Sail away, sail away – the international strategy for reducing greenhouse gas emissions in the shipping industry

What you need to know

• Member States in the International Maritime Organisation have adopted the2023 IMO Strategy on Reduction of GHG Emissions from Ships, with the goal of achieving net zero greenhouse gas emissions in the shipping industry by as close to 2050 as possible.
• The strategy includes a pathway for developing a marine fuel efficiency standard and a greenhouse gas emissions pricing mechanism, which could come into force as soon as 2027 and apply to shipping worldwide.
• These measures are expected to increase the cost of shipping and, as a result, the cost of consumer goods across the global economy.

What you need to do

• Shipowners should revise their fleet decarbonisation strategies to align with the new emissions targets and closely monitor emerging technical standards and pricing mechanism.
• Charterers can expect additional costs of compliance to be reflected in freight and charter hire rates, and novel contract terms covering fuel and potential consequential losses of the shipowner.
• Businesses that rely on shipping should budget for a potential increase in freight costs.

The 2023 IMO Strategy on reduction on GHG emissions from ships

In early July, Member States of the International Maritime Organisation (IMO) met at the Marine Environment Protection Committee and adopted the2023 IMO Strategy on Reduction of GHG Emissions from Ships(the 2023 Strategy). The 2023 Strategy builds on theIMO Strategy on Reduction of GHG Emissions from Shipsfrom 2018 (Initial Strategy) and includes:

• a new target of achieving net zero greenhouse gas (GHG) emissions by as close to 2050 as possible; and
• a plan for developing implementation measures, including a marine fuel greenhouse gas standard and a maritime GHG emissions pricing mechanism.

The implementation measures could come into force as soon as 2027 and apply to all shipping, worldwide. The measures are expected to increase the cost of shipping, which will have flow-on effects for the cost of consumer and other traded goods.

The 2023 Strategy: New targets and implementation measures

在最初的策略是第一个里程碑e IMO's roadmap to reducing GHG emissions in the global shipping industry. The 2023 Strategy departs from the Initial Strategy, by:

• setting more ambitious carbon emission reduction targets and efficiency goals;
• outlining the next steps to develop new implementation measures to reduce carbon emissions from shipping; and, significantly; and
• foreseeing an emissions pricing mechanism.

Carbon emission reduction targets and efficiency goals

The Initial Strategy included an emissions reduction target for the global shipping industry to reach peak GHG emissions as soon as possible. The 2023 Strategy goes one step further, setting an "ambition" for the industry to achieve net zero GHG emissions by as close to 2050 as possible.

This new reduction target is supplemented by two "indicative checkpoints", with the goal to reduce the total annual GHG emissions from international shipping, compared to the 2008 baseline by:

• at least 20%, striving for 30%, by 2030; and
• at least 70%, striving for 80%, by 2040.

The 2023 Strategy also outlines goals for improving the emissions efficiency of the global shipping fleet, including:

• the carbon intensity to decline through further improvement of the energy efficiency design requirements for new ships; and,
• 增加零个或ne的吸收ar-zero GHG emission technologies, fuels and/or energy sources so they represent at least 5%, striving for 10%, of the energy used by international shipping by 2030.

Implementation measures

As a result of the Initial Strategy,short term measures(applying from 2018-2023) have already been developed and are in force. The short-term measures include theEnergy Efficiency Existing Ship Index and Carbon Intensity Indicator, which are legally-binding energy-efficiency measures applying to the shipping industry worldwide. The requirements for these two measures came into effect on 1 January 2023 and from 2024 ships will be issued with a statement of compliance.

The 2023 Strategy now provides more clarity on themedium term"basket of candidate measures"(applying from 2023-2030) that will be developed and implemented over the next few years, comprising:

• a technical standard – this will be a goal-based marine fuel standard regulating the phased reduction of the allowable GHG intensity of marine fuel; and
• an economic mechanism – this will be a maritime GHG emissions pricing mechanism and there are several options being considered, including a GHG fuel levy.

The medium term measures have not been confirmed. Instead, the 2023 Strategy outlines the process IMO Member States will follow to agree on their final form.

Long term measures(applying from 2030 onwards) will be developed as part of the review of the 2023 Strategy, which will be released in 2028.

Next steps for implementation

The IMO will now study and consider options for the medium term measures, publishing a "comprehensive impact assessment" in the third quarter of 2024. It is likely their assessment will focus heavily on the economic mechanism, with the IMO required to consider its impact on states, by reflecting on the following factors:

• geographic remoteness of and connectivity to main markets;
• cargo value and type;
• transport dependency;
• transport costs;
• food security;
• disaster response;
• cost-effectiveness; and
• socio-economic progress and development.

Both the technical standard and economic mechanism will be finalised and agreed to by 2025 and could enter into force as soon as 2027. Like theEnergy Efficiency Existing Ship Index and Carbon Intensity Indicator,these measures could be legally binding across the entire global shipping industry, if they are incorporated into the International Convention for the Prevention of Pollution from Ships (MARPOL).

Potential impacts of the 2023 Strategy

If the technical standard and economic mechanism become legally binding, they could have major impacts for the shipping industry, users of shipping services and consumers.

Impacts on the shipping industry

In theshort term, shipowners will be under additional pressure to adapt their existing fleet and operations. Options include:

• slow steaming to reduce fuel consumption;
• optimising passage planning and weather routeing for fuel economy;
• wind assistance, such as sails, kites and rotors; and
• mixing "drop in" fuels, which reduce CO2 emissions released into the atmosphere.

Thelong termtargets in the 2023 Strategy will be harder to achieve because industry-wide technological innovation will be necessary. According to a report by shipping consultancy UMAS and the UN Climate Change High Level ChampionsClimate action in shipping: Progress towards Shipping's 2030 Breakthrough, