

• Shipowners purchasing new vessels will assess vessel costs, fuel cost, and resale value. Previous Center analysis shows that while the CapEx premium for dual-fuel vessels ranges from 11% to 16% for container vessels and 14% to 21% for tankers, it's spread over 25 years. Therefore, additional CapEx is relatively modest compared to the higher cost of sailing on alternative fuels. Resale value will also be linked to the future cost of fuels.

• Fuel producers who build facilities will anticipate demand shifts based on the commercial attractiveness of competing alternative fuel pathways relative to the costs of incumbent fuels. Producers will generally have a longer-term view due to the long life of production facilities and the risk of stranded assets.

• Charterers who hire vessels from shipowners indirectly influence investments in fuel production and vessels, as they typically bear the costs of fuel. Generally, charterers will focus on near-term fuel availability and cost in a competitive market.
  

All three stakeholder groups will be carefully evaluating the relative costs of various fuel options. For example, biofuels offer a mature existing solution to regulatory requirements, yet face scalability issues due to limited supply. While potentially more scalable, e-fuels currently come at a substantial cost premium – roughly two to four times higher than conventional bunker fuel, according to the 2027 global average of Fuel Cost Calculator projections. Our new MTM Compliance Cost Calculator tool allows stakeholders to understand the relative costs of fuel options under a range of MTM scenarios.

For those looking to get a deeper understanding of MTMs and how proposed regulations translate into incentives to invest in sustainable alternatives, we are providing a link to download an Excel-based MTM Compliance Cost Calculator. This tool allows users to assess the impacts of various proposed regulatory scenarios, including different emissions reduction trajectories, rewards for zero- and near-zero-emissions (ZNZ) fuels, variable levies, and emissions scope. In addition to policy parameters, users can input their assumptions regarding fuel costs and emissions factors, tailoring the analysis to their perspectives and needs.

This calculator is simpler than our comprehensive NavigaTE model. The MTM Compliance Cost Calculator helps policymakers and industry stakeholders gauge how companies might respond under a given set of incentives from the MTMs but does not account for fuel availability, limiting its scope compared to NavigaTE. We aim to iteratively update this tool to reflect new data and insights as they become available.

To illustrate the application of this new tool, we used the MTM Compliance Cost Calculator to estimate the financial implications of the MTMs from 2027 to 2037. Following our previous work on the RU and trading, here we focus on the Global Fuel Standard (GFS) to understand its impacts on fuel cost.

Once MTMs come into force, commercial stakeholders will have different options for how to comply with the regulations. As part of developing the MTM Compliance Cost Calculator, we defined four compliance strategies (shown below), aiming to represent different decisions that these stakeholders may make to minimize costs. The tool allows us to compare these strategies, and how they are affected by different aspects of the MTMs, in the same way that a commercial stakeholder could evaluate different options for an investment case.

These four strategies are illustrative, not exhaustive. Stakeholders will also consider options including bio-oils, batteries, wind, and carbon capture. Strategies can also be combined by, for example, running a dual-fuel vessel on LSFO and bio-diesel, or an LNG vessel on ZNZ e-methane.

The MTM Compliance Cost Calculator allows the user to set various policy parameters, reflecting different aspects of the MTMs. For this analysis, we set the emissions scope as well-to-wake (‘WTW’, or full life-cycle emissions) and set the reference value as the WTW emissions factor of VLSFO from Annex 10 of the 2024 IMO LCA Guidelines (MEPC 81/16/Add.1). We assume a GFS that allows for trading of surplus units at a price set in a compliance market. To isolate the impacts of the GFS, we incorporate the lowest proposed GHG levy of $18.75 per tonne of WTW emissions and do not include a reward mechanism. We use the ‘base’ Z-factors, or GHG emissions reduction pathway, which are aligned with the targets in the 2023 IMO Strategy.

Finally, our previous work using NavigaTE showed that a minimum RU value of 450 USD is needed to enable the global fleet to decarbonize in line with the 2023 IMO Strategy. In short, the RU should cost more than using alternative fuels, incentivizing fuel switching. We further explore this relationship using the MTMs Compliance Cost Calculator. By setting RU values above (600 USD) and below (300 USD) our previously proposed minimum of 450 USD, we can evaluate the impact of a range of RUs on decarbonization outcomes.

