With a sharp uptick in the volume of GHG emissions regulations, an increasingly complex and fragmented regulatory landscape lies ahead for the maritime industry. The European Union’s (EU) regional Emissions Trading System (ETS) has been expanded to cover ships from 2024, and the FuelEU Maritime regulation will kick in from 2025. Meanwhile, the International Maritime Organisation (IMO) is in the process of developing new international regulations that are expected to enter into force in 2027, building on the revised GHG strategy that was adopted in 2023.

The IMO is the prime international regulator of the shipping industry. Within this, the IMO’s Marine Environmental Protection Committee (MEPC) is responsible for general environmental regulations, including the crafting of specific GHG regulations.

The GHG work saw a crucial breakthrough in July 2023 at the 80th MEPC meeting (MEPC 80), when the initial 2018 GHG strategy was tightened to aim for net zero GHG emissions by 2050, with additional emissions reductions targets for 2030 and 2040 of 20% and 70% respectively, compared to 2008 levels.

Strategic targets are now on a ‘well-to-wake’ basis rather than the previous ‘tank-to-wake’ basis, which means that the GHG footprint associated with fuel production is now set to become part and parcel of the regulatory requirements for ships. There is also a sub-target for 2030 of a minimum 5% uptake of ‘zero or near-zero GHG technologies, fuels and/or energy sources’.

While the language of the strategy can appear a bit fuzzy at times, this is essentially an application of ‘Kissingeresque’ realpolitik, where, following the lead of the late US diplomat Henry Kissinger, so-called ‘constructive ambiguity’ is used as an approach to nudge member states towards consensus. The MEPC almost never votes – it has only happened once since 2008 – and achieving consensus is the only way forward on issues as sensitive as GHG.

The GHG strategy is not a regulation per se; instead, it is something which expresses the collective will of the IMO member states to achieve certain goals. It is the combined package of existing and new regulations that will fulfill those strategic goals. Therefore, any perceived ‘fuzziness’ in the wording of the strategy can be expected to evaporate as actual regulations develop. These will contain firm deadlines, clear reduction requirements and trajectories along with robust enforcement provisions. So where are we heading?

Incoming IMO regulations
At MEPC 80 a so-called ‘basket of measures’, comprising two key elements, was agreed upon. One is a technical measure aiming to regulate the GHG intensity of fuels used onboard ships: the greenhouse gas fuel intensity (GFI). The other is an economic measure, imposing some form of carbon pricing.

The agreed plan is for these measures to become MARPOL (International Convention for the Prevention of Pollution from Ships) regulations, ready to be approved at MEPC 83 in April 2025 and then adopted at an extraordinary session of the MEPC in October 2025. That will allow them to enter into force in 2027, most likely becoming effective from January 2028.

On the technical side, there are several proposals for regulation on the table; two are getting the most traction. One is fronted by the EU and directly applies the well-to-wake approach to calculate GHG intensity. The other is spearheaded by China and applies a tank-to-wake approach to the calculation with additional well-to-tank fuel categorisation and sustainability criteria thrown into the mix.

Both are designed to meet the well-to-wake GHG intensity targets of the IMO GHG strategy, but there are political reasons behind these different approaches to the explicit incorporation of well-to-wake in the regulation itself. Both proposals also pave the way for an economic instrument to be embedded in the technical regulation through proposed flexibility provisions that include pooling and trading of compliance balances.

During MEPC 81 (18–22 March 2024) there was some greater mutual understanding and at least some convergence on the technical GFI regulation, and this was reflected in a general – though non-binding – agreement on a framework for the legal language that needs to be developed in MARPOL. Developing this further will be a key focus area for MEPC 82 in October 2024.

Carbon pricing through MEPC 81
Like at last summer’s MEPC 80 meeting, MEPC 81 was deeply split about whether the IMO should develop an additional carbon pricing mechanism or not.

Several countries have expressed the view that a levy will be a ‘tax on trade’ which will predominantly disadvantage developing nations, making it utterly unacceptable. These countries broadly consider the flexibility mechanism of the GFI as adequate and satisfying the agreement in the GHG strategy of developing an economic element as part of the ‘basket of measures’.

So what is the way forward?

