The IMO’s Net-Zero Framework and the Road Ahead for Global Shipping

At the recent MEPC 83 meeting held from7 to 11 April 2025 at the IMO’s headquarters in London, Member Nations approvedby a majority vote for a two-tiered carbon pricing mechanism and fuel standard,by adopting a draft amendment to Annex VI of the MARPOL Convention. This breaksthe deadlock on discussions about climate rules and is seen as a breakthroughestablishing a compromise framework on which final guidelines can be built and eventuallyvoted on for adoption at the next MEPC meeting in October this year. If adopted,it will make shipping the first industry of any to have a global carbon priceagreed with internationally mandated emissions reduction targets.

Despite strong objections from PacificIsland states and the withdrawal of the United States from the negotiations,consensus was ultimately achieved through a compromise known as the “J9 Bridge”proposal. Led by Singapore and originally based on the IMSF&F plan backedby China, Brazil, and others, this proposal gained majority support and nowforms the foundation of the IMO’s mid-term climate strategy.

At the heart of the J9 Bridge proposal is a two-tiered compliance system thatwill come into force in 2028. From that year onwards, vessels of 5,000 grosstonnage and above will be required to measure their greenhouse gas fuelintensity (GFI) against a benchmark compared to 2008 levels of 93.3 gCO₂eq permegajoule (EU’s FuelEU Maritime baseline is 91.16 gCO₂eq/MJ - average 2020) andwill need to meet two levels of mandatory emissions reduction targets.

The first level, known as the “BaseTarget”, sets relatively moderate reduction goals - starting at 4% in 2028,increasing to 8% in 2030, and reaching 30% by 2035.

The second level, the “Direct ComplianceTarget” (DCT), imposes more ambitious reductions - 17% in 2028, 21% in 2030,and 43% in 2035.

Vessels that do not meet the Base Targetmust purchase Tier 2 Remedial Units (RUs) at a rate of $380/tonne CO₂eq tooffset the amount by which they exceed the threshold.

Vessels that meet the Base Target, butfall short of the more ambitious & stricter Direct Compliance Target,results in additional penalties, through the purchase of Tier 1 Remedial Units(RUs) at a lower rate of $100/tonne CO₂eq on the difference of any emissionsbetween the Base Target reduction target and secondary DCT reduction target.

Tier 1& 2 RU prices are set until 2030 – thereafter values will be decided upon.

Vessels that meet or exceed the DirectCompliance Target will pay no fees and generate Surplus Units (SU’s), which maybe transferred to other vessels in carbon deficit within the same fleet (for DCTcompliance) or banked for two years for use in future reporting periods or sellthem through an IMO GHG fuel intensity registry.

The framework also includes incentivesfor early adopters of zero or near-zero greenhouse gas technologies (ZNZs),defined as fuels with GHG intensity below 19 gCO₂eq/MJ through 2035. Revenuesgenerated through the compliance system will help support the deployment ofthese technologies, fund training for seafarers, and address potential negativeimpacts, particularly in developing countries.

Industry observers expect a split incompliance strategies. Operators that invest early in cleaner technologies andfuels may benefit from cost savings, surplus credits, and IMO subsidies. Thosethat aim only to meet the base target may find themselves paying approximately$100 per tonne of CO₂ in fines - translating into an estimated $300 per tonneadded to traditional fuel costs. This route may be more attractive for small ormid-sized fleets with older vessels, according to shipping media outlet XindeMarine.

For shipping companies already subjectto the EU regulatory framework, the IMO system will complement - but notreplace - existing obligations. Under the EU Emissions Trading System (EU ETS),shipowners must purchase EU Allowances (EUAs) to cover 100% of intra-EUemissions and 50% of emissions from voyages between EU and non-EU ports.Current EUA prices stand around mid-€60’s per tonne, with projectionssuggesting a rise to €105 by 2027 and over €120 by 2030.

Meanwhile, the EU’s FuelEU Maritimeregulation introduces stricter Well-to-Wake GHG intensity limits for marinefuels beginning at 2% in 2025 to 6% by 2030 and 14.5% by 2035, with the goal ofachieving an 80% reduction by 2050 compared to 2020 levels. Both EU ETS andFuelEU Maritime are set to be reviewed by 2028 to assess their alignment withthe new IMO framework and to minimise regulatory overlap.

The United States’ stance remainsuncertain following its exit from the MEPC 83 negotiations. However,U.S.-flagged ships calling at IMO ports will still be required to comply withthe Net-Zero Framework from 2028 onwards.

One of the most contentious aspects ofthe negotiations was the issue of revenue distribution from the new IMOcompliance system. Pacific Island nations pushed for a fixed share of funds tobe allocated directly to them, a demand that failed to gain widespread supportfrom larger economies. Instead, the IMO will establish a Net-Zero Fund, managedby the IMO Secretary-General, which could generate tens of billions of dollarsannually.

The fund’s revenues will be channeledinto three main areas: rewards for the use of ZNZ technologies, support fordeveloping countries (including training, technology transfer, andinfrastructure), and administrative costs. However, the exact mechanisms fordistributing these funds remain vague, leaving space for further debate anduncertainty.

The proposed amendment is still pendinga vote in October, but it is expected to receive final approval given the relativelystrong support demonstrated at MEPC 83. However, environmental NGOs view theoutcome and the proposed penalty levels as insufficient to drive meaningfuldecarbonisation in the global shipping sector. The fines are notably lower thanthe non-compliance penalties imposed under the EU ETS and FuelEU Maritime forinternational shipping.

This underscores the continuedimportance for the shipping sector to navigate the EU’s decarbonisationmeasures and minimise compliance costs under both the EU ETS and FuelEUMaritime, as these rules apply to their fleet. The recent milestone - includingthe adoption of a globally sector-wide GHG intensity target - sends a strongsignal that the shipping industry acknowledges the need for decarbonisation,and that early movers will be rewarded under such schemes. While the IMOoutcome reflects a compromised approach to carbon pricing, it is likely to bestrengthened over time, especially as the EU sets a leading example through itsmore ambitious shipping decarbonisation regulations.

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