As the dust settles from a week of intense negotiations at ISWG-GHG 18 in London, we reflect on the key developments in this seventh edition of Countdown to MTM. Our Center experts were on the ground, contributing to the discussions around the mid-term measures (MTMs). The MTMs are critical to reaching the 2023 IMO Strategy on Reduction of GHG Emissions from Ships (which we refer to here as the IMO Strategy).
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“We had an intense week covering ISWG-GHG 18. The Center celebrated a success in having specific regulatory text on fuel certification included in the IMO’s net-zero framework. Certification is the foundational piece for shipping’s energy transition, and the Member States and NGOs unanimously agreed to support the proposal the Center contributed to.
The clock is ticking, with little time left to reach a consensus before MEPC 83 and many elements of the MTMs still pending an agreement. While the discussions are still quite divergent and sensitive, Member States appeared willing to work together to agree on an IMO net-zero framework that will deliver on the IMO Strategy’s goals. So, we remain optimistic about a good outcome in April that will shape the future of net-zero shipping.”
“At ISWG-GHG 18, there was a clear sense that the pressure to reach an agreement on the MTMs is increasing as the deadline of MEPC 83 approaches. It was encouraging to see that Member States remain committed to finding solutions that will deliver on the IMO Strategy, although opinions on the best way forward still differ – especially with regard to the adoption of a flat levy. It was also positive to see solidifying support for a robust Global GHG Fuel Standard (GFS) that has a sufficiently high penalty for non-compliance and a strict reduction pathway.
The discussions we had in London last week made it clear that the analysis being done by the Center is seen by Member States as helpful and valuable input. In the coming weeks, the Center will continue to work closely with Member States across the board to ensure that the final regulation can most effectively deliver on the goals of emissions reductions and revenue mobilization. With just a few weeks left before MEPC 83, we remain hopeful that Member States will come together to bridge positions and deliver on an equitable, ambitious pathway to decarbonization.”
Below, our experts have consolidated their reflections and insights on both the technical and economic elements under discussion at ISWG-GHG 18. We compare the progress of these elements now with where things stood immediately after MEPC 82, as covered in a previous edition of Countdown.
Although we discuss technical measures, such as the GFS, and economic measures, such as GHG pricing, separately here, all these measures should be seen as working together to create the required incentives to transition to sustainable marine energy. Together, these elements are critical to ensuring that the MTMs can deliver on the ambitious net-zero goal.
Our reflections on the progress of technical measures:
Overall: While many elements of the technical measures still remain to be settled, we see support for a robust GFS gradually increasing.
Remedial unit (RU): The RU value determines the cost of failure to comply with the GHG intensity reduction requirements laid out in the MTMs. An RU value that is set too low will fail to incentivize uptake of zero- and near-zero-emissions (ZNZ) fuels and technologies. As covered in a previous edition of Countdown, our analysis indicates that a minimum RU value of 450 USD is needed to drive decarbonization in line with the IMO Strategy. After ISWG-GHG 18, we believe it is more likely that the RU value will be set at this level or higher.
GHG reduction pathway: The GHG reduction pathway determines the shape of the industry’s decarbonization trajectory – in other words, how much decarbonization is required by when. In contrast with our observations from MEPC 82, we found that the reduction rates discussed at ISWG-GHG 18 were, at a minimum, moving towards the ‘base’ ambition levels laid out in the IMO Strategy. As a result, we now see a greater likelihood that the reduction pathway in the final agreement will be sufficiently ambitious to deliver on decarbonization.
Flexible compliance mechanisms: Flexibility mechanisms would allow vessels that reduce their GHG emissions to below the required level to trade their ‘surplus’ compliance with vessels that fail to meet the target. Center analysis has found that including the flexibility mechanism reduces both emissions and transition costs by incentivizing over-compliance, which can be purchased by vessels that cannot switch fuels. After ISWG-GHG 18, we still have medium-to-high confidence that some flexibility mechanism will be included in the MTMs.
Our reflections on the progress of economic measures, which centered on GHG pricing:
Overall: While there is consensus on the need for an economic measure in the MTMs, we saw continued disagreement about whether the measure should be a levy. The number of countries supporting a levy increased during the most recent meeting, but there was also vocal opposition to the levy. A significant development at ISWG-GHG 18 was the introduction of a potential bridging proposal with an alternative revenue-raising economic measure (see more below), which was welcomed by many Member States. The interest in including a bridging proposal shows a commitment across opposing camps to finding a solution that ensures stable and sufficient revenues. This progress is significant because revenues can be used to fund important initiatives, including support for ZNZ energy, fuels, and technologies; mitigation of potential adverse effects of the regulation; and support for climate mitigation efforts.
ZNZ definition: Our analysis of the proposals discussed at MEPC 82 noted a high level of ambiguity surrounding the definition of “zero or near-zero GHG emission technologies, fuels and/or energy sources” in the IMO Strategy. At ISWG-GHG 18, we saw new and more detailed proposals for ZNZ definitions included in the draft legal text. A ‘strong’ ZNZ definition will better support green technologies that are scalable and can deliver on the GHG emissions reduction ambitions set in the strategy.
Revenues distribution: Revenues distribution remains an area where Member States show divergent positions, and we observed little progress toward reaching a consensus on this issue during ISWG-GHG 18. Therefore, further discussion will be needed at future meetings.
During the discussions at ISWG-GHG 18, a proposal (called J9) put forward by Singapore for a two-tiered GFS received some attention. This approach to a GFS has not previously been explored in detail – so how would such a two-tiered scheme work?
A two-tiered GFS would create an alternative system of revenue collection for the IMO. In a ‘standard’ GFS (see left side of the graphic below), vessels that exceed the annual GHG intensity limit (green line) must pay for their failure to comply with the regulation. They can do so by buying RUs or, if a flexibility mechanism is included in the GFS, by buying surplus units (SUs) from vessels that are below the limit. In this way, the GFS incentivizes the use of sustainable fuels and energy sources.
In a two-tiered GFS (right side), the main mechanism of a standard GFS remains as described above. However, the two-tiered GFS adds a second GHG intensity pathway (blue line) below the first. Vessels whose emissions fall between the two lines must purchase a less expensive type of RU (or SUs if available). This ‘lower’ RU (RUlower in the graphic) would be more affordable than the ‘upper’ RU (RUupper), meaning that shipping operators would be more willing to pay it. The revenues raised from the lower RU could then be used for the same purposes as revenues from GHG pricing mechanisms, such as a levy.
The revenues created through an economic measure can be used to fund the IMO’s strategic ambitions of ensuring a just and equitable transition and incentivizing sustainable fuels and technologies. However, discussions at MEPC 82 revealed a divide between Member States over how to ensure revenue mobilization.
By putting forward an alternative revenue collection mechanism, the proposal for a two-tiered GFS might help to bridge these divisions. In our view, the interest shown in this proposal at ISWG-GHG 18 demonstrates how more countries are moving towards compromise and convergence on the inclusion of an economic element in the MTMs. That said, further discussion is clearly still needed before a final agreement.
If you have further questions about the two-tiered GFS, please get in touch.
We’re happy to have already received positive feedback on the Center’s MTM Compliance Cost Calculator tool, which was released with the last edition of Countdown.
In light of the developments at ISWG-GHG 18, we’ve made some updates and improvements to this tool – including the option to model a two-tiered GFS.
Joe Bettles & Jenny Ruffell Smith
