Next spring, the Member States of the UN International Maritime Organization (IMO) will decide on historic regulations for greenhouse gas (GHG) emissions from international shipping. These mid-term measures will either be a turning point and drive decarbonization of the industry — or fail to meet the ambition of the IMO strategy and lock in fossil fuel use.

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Here are our key recommendations for policymakers to consider during IMO negotiations:

• Support an effective reduction pathway for the Goal-based Fuel Standard (GFS): Be ready to refine emissions limits per unit of energy (gCO2eq/MJ). To be effective, the GFS must have a strict reduction pathway with progressively tightening intensity targets, exposing a growing share of emissions to remedial units.
  

• Set the right remedial unit levels: Establish a sufficiently high remedial unit, or fee for non-compliance, to increase the cost of failing to meet targets and incentivize overcompliance.
  

• Account for GHG pricing: Understand the implications of GHG pricing and its role in mobilizing revenue – and gear up for discussions on how best to disburse these funds.
  

• Ensure the right scope: Support measuring emissions on a WTW basis, in line with the IMO strategy.

The IMO is the UN agency tasked with setting global standards and regulations for the international shipping industry on safety, security, and the environment. It creates regulations that its 176 Member States implement in national law. Countries that have ratified the IMO’s conventions, such as the International Convention for the Prevention of Pollution from Ships (MARPOL), are obligated to enforce these rules, giving the IMO significant global regulatory power.

In 2023, IMO member states agreed on a revised GHG strategy. As shown by the figure below, the strategy calls for substantial and lasting reductions in emissions of GHGs contributing to the climate crisis: carbon dioxide (CO), methane (CH), and nitrous oxide (NO). These emissions are typically reported together in terms of carbon dioxide equivalents (CO2eq). As global economic growth depends on shipping, GHG cuts must happen alongside the continued growth of the shipping industry.

The new IMO strategy outlines the target GHG emission reductions for the shipping industry. However, meeting these targets will rely on effective regulations.

Global environmental regulations have proven effective in the industry before. According to the IMO, the combination of Emission Control Areas and rules limiting sulfur dioxide (SO) emissions drove a nearly 30% reduction in SO emissions between 2014 and 2017. We have also seen markets and industries nimbly adapt to new rules. For example, in 2020, the IMO limited sulfur to 0.5% of fuel content by mass. Subsequent analysis shows that just 20% of fuel supply complied with the limit before the rules were enacted, but from 2021 to 2023, on average 80% of the fuel supply was compliant.

Meeting the new GHG emissions targets will rely on a package of measures regulating ship performance and GHG emissions, known as the short- and mid-term measures, together with guidelines on lifecycle analysis of emissions.

Short-term measures including the Carbon Intensity Indicator (CII), which aims to increase the efficiency of the global fleet, were agreed between 2018 and 2023. The MTMs are currently under discussion at the IMO’s Marine Environmental Protection Committee (MEPC) meetings. The MTMs aim to provide clear, strong, and binding incentives to transition the world’s fleet to cleaner forms of energy. The 2023 strategy committed to achieving this in a “just and equitable manner”, ensuring that the transition supports economic development in all countries while minimizing risks to vulnerable groups, particularly in developing countries.

Fossil fuels are currently the cheapest fuels available because their prices do not account for their climate impact. As a result, sustainable marine fuels struggle to compete. Low fossil fuel prices lead to overconsumption and high GHG emissions. Just as late-night partygoers might enjoy loud music while their neighbors pay the costs of lost sleep, ships over-emit GHGs, and we all suffer the consequences of climate change.

The chart below quantifies the cost gap between fossil and sustainable marine fuels using current and projected production cost estimates. These forecasts come from our Fuel Cost Calculator, a leading techno-economic tool that aggregates data from hundreds of experts across dozens of industries to predict production costs for a range of marine fuels. Since these are production costs rather than market prices, they may be a conservative estimate of the “cost gap” between sustainable and fossil fuels.

Fuel dominates the total cost of owning and operating a vessel over its lifetime (considering all future costs in today’s dollars). Our analysis shows that owning and operating an 8,000 TEU containership over 25 years costs approximately 200 million USD. If the same vessel were a dual-fuel ship running on e-methanol (methanol made using renewable electricity), the cost of sailing the same route over the same period would be 470 million USD. Most companies can’t compete with costs 2.4x higher than their competitors. Without policy, there is often no business case for decarbonization.

