Countdown: Energy efficiency and the IMO Net-Zero Framework

Why this matters

When MEPC 84 convenes later this month, regulation of energy efficiency is set to play a key role in the discussions. The IMO is counting on two sets of instruments to deliver on the ambitions of its 2023 GHG Strategy. The IMO Net-Zero Framework (NZF) introduces a GHG Fuel Standard and economic measure to drive a transition to lower-emissions fuels and energy sources. Meanwhile, the IMO’s short-term GHG reductions measures, or Energy Efficiency Framework, target operational and technical improvements to reduce ships’ energy use.

In this edition of Countdown, we focus on the links between these two frameworks and how they can work together. With the IMO’s Energy Efficiency Framework currently undergoing its Phase 2 review, Member States are facing an important regulatory opportunity at the upcoming MEPC. How should the Energy Efficiency Framework and IMO NZF be designed so that, together, they drive the decarbonization of shipping?

What is energy efficiency – and what isn’t?

In general, energy enters the vessel as chemical energy in the fuel. It passes through onboard converters, engines, boilers, and auxiliary systems, where a significant share is lost as heat and other inefficiencies. The remaining usable energy is split between propulsion and onboard demand. Only the portion of energy that moves cargo over distance contributes to transport work.

In the metrics used by IMO regulations, energy efficiency is defined by the ratio of transport work to energy consumed. In this way, the energy input is directly connected to the output from the usable energy. Energy efficiency can be operational (relating to how the vessel is operated) or intrinsic (relating to how the vessel is designed).

Four distinct drivers can support the shipping industry in reducing emissions: energy input diversity, improved energy conversion, reduced energy demand, and economy of scale. The first driver does not fall under energy efficiency, while the other three do (Figure 1). Keeping this distinction clear is central to the discussion at MEPC 84 and to ensuring that regulations can deliver on their intended goals.

Figure 1. Four different drivers to reduce emissions from shipping

As outlined in Figure 1, energy input diversity sits apart from energy efficiency. A vessel using wind propulsion or low-emissions fuels may have lower GHG emissions than a conventionally-fueled vessel, but it is not necessarily more energy-efficient. Moreover, improving that vessel’s energy efficiency would theoretically reduce both its operating costs and any associated GHG emissions. In a context where many alternative maritime energy sources are not yet available at scale, energy efficiency also helps the industry manage demand for scarce resources.

Therefore, the regulatory approach to shipping decarbonization should carefully distinguish between energy input diversity and energy efficiency. While both drive emissions reductions, these levers differ in their economics, decision-making processes, and relevant contractual arrangements.

Where two frameworks meet

The IMO’s approach to regulating operational energy efficiency centers on the Carbon Intensity Indicator (CII), introduced in 2023. Each year, ships of 5,000 gross tonnage and above must document their attained operational CII and receive a rating from A to E, depending on how their attained CII value compares to the required value for that year. For a deeper look at the CII and the IMO’s other regulatory instruments for energy efficiency, including implementation challenges and areas for improvement, see the Center’s previous report on the Role of Energy Efficiency Regulations.

When the CII was designed, the policy landscape was different from today. The initial IMO GHG Strategy, adopted in 2018, set a target to reduce the carbon intensity of international shipping by at least 40% by 2030 compared to 2008, on a tank-to-wake (TTW) basis. The CII was developed to serve that target. The metric for the CII is based on CO₂ emissions per unit of transport work, with CO₂ calculated from reported fuel consumption using carbon conversion factors. Because the fleet at the time ran almost entirely on conventional fuels, CO₂ emissions served as a practical proxy for energy consumption. A ship that reduced its fuel consumption per distance traveled improved its CII.

Since then, two main developments have changed the context for energy efficiency regulation. First, the 2023 IMO GHG Strategy shifted the regulatory direction from TTW carbon intensity towards well-to-wake (WTW) GHG emissions reduction. Second, the adoption of the Interim Guidance on the use of biofuels (MEPC.1/Circ.905) introduced lower carbon conversion factors for biofuels into the CII calculation. In practice, this change injected a WTW dimension into a metric designed on a TTW basis. In the meantime, the IMO NZF has introduced the GHG Fuel Standard, built around the GHG Fuel Intensity (GFI) metric. The GFI measures the WTW emissions intensity of the energy a ship consumes, independently of how efficiently energy is converted into transport work (see Figure 2).

Figure 2. GFS = GHG Fuel Standard, CII = Carbon Intensity Indicator, WTW = well-to-wake

With the GFI now set to regulate fuel on a life-cycle basis, the CII sits at a crossroads. In practice, even before MEPC.1/Circ.905, switching to fuels with a lower carbon content (e.g., LNG or methanol) was already rewarded on a TTW basis, without accounting for upstream production.

Because the CII and GFS partially overlap in emissions scope, a ship switching from conventional fuels to biofuels will simultaneously improve both its attained CII and GFI with a single compliance action. By contrast, energy-efficiency measures only improve the CII, leaving the GFI unchanged.*

When one compliance choice satisfies two regulations and others satisfy only one, decision-making may be steered toward compliance optimization rather than climate impact. Fuel switching may become the preferred route, not because it is the most effective decarbonization pathway, but because it most efficiently resolves regulatory requirements under both instruments. So: does the shipping industry still need the CII?

