Pacific Environment: IMO’s carbon levy is a progress but more steps are needed

This marks the first time a global industry has established a worldwide carbon pricing mechanism an move that underscores the significance of the agreement and its impact on the future of maritime sustainability. As analysed by Jamie Yates, Climate and Renewable Energy Analyst, Pacific Environment, on the article “IMO’s history-making carbon emission levy is a step forward; Pacific Environment argues more steps are needed” ultimately, the IMO agreed to create a two-tier system that integrates the fuel standard and carbon price into one — where ships that use fuels above certain carbon intensity levels must pay a set price (or for the least compliant ships, purchase a credit from over compliant ships).

Never one for simplicity, the IMO decided to set two GHG intensity thresholds: a Direct Compliance Target and a Base Target.

This creates three tiers of ships: 

1. Those below the Direct Compliance Target do not have to pay a fee and instead generate credits, called Surplus Units (SUs) they can sell to under compliant ships;
2. Tier 1 ships falling in between the Direct Compliance and Base Compliance lines; and,
3. Tier 2 ships that do not meet even the minimum Base Compliance targets.

Tier 1 and Tier 2 ships that do not meet the compliance targets generate Remedial Units (RUs) for each ton of emissions above the yearly thresholds. Tier 1 ships must pay $100/tonne for these emissions above the

Direct Compliance line, while Tier 2 ships — in addition to payment for their Tier 1 RU emissions — must either pay $380/tonne per carbon dioxide equivalent or purchase a Surplus Unit from a direct compliant ship to offset their Tier 2 Remedial Unit. Note that purchasing an SU from a direct compliant ship is only available for Tier 2 emissions. 

Pacific Environment’s analysis on results of negotiation

Overall, the agreement is a momentous achievement for a global industry, especially at this moment of complicated geopolitics, Jamie Yates pointed out. But this success is put into perspective when considering the level of investment and pace needed both to meet the IMO’s GHG Strategy goals as well as to meet the Paris Agreement’s goal of limiting warming to 1.5C. 

With that view, the outcome is insufficient. Both the agreed upon emission reduction targets and the penalties for Tier 1 and Tier 2 noncompliance, as well as the revised short-term energy efficiency targets, are not enough to meet the 1.5C goal. 

…said Jamie Yates.

Transport & Environment has analyzed the needed emission reduction pathways to meet the IMO GHG Strategy goals (base and striving) as well as the Paris Agreement’s 1.5C pathway, and their analysis shows that this agreement fails to meet all of the above.

In an exclusive interview to SAFETY4SEA, Jonathan Butler, Corporate Climate Campaign Manager for Pacific Environment’s Ship It Zero campaign, has highlighted that the technology is here and there must be greater investment from corporations to bring the maritime industry to full-scale zero-emissions. 

In addition, the prices of the Tier 1 and Tier 2 Remedial Units are not sufficient to send clear signals for fuel switching in the critical next few years, further delaying and complicating the energy transition for the maritime sector.

The low RU prices will also only raise a fraction of the revenue that was estimated necessary to enable the energy transition in a just and equitable way. With lower revenues collected, there will likely be greater limits imposed on which projects can be funded and could lead to greater inequity in a worst case scenario. In addition, low RU prices raise the risk of operators choosing to “pay to pollute” without changing behavior or fuel consumption. 

In terms of real-world impacts on fuel decisions, much remains to be seen if the investment signals for green e-fuels are strong enough to increase fuel production.

But given the complexity of the legal text and the questions remaining for what is to come in the guidelines, stakeholders including shipowners and carriers might wait until those are finalized in 2026 or early 2027 — a delay that further weakens the impact of the framework. 

…Yates highlighted.

Reliance on a credit trading system of SUs and RUs also creates uncertainty given the unpredictable nature of credit prices added onto a sometimes volatile fuel market that will determine the fuel decisions of ship operators.

These SU credits can be banked for two years or used to pool with other ships and avoid fees, in addition to being able to trade them to Tier 2 under-compliant ships. The multitude of options creates complex decision pathways that will differ for each company and muddy the waters for fuel producers and investors hoping for clarity and certainty from the framework decision.

Liquefied natural gas (LNG) rewarded in the first couple of years of the framework, but beyond 2030 it will be penalized in the Tier 1 category; biofuels will remain directly compliant — and thus rewarded by generating SUs — through 2040, with waste-based biofuels potentially additionally rewarded by the ZNZ fuel reward if limitations are not developed in the guidelines.