Importantly, these assumptions reflect one plausible scenario for the outcome of MEPC 83, not an endorsement of a set of policies. The tool also allows users to model scenarios that include a range of additional proposed policy mechanisms, such as rewards for ZNZs and an adjusted tank-to-wake (TTW) emissions scope.

With the above parameters in place, let’s compare the relative costs of our four compliance strategies.

• Figure 1 shows the lowest-cost strategy varies between 2027 and 2037. Strategy 2 is the lowest-cost option through 2032, but the ZNZ strategies (3 and 4) are increasingly competitive through 2037. This result is due to the rising compliance costs for LNG and LSFO, while the ZNZ strategies are assumed to have stable fuel costs due to a fixed-price offtake agreement and can also benefit from trading surplus compliance.

• The cost of operating fully on ZNZs (Strategy 4), when factoring in the benefits of trading surplus compliance, can lead to significantly lower costs compared to the base case (Strategy 1) or LNG (Strategy 2) in the later years.

• Looking at Strategy 2, the lowest-cost compliance option changes in each period shown. In 2027, when the GFS requires a 7.5% reduction below the reference, LNG can be used at a discount compared to LSFO because fuel costs are comparable, and it can generate a compliance surplus to sell in a compliance market. In 2032, bio-methane is the lowest-cost compliance option to meet the GFS target. In 2037, assumed bio-methane costs are higher than the RU, leading the LNG vessel to pay the RU.
  

To further understand the effect of the RU on compliance strategies, we also calculated base case and ZNZ fuel costs using an RU priced at 300 USD and compared these to the costs when the RU value is 600 USD.

• When the RU is set at 600 USD, operating fully on ZNZs (Strategy 4) becomes the lowest-cost option from 2033 to 2037 due to significant benefits from trading surplus compliance (dashed grey portion of the bar).

• If the RU is lowered to 300 USD, choosing the minimum share of ZNZs to meet the GFS (Strategy 3) remains the lowest-cost option throughout the period we consider.

• Furthermore, the lower penalty flattens the rise in costs over time for the base case (Strategy 1), lowering the demand signal to switch to ZNZs.
  
  

The RU sets a maximum price for how much companies are willing to pay for emissions reductions in the compliance market. Hence, lowering the RU has two effects.

First, we see a reduced compliance cost for LSFO vessels, which can pay RUs when the cost of doing so becomes cheaper than the additional cost of bio-diesel. With an RU of 300 USD and our set of assumptions (adjustable in the tool), this switch from blending bio-diesel with LSFO to paying the RU happens in 2032. By contrast, if the RU value is set to 600 USD, paying the RU never becomes the cheapest compliance option in the period covered by our analysis.

Secondly, a lower RU value limits the benefits of trading for vessels fully operating on ZNZs. In the case of a 300-USD RU in Figure 2, operating fully on ZNZs never becomes cheaper than buying RUs. In effect, capping the benefits of the surplus trading at 300 USD per tonne of abatement does not create sufficient incentives to fully operate on ZNZs.

As Member States go into the final rounds of negotiations, they should keep these two effects of the RU in mind. As we said previously, we find that an RU of at least 450 USD is needed for the fleet to meet the ambitions of the 2023 IMO Strategy. The analysis here shows the risks of going below this level, especially considering the strategy's aim to incentivize the scale-up of ZNZ fuels and technologies.

Negotiations are narrowing down the number of regulations under discussion. The MTM Compliance Cost Calculator is designed to support the industry and Member States to better understand the commercial impacts of potential rules. We plan to update the tool in future releases as the MTMs are fine-tuned.

As we move through those negotiations, we're approaching pivotal moments. Here’s a look ahead:

In case you missed it, FuelEU Maritime took effect on 1 January 2025. We covered this topic in our Countdown to FuelEU series last year. Here is a brief update on what has happened and what to expect during the initial reporting period.

FuelEU Maritime is a landmark policy aimed at driving investment in fuels and technologies that can decarbonize the maritime industry. Since our last edition of the Countdown to FuelEU newsletter series, we have seen:

• BIMCO publish FuelEU Maritime Clause for Time Charter Parties

• EMSA and DG MOVE host a series of webinars for a better understanding of FuelEU