*Energy-efficiency measures can arguably reduce a ship’s compliance balance under the IMO NZF, which can contribute to decreasing exposure or decreasing amount of generated surplus units. However, the primary compliance target for the IMO NZF is the attained GFI, not the compliance balance.

Three options for the future of the CII

The IMO is already working to address these overlaps and uncertainties. The work plan for the review of the IMO Energy Efficiency Framework specifically considers proposals to ensure synergies between this framework and the IMO NZF. The plan also calls on the Committee to “pursue incentives for energy efficiency and for the adoption of better operational practices in the shipping value chain.”

Submissions to MEPC 84 on this topic converge on a few points. All recognize that the two frameworks must be designed to co-exist. Submissions also stress the importance of understanding the consequences of any changes to metrics or enforcement mechanisms. That is, which behavior will the regulations drive: fuel switching, energy efficiency improvement, or a combination of both?

In previous MEPC meetings, three options have emerged for how to update the CII metric. Each option has distinct implications for how the industry responds to regulation.

Option 1: Retain the CII on a tank-to-wake (TTW) basis

Under this approach, rescinding MEPC.1/Circ.905, the metric continues to use CO2 emissions from fuel combustion relative to transport work. Since most conventional fuels have known carbon factors, this should preserve the original intent of the CII as a measure of energy efficiency. Fuel switching would not improve a ship's CII rating if the fuel has a similar TTW carbon factor to conventional fuels, meaning that the incentive to reduce energy demand remains intact. The CII and the GFI (as part of the IMO NZF) would then address separate decarbonization drivers: the first targeting how efficiently energy is used, the second targeting how clean that energy is.

However, a TTW CII would require careful consideration of how fuels with zero or near-zero emissions at combustion, such as ammonia, are treated. A vessel running on ammonia would have very low TTW emissions, potentially achieving a strong CII rating. Meanwhile, the upstream production and transport of that ammonia may carry a very high emissions footprint – for example, if the ammonia is fossil-based. Therefore, the regulations must be carefully designed to avoid incentivizing compliance actions that are ineffective in combating climate change. In this example, an IMO NZF that specifically restricts or disincentivizes the use of fossil-based ammonia could help to resolve the misaligned incentive.

Option 2: Change the CII to use an energy-based metric

In this case, the CII would be based on energy consumption per unit of transport work rather than CO2 emissions. This is arguably a more precise representation of energy efficiency in its classical sense. It would also handle sustainable marine fuels transparently, since the metric would be indifferent to the carbon content of the fuel and focus purely on how much energy is consumed to deliver transport work. If the CII switches to an energy-based metric, regulators will need to consider whether and how to account for wind propulsion and other non-fuel energy inputs. Like Option 1, this option can preserve a clear separation between the CII and the GFI, keeping the two instruments complementary.

Option 3: Expand the CII to a fully well-to-wake (WTW) basis

This would align the CII with the life-cycle emissions logic of the IMO NZF, meaning that switching to a lower-emissions fuel improves both the CII and the GFI simultaneously. While this option may be appealing because of the consistency it creates, it would mean that a single compliance action (fuel switching) satisfies two regulatory instruments at once. This could weaken the CII’s role as an independent incentive to improve energy efficiency.

Figure 3. CII = Carbon Intensity Indicator, WTW = well-to-wake, TTW = tank-to-wake, GFS = GHG Fuel Standard, GFI = GHG fuel intensity

A recommended path forward

In this newsletter, we have discussed how the IMO Energy Efficiency Framework has evolved over time, and how it can work together with the IMO NZF. The newsletter also highlights the opportunity to adjust current energy efficiency measures to further complement the IMO NZF and effectively address all four decarbonization drivers (see Figure 1).

The IMO NZF and Energy Efficiency Frameworks should ideally function as mutually exclusive and collectively exhaustive regulatory levers. As these regulations continue to develop, MEPC 84 should first clarify the intended purpose of the Energy Efficiency Framework, including the CII, and how it intersects with the NZF. The CII metric should maintain a direct, transparent link between fuel consumption, transport work, and performance outcomes, and any modifications should be assessed carefully to avoid unintended consequences.

A fleet transitioning to costlier low-emissions fuels while improving efficiency needs less of those fuels to meet the same transport demand. Every unit of energy saved reduces fuel costs and material inputs, with compounding benefits across the value chain.

Authors: Daniel Barcarolo and Athanasia Vasileiou

This newsletter issue was developed jointly with the Center’s knowledge partner, the Royal Institution of Naval Architects (RINA). The Center and RINA have been working together on the topic of energy efficiency regulations.

Download the slides from this newsletterCountdown: Energy efficiency and the IMO Net-Zero Framework

This is part of a series of newsletters on the IMO NZF, find previous editions and learn more hereIMO Net-Zero Framework