Currently, Member States are developing proposals for MTMs before evaluation in IMO meetings. These proposals vary in ambition and likely effectiveness but generally include five elements: the scope used to measure emissions, a goal-based fuel standard (GFS), GHG pricing, penalties for failing to meet the GFS, and flexibility mechanisms that reward ships going beyond the GFS. These elements are explained in more detail in the following paragraphs.

• Scope: Legislating fuel emissions requires decisions about the “boundaries” of emissions that can be attributed to fuels. The IMO strategy mentions that emission reductions should take into account well-to-wake (WTW) GHG emissions as addressed in the LCA guidelines, meaning the scope would include the full lifecycle emissions from feedstock to fuel production processes and their use onboard. Some proposals for the MTMs, however, focus on a tank-to-wake (TTW) approach, measuring only the emissions onboard the ship. Others call for a “TTW with sustainability criteria” method that begins with TTW values but moves to WTW over time. The differences between these approaches are significant. For example, the emissions from ammonia produced from natural gas occur upstream and would not be counted in a TTW approach. Depending on how the targets are set, the choice of emissions scope could significantly impact the cost of compliance for fossil fuels.
  

• Goal-based Fuel Standard (GFS): Also known as a Technical Standard or GHG Fuel Standard, a GFS would limit the emissions per unit of energy, expressed as gCO2eq/MJ. Progressively tightening intensity targets would push companies to phase out fuels with higher climate impacts by exposing a growing share of emissions to a penalty.
  

• GFS Remedial Units: The effectiveness of the GFS depends on how much companies pay for non-compliance. The price of remedial units is critical because it will determine whether it is more favorable to invest in sustainable marine fuels or continue business as usual and simply pay to pollute.
  

• GFS Surplus Units and Flexibility: Some proposals suggest introducing flexible compliance mechanisms, allowing ships to exceed or fall short of GHG fuel intensity targets while remaining compliant through banking and trading “surplus units”. Ships that generate surplus units by achieving intensity below the target can earn revenue through trading which can lower the high costs of sustainable marine fuels. For those unable to access these fuels, securing surplus units provides an alternative compliance option to remedial units. For more on flexibility, see our second newsletter which provides an in-depth analysis of the mechanisms.
  

• GHG Pricing: Member States are evaluating proposals for a direct cost on each unit of GHG (that is, per tonne of CO2eq) emitted onboard. This has been called a “contribution” because it would generate revenue that could be mobilized to incentivize sustainable marine fuels and technologies, offset the potential economic damage from higher shipping costs, be recycled back into communities and countries affected by the climate crisis, or some combination of these. Even modest GHG pricing would mobilize billions of dollars per year — particularly early on, when the industry will continue to rely on fossil fuels.
  

To incentivize decarbonization, the various elements of the MTMs have to work together to make sustainable fuels and energy efficiency investments commercially competitive.

If regulations fall short of making sustainable marine fuels cost-competitive, they could increase costs but fail to create incentives to meet the IMO’s GHG Strategy.

The primary risk that negotiators should seek to mitigate is ensuring regulations are ambitious enough to drive sustainable fuel uptake. As the figure below shows, a GFS with higher (“stronger”) and lower (“weaker”) penalty values, will determine whether sustainable marine fuels become financially viable or if regulations merely increase fossil fuel costs without incentivizing a transition. Under weak regulations, the industry might continue using fossil fuels and pay penalties, adding costs to shipping.

We face a tight timeline to agree on MTMs that can credibly deliver on the IMO’s ambitious strategy. Critical meetings are scheduled for September and October, followed by a decision in spring 2025. Below, are the key dates to remember as the industry and Member States develop, coordinate, and eventually pass the new regulations.

In the countdown to these important deadlines, our newsletter will provide up-to-date analysis to help everyone at the table deliver effective public policy that achieves our climate ambitions.

• Evaluate regulatory impact on fuel cost gaps: Game out the cost gap between a range of sustainable and fossil fuels with our Fuel Cost Calculator to check if proposed regulations can bridge the gap.