Decarbonizing international shipping ultimately requires switching to low- and zero-emissions fuels. However, these fuels remain substantially more expensive than the fossil energy they would replace, partly because the climate damage from fossil fuels is not reflected in their market price. Targeted financial support can help close this gap, but its design determines whether subsidies buy cheap near-term emissions cuts or build a future low-emissions fuel system.
To ground our discussion of subsidy programming for low-emissions fuels, we focus on an active policy debate: how to incentivize “zero or near-zero” (ZNZ) fuel use in the context of the International Maritime Organization’s (IMO) Net-Zero Framework (NZF). If implemented, this framework currently under negotiation would be a globally binding climate regulation for shipping.
Underlying any ZNZ reward scheme is an overarching choice: whether subsidies are used to lower the cost of abatement using fuels already close to being competitive, or to accelerate the deployment of higher-cost but scalable next-generation fuel pathways. Pursuing both aims with a single undifferentiated instrument risks achieving neither well.
Taking this trade-off as the starting point, we distil the design of a ZNZ reward program into five interlocking “variables”: eligibility, abatement benchmark, multipliers, differentiation, and reward instruments. In this paper, we set out the options under each variable and examine the trade-offs across incentive strength, fiscal durability, and environmental integrity. We recommend an approach where the analysis supports a clear preference.
This options paper unpacks the analysis in four parts:
Section 1 of the paper explains the need for incentives.
Section 2 introduces the NZF and the methodology for calculating ZNZ rewards.
Section 3 lays out our main analysis of each of the five variables, while the conclusion consolidates this analysis in a decision table.
Two appendices cover the multiplier mechanism and further differentiation criteria.