Broad strategic consensus on the key elements of the regulatory package has to be in place by the end of MEPC 82 in October for there to be a chance of approval at MEPC 83 in April 2025. With numerous red lines in sight, this may appear to be an insurmountable challenge, especially since decisions must be reached by consensus. But international negotiations favour the art of the possible, and there is the potential for compromise if the GFI and the levy disagreements are viewed in combination. What is clear is that no one party is going to get everything it wants [re IMO regulation of maritime GHG emissions], and that flexibility when negotiating is going to be crucial to land this by the end of MEPC 82.

What is clear is that no one party is going to get everything it wants [re IMO regulation of maritime GHG emissions], and that flexibility when negotiating is going to be crucial to land this by the end of MEPC 82.

EU GHG regulations – where do we stand?
The EU has ambitious GHG reduction goals, and these have direct regulatory impacts on ships that call on European ports. From a historical perspective, the EU Monitoring, Reporting and Verification (MRV) regulation – which has been in place since 2018 – came about as a direct consequence of the failure earlier that decade to expand the EU ETS to the aviation and maritime sectors. Fast forward a few years, and the MRV has become the basis for shipping’s inclusion in the ETS, effective as of 1 January this year.

Ships above 5,000 gt (gross tonnage) transporting cargo or passengers now have to acquire emission permits corresponding to their EU-relevant CO₂ emissions. These permits, or EU allowances (EUAs), will be required for all vessels trading in the EU, irrespective of flag, owner or operator location. One EUA corresponds to one tonne of CO₂ and has traded at costs exceeding €100. While at the time of writing this price is lower, this still represents a significant surcharge on operating costs.

Achieving compliance is only one part of the equation. Establishing contractual arrangements which ensure that costs are passed on will also be a key commercial consideration, with the tracking of vessel emissions at a granular level needed to facilitate this.

Finally, the ETS is not static. It will evolve over the next few years by adding offshore ships, expanding to include methane (CH₄) and nitrous oxide (N₂O) emissions, and potentially extending to ships above 400 gt for some ship types.

Upcoming FuelEU Maritime regulation
FuelEU Maritime (FEM) is the next regulatory step from the EU, taking effect from 1 January 2025. FEM applies requirements to the GHG footprint of the energy used onboard ships, with identical vessel coverage to the ETS. Conceptually it also forms the basis for the EU’s GFI proposal to the IMO, although the technical details differ.

FEM imposes requirements to the well-to-wake GHG footprint of the fuel used onboard ships, covering CO₂, CH₄ and N₂O, tightening in five-yearly increments. It starts in 2025 with a 2% reduction requirement from a defined baseline, tightening to an 80% reduction in 2050.

Most ships will be immediately non-compliant in 2025, so what actions are available?

The first and most obvious one is to start using alternative fuels. The obvious initial go-to solution is to use a small amount of sustainable biofuel, which will be sufficient to achieve a 2% footprint reduction. However, like most alternative fuels, supply is short.

The second option is to work with what is called the ‘compliance balance’. In essence this is the difference between required GHG intensity and actual GHG intensity, multiplied by the FEM-relevant energy use, giving a balance measured in tonnes CO₂ equivalent (CO₂e). If you are under-compliant you can use this negative balance to pool with other over-compliant ships to attain overall pool compliance. Alternatively, you can put surplus compliance units in a bank for use in later years, or you can borrow compliance units from next year if needed (in which case you get hit with a 10% ‘interest’ the following year).

It is also possible to become compliant by paying a penalty based on the negative compliance balance. While this is designed to be dissuasive, it is a legitimate compliance strategy and may be attractive to some, at least initially. When comparing the costs of the ETS and the penalty mechanism of the FEM, the ETS hits much harder initially, with cost parity between the two expected around 2035.

More complexity ahead
The complexity and overlap between regulatory regimes is set to increase. With little prospect of alignment or sunsetting of regulations this side of 2030, the more likely prospect is that even more national regulations will be added to the mix, for example a UK ETS. China already has national GHG regulations in place that can easily be expanded to cover shipping if political or other considerations dictate.

Irrespective of the outcomes of the regulatory processes underway, anyone operating ships is well advised to take all necessary steps to ensure that they have full control over what they emit, when they emit it, and where they are when doing so.

Losing track can have profound compliance and commercial consequences.

• Further reading: ‘LNG remains top choice for dual-fuelled vessels in shipping’. LNG remains the fuel of choice for lower-carbon shipping, despite the rise in orders for vessels equipped with dual-fuel methanol and ammonia engines, according to Rystad Energy analysis.
• Discover more about some of the radical marine fuel decarbonisation initiatives that are underway in pursuit of zero GHG emissions to meet international regulations.