The IMO NZF as agreed upon in 2025 still remains the most likely way to achieve the IMO 2023 GHG strategy
MEPC 85 is coming up fast, and negotiations for what the Net Zero Framework will look like are increasing in intensity. With several proposals on the table, it is likely that the outcome will be a composite, blending together different aspects of each proposal - although none of the new ideas have improved the entire regulation impact and the NZF as agreed upon in 2025 still remains clearly the most likely way to achieve the revised 2023 GHG strategy.
Any policy that is adopted needs to continue to support the IMO's GHG goals. With each operational component of the NZF subject to separate negotiations, it is important to ensure the overall goals of the GHG Strategy are achieved.
UCL and Rocky Mountain Institute have conducted a sensitivity analysis on structural elements of the NZF, focusing on GFI trajectories and compliance prices (Remedial Units or Direct Contributions), as well as measuring the impact of differing ZNZ fuel reward schemes. This work has informed the recent Institute of Marine Engineering, Science & Technology (IMarEST) submissions (ISWG-GHG 23/2/9, 23/3/7, and 23/3/8 - see below). We have found (unsurprisingly) that higher ambition GFI trajectories with higher RU prices results in lower cumulative emissions. RMI/UCL Shipping and Oceans Research Group modelling has clarified:
Even slightly loosening the GFI trajectory leads to higher cumulative emissions.
The GFI trajectory effectively sets the emissions allowed, making it one of if not the centerpiece of the entire policy; with negotiations considering loosening of the trajectory, there is possibility of undermining the entire purpose of the NZF as even slightly loosening the trajectory results in higher near-term emission while making later emission reduction more expensive and disruptive.
Lowering the price of Remedial Units leads to a rapid increase in cost of abatement and impact on states.
RUs can be seen as a measure of the incentivisation of investment in alternative energy: the higher the RU price, the stronger the investment in solutions that reduce emissions and therefore the lower the cost of abatement.
We tested the ‘as-is’ prices (RU1 = $100 and RU2 = $380) held constant, versus a scenario where the RU2 price starts at $380 increases over time (broadly reflecting the rising cost of emissions abatement as lower-cost measures are exhausted); only with RU price increasing was investment and energy transition sustained, leading to cost-effective emission reduction.
We also considered ‘No RU’ scenario reflected policy that only trades SUs for compliance, but included vessel impoundment as an enforcement mechanism. To represent the significant impact of impoundment, we modeled RU2 as $1,000 - showing that there is still an effective price on emissions in this policy design even if it is not labelled as such. Because the modelling assumes long-run equilibrium in prices, this policy still achieves emission reduction, but in practice the policy design creates high risks of disruption and high transport costs as volatility and price shocks in the energy system would be more directly translated into shipping price shocks than if there was a third compliance mechanism (RU price etc.)
The proposed ‘Direct Contributions’ are an alternative to RUs where shipping companies make payments to qualifying projects instead of paying the IMO; however, there is a possibility that companies will recover their contribution in the backend if they have financial stake in the project. We refer to this as ‘leakage’. We modeled this possibility by assuming an RU pricing scheme of 50/190, reflecting a 50% recovery of contributions. In every scenario, this led to substantially higher cumulative emissions than NZF ‘as is’, and much higher cost of abatement - as well as no IMO GHG fund for addressing JET.
ZNZ incentives of any kind must be differentiated by fuel type (e-fuels and biofuels) to achieve climate goals
Policies structured where incentives were not differentiated led to a massive increase in the use of biofuels and higher use of fossil fuels in the 2050 fuel mix compared to differentiated incentives.
Regional policies have included both rewards and multipliers successfully, but differentiate them to adjust to climate benefits and cost. For example, FuelEU utilizes multipliers, and the proposed ETS revision’s SMAP mechanism differentiates rewards by different proportions of each alternative fuel’s cost gap to conventional fuels.
Overall, the Net Zero Framework as-is reflects elements that result in lower emissions, lower costs of abatement and therefore impacts, as well as stable revenues for both ZNZ and JET - diverging from its specification compromises one or more of these outcomes. While different elements of the policy are under negotiation, we must recognize that deviating from what was agreed upon could undermine its fundamental purpose.
