IMO compromise proposal - a bridge to nowhere?

1. A global fuel standard with a carbon levy and low carbon fuel incentive. There would be a global fuel standard used to measure the emissions. A levy would be paid based on the emissions calculated. A rate of 100 USD/tCO2e has been suggested. Ships using green fuels would likely be counted as zero emissions and pay no levy. This proposal, with standard, levy and incentive, has the support of most of the IMO countries, with strong backing from a number of OECD countries, flag states, Small Island Developing States (SIDS), and Least Developed Countries (LDCs).

2. A global fuel standard with a “flexibility mechanism”, creating a credit trading scheme. There would be no levy on emissions paid to a central administration. Based on the global fuel standard, for vessels using low carbon fuels, credits, called surplus units, would be issued, which could then be traded and bought for vessels using fuels with emissions. This option has support from several countries, including Brazil, China, Norway and the United Arab Emirates.

3. A bridging option, recently introduced as a possible compromise, also referred to as the hybrid option. This suggestion, based on an earlier proposal by Singapore would have a global fuel standard, a fund and credit trading scheme. (See more below.)

The Bridging Option

Questions have been raised about whether the bridging option is able to deliver on the IMO’s decarbonisation strategy. Let us first consider how it would work.

With this compromise proposal an annual fuel intensity standard would be agreed, representing the average fuel emissions intensity for international shipping that year. The standard would in turn have two thresholds (that would be reduced toward zero over time): a base emissions standard and a stricter threshold, called direct compliance target.

Ships would therefore operate within three bands:

1. If the strictest level is met, a vessel would be deemed in direct compliance. It would give right to credits, called surplus units, which could be banked or traded.
2. In the second category, a ship might fall between the “high” and “low” tier.
3. In the final category would be ships the exceed both thresholds.

If a vessel is not meeting the stricter standard, i.e., not in direct compliance, in both cases it could either buy and use credits, surplus units, or buy remedial units. There would be two parallel systems, one of surplus units, which would be traded like credits, and the carbon levy/remedial units paid into the fund and incentives obtained.

What Others Say

The Maersk Mc-Kinney Moller Center for Zero Carbon Shipping, a leading organisation in maritime decarbonisation, has welcomed the bridging “hybrid” proposal. While noting that a universal GHG levy combination and a GFS is still their preferred option, they note that the bridging proposal could deliver on meeting the IMO’s indicative checkpoints and mobilize revenue. The key is to optimise the thresholds to incentivize fuel switching and reward efuels so that these are favoured over other options (like biofuels and blue ammonia).

In a readout from the most recent meeting published by the Bartlett Energy Institute and University College London, Tristan Smith and others challenge this view, noting a key shortcoming: the supply of credits and the supply of green fuels counteract each other:

While e-fuel/ZNZ supply is low, it’s feasible that there could be high RU-related revenues. However, as e-fuel uptake matures (e.g., due to reward revenue usage), this creates a greater supply of SU’s that then reduces the use of RU’s, diminishing the available revenues and increasing the likelihood that there will be inadequate revenues to cover the total reward costs. It is also possible that non-ZNZ fuels (e.g. biofuel blends operating below the direct compliance target) sell SU to under-compliant ships, which would also reduce the amount of revenue generated.

Put simply, the more ships using green fuels, the less money there will be to incentivise green fuel production. There will be a progressive shift to the issuing of credits, surplus units, and a decrease of the amount of remedial units. The system would in effect starve itself.

This will not only become a challenge after a while, when the amount of revenue starts to fall, but from the outset. This because producers and consumers of green fuels need to have confidence that the levy system is sustainable in the long term. Fuel suppliers will not commit to large scale production if there is clear risk that the demand for their products will falter. Similarly, ship owners will not commit to new technologies and fuels that may place them at a long term competitive disadvantage. Port operators and others will also won’t have the confidence in making long term investments to provide green fuels.

Transport and Environment (T&E) have raised another crucial concern: the risk that a large amount of fossil fuels will be replaced with unsustainable biofuels, fuelling deforestation. T&E have noted that palm and soy oil could make up nearly two-thirds of the biodiesel used to power the shipping industry in 2030 because they currently represent the cheapest fuels to comply with the marine fuel standard. These palm and soy oil-based fuels are associated with indirect land use change emissions that make them worse than the heavy fuel oil used today. Without proper safeguards, T&E calculate that the GFS could result in an additional 270 Mt CO2e emissions in 2030 compared to the current fossil fuel mix.

The Global Maritime Forum has noted that negotiators “should remember that a bridge is only as strong as its pillars”:

A global fuel standard to reduce carbon intensity, a fixed levy on greenhouse gases, targeted rewards for e-fuels, and dedicated support for countries most affected by the transition are all necessary for the IMO to deliver on its Revised Greenhouse Gas Strategy. No single one of these can stand alone.

The bridge option would not satisfy this list of pillars set out by the Global Maritime Forum, as it is not likely that there would be sufficient funds for targeted rewards and dedicated support for countries most affected. In addition, there would not be what investors arguably need more than anything, certainty leading to confidence.

A Bridge to Nowhere

The proposal also states that at least 30 percent of total revenue should go to countries in need of support. While some revenue needs to be channelled to countries affected by higher shipping prices, 30 % appears high when the fund will be so much smaller.

The bridge compromise is likely to politicise the IMO for a long time. It would not only initially have to agree the standards and its various thresholds, the direct compliance target and base target, but these would have to be annually updated based on the average emissions intensity. Adjustments are likely to be necessary, and there will be calls to adjust the various thresholds. It would not create certainty. A simple carbon levy based on a proper fuel standard and the emissions intensity would create the confidence investors need. 

We need the production of green ammonia at scale to grow rapidly. Investments will have to be large. To illustrate, Europe’s largest green hydrogen project, Moeve’s 2 gigawatt project in Huelva, Spain, is costed at EUR 2 bn for an annual production of 300 000 tonnes of hydrogen, equivalent of 1.65 mt of ammonia. Argus has forecast that 200 million tonnes per annum of green ammonia will be demanded for shipping by 2040. Even if costs are likely to fall significantly in the coming decades, based on the figures for Moeve’s project, the upfront investment cost of the production capacity of some 37 million tonnes of hydrogen (resulting in 200 mt of green ammonia) is ballpark EUR 200 billion. While this is just a rough estimate, it shows that the fund supporting these investments will have to be large. It is however important to bear in mind that for renewable energy like green ammonia, much of the cost is capital expenditure, that the operational costs will be low and falling. In contrast to oil-based products, renewable energy costs are likely to be less volatile.

The key question is whether this bridging option will catalyze the necessary investment in green fuels that are needed to achieve net zero. A universal levy on carbon emission is the only option which will reliably raise sufficient revenues to support the business case for the long-term investment in green fuel adoption and production, to develop supply chains at scale, and to create a virtuous feedback loop that will reduce productions costs and close the price gap between green and higher emitting fuels.

Consensus and compromise are worthy goals, but not if they lead to a watered down proposal that compromises the whole exercise before it even begins.

 

 

Jonas Moberg 

CEO, Green Hydrogen Organisation

 

Ocean Fay

Researcher, Green Hydrogen Organisation