A draft new fuel standard has been voted upon by IMO to help the shipping industry decarbonise; a further vote will be needed to bring the new rules into force. In our other article, we explain the background a bit more and how the vote played out. In this article we explain, in rough terms, how the global fuel standard is calculated and how it will cut pollution.
Incidentally, we wrote an overview of the development in our article: “IMO approves world-first framework for net zero greenhouse gas emissions”. Read that article for a bit of an overview.
Warning: Greek letters in a mathematical formula!
We’ll have a go at translating the mathematical formula to something a more understandable by the average person. The following explanation might not satisfy mathematics professors, but it’s roughly correct.
Ships will need to work out the greenhouse gas intensity for each fuel that the ship has used. This is done figuring out how many grams of greenhouse gases are emitted per megajoule of energy provided by the fuel. We can call this number the GHG intensity.
Ships then multiply the GHG intensity by the amount of energy used by the ship from the fuel.
This process is repeated for each type of fuel used by the ship.
Ships then add up all the different emissions from the different fuels and divide it all by the total amount of energy used by the ship in a given reporting period – such as a calendar year.
Mathematics gobbledygook
So, if you’re an engineer, math professor, or academic, and you’re jumping up and down in rage at the inaccuracy of the previous statement(s), remember, it’s not aimed at you. If you want a more accurate explanation, the GHG Fuel Intensity standard is a weighted average of a ships’ energy sources in the form where:
Additionally, “j’ is the energy source (i.e. the fuel); “Energy total” is the total amount of energy used by the ship in a given reporting period.
The greenhouse gas intensity of the energy sources used is defined as the grams of carbon dioxide equivalent, so it captures gas emissions that have a greenhouse effect from gases other than carbon dioxide, such as methane or nitrous oxides. These calculations are all done on a well-to-wake basis, which means that all emissions associated with the production and transportation of the energy source right through to the burning of the fuel onboard, will be accounted for. The energy source will have to be assessed and certified by an IMO-recognised fuel certification scheme.
Targets
This “attained” fuel intensity is then compared to an annual target. That’s going to be a percentage reduction factor of the fleet average in 2008, which is stated to be 93.3 grams of carbon dioxide equivalent per Megajoule. There are two sets of targets, a “Base” and a “Direct Compliance: target as follows:
| Year | Base target (with ref to the 2008 fig of 93.3 gCO2eq/MJ | Direct target (with ref to the 2008 figure of 93.3 gCO2eq/MJ) |
| 2028 | -4% | -17% |
| 2029 | -6% | -19% |
| 2030 | -8% | -21% |
| 2031 | -12.4% | -25.4% |
| 2032 | -16.8% | -29.8% |
| 2033 | -21.2% | -34.2% |
| 2034 | -25.6% | -38.6% |
| 2035 | -30% | -43% |
The Base target for the year 2040 is set at -65%.
Meeting targets and the Global Economic Measure … earning credits
When a ship beats the Direct Compliance Target then it need take no further action to receive certification. It will also receive credits called “Surplus Units” expressed in tonnes of CO2 equivalent. Surplus Units can be sold, or banked (for use within two years), or used. We understand that the price of Surplus Units will be determined by the market.
If a ship beats the Base Target, but does not beat the Direct Compliance Target, then it has not complied. It will generate a Tier 1 Compliance Deficit.
If a ship does not beat the Base Target then it has not complied. It will generate both a Tier 1 Compliance Deficit and also a Tier 2 Compliance Deficit i.e. two deficits for the price of one non-compliance!
When ships don’t beat the target then they have to “balance” the deficit by, you guessed it, getting their hands on an offsetting credit. We’ve discussed one of these – the Surplus Units. Operators can draw upon any Surplus Units that have been generated by another ship – whether those Surplus Units are drawn from the operators’ own stock (provided they’re less than two years old), generated by another ship in its fleet, or bought from the open market. There’s a twist in the tail though… ships can only use Surplus Units to offset Tier 2 Compliance Units.
Ships can also offset Tier 2 Compliance Units by buying Remedial Units from the soon-to-be-established IMO Net Zero Fund (for more, see below). Both Tier 1 and Tier 2 Deficits can be offset with Remedial Units but, in yet another twist, there will be two different prices. Tier 1 Remedial Units will cost US$100 per tonne of CO2eq. Tier 2 Remedial Units will cost US$380 per tonne of CO2eq.
“The regulations are designed in this manner so that most ships will use sufficient low-GHG emission fuels to reach the Base target and then buy Tier 1 RUs. Alternatively, they can buy SUs to cover the Tier 2 compliance deficit and then acquire Tier 1 RUs. This ensures that a certain amount of revenue is generated for disbursement purposes, while ensuring that the fleet achieves at least the Base target,” Class Society DNV explains.
IMO Net Zero Fund
Additionally, delegates to the IMO MEPC have authorised the creation of a “Net Zero Fund” that will collect pricing contributions from emissions. According to the IMO, these revenues will then be used to reward low emissions ships; support a variety of programs in relation to innovation, research, or infrastructure; fund training, technology transfer and capacity building; and mitigate negative impacts on vulnerable countries. Revenues will not go to IMO Member States but will be paid by the shipping company directly into the IMO Fund.
Rules tackle a twin policy problem
This is all pretty complicated and clever stuff. The rules have clearly been designed to tackle a twin problem – what do to about the existing fleet of conventionally-powered ships, and what to do to influence the choices of ship-owners into buying alternatively-powered vessels in the future.
Despite action being taken around the world by ship owners, ship operators, policy institutions (like the IMO), shipper organisations and so-on, the world fleet as a whole remains stubbornly conventionally-powered. According to Class Society DNV, about 99.08% of the current world fleet in operation today is conventionally powered. Only about 0.92% is alternatively fuelled.
Yes, there have been lots of initiatives and announcements of ships that will run on new fuel, and the orderbook for new ships really does show that. But it’s still relatively small. Today, 82.77% of all ships on order (i.e. yet to be built) are conventionally-powered and 17.23% will be alternatively powered (and the majority of those will be liquefied natural gas-powered ships, which is still substantially a hydrocarbon fuel).
Yes, there have been lots of announcements by the bigger ship owners and operators. But even the biggest corporate fleets are tiny when compared to the size of the world fleet. We have recently heard of a corporate shipping fleet (chartered and owned) that’s about 900 vessels strong, which is a huge fleet. But given that the total world fleet of ocean going cargo ships (*note: seagoing, over 1,000 gross tons, propelled; Source Table II.6, UNCTAD Review of Maritime Transport 2024) is just over 58,000 ships, even that large corporate fleet is tiny in comparison, accounting for just under 1.55% of the world fleet.
The world fleet is aging too. Most vessels across the different sector types (bulkers, boxes, general, tankers, other) are over 15 years. A very substantial minority (i.e. just shy of 50%) are more than 20 years old. Older ships are more fuel inefficient ships – ships naturally become more power hungry / fuel inefficient over time owing to increasing wear and tear on engines, hulls, and machinery. And greater fuel inefficiency means greater fuel consumption which means, in turn, more greenhouse gas emissions.
The new IMO rules ought to, in theory, tackle this twin-problem by encouraging ship owners to buy greener ships and by inducing older vessels to hit the scrapyard.
Likely effect on the shipping fleet – older ships will be forced out of service, newer ships will be greener
The implications of the new rules are that it will be harder and harder for ships to meet the Direct Compliance Target – but, of course, that won’t be a problem for a net zero ship e.g. one that’s powered by bio-methanol, ammonia, or by bio/synthetic LNG (provided all the fuel was manufactured in a green way). Such vessels presumably ought to be beating the Direct Compliance Target and should generate a solid stream of Surplus Units.
Ships that cannot meet either or both of the Base or Direct Compliance targets by themselves will become more and more expensive to operate over time as they will need to acquire more and more Surplus Units from greener ships or Remedial Units from the IMO Net Zero Fund so as to offset their deficits.
Conventional ships will, in effect, start to subsidise green ships. And, ships that can’t meet the Base Target are going to be penalised heavier and faster compared to ships that can meet the Base target but not the Direct target. Remember: this is going to be an increasing cost. More ships fall into a bigger Deficit each year because the targets are designed to become more difficult to meet and more expansive over time. More ships will also fall into Deficit, or will incur bigger Deficits (or both), because ships naturally become more power hungry / fuel inefficient over time owing to increasing wear and tear on engines, hulls, and machinery.
It’s commonly said that ships have a life of 25-ish years (although there are some vessels in service, particularly the North American Great Lakes fleet, that are a lot older). Ships that are nearing the end of their service life, but which are not yet at the end of their service life, would normally still have a few years worth of trading in them. Compared to newer vessels, such ships are generally more expensive to run (they have more maintenance demands, use more fuel, need more crew and so on). If these new rules come into force and the elderly ships start generating Tier 1 and Tier 2 Deficits, then would-be buyers in the second-hand market are likely to stop buying these kinds of ships because they will be too expensive to operate. Would-be sellers who are unable to find buyers may also find that these older ships are so expensive to operate that they may choose to send the old ships to the scrapyard instead of continuing to trade.
These economic incentives are only going to grow stronger over time as more and more conventionally-powered ships generate bigger and bigger Tier 1 and Tier 2 Deficits.
Meanwhile, companies that want to build new ships will have two sets of very powerful incentives – a strong incentive to order green ships and a strong incentive not to order conventionally-powered ships.
This new target-surplus-credit system is going to cause the newbuilding, second-hand, and scrapping markets to force conventionally-powered ships out of service over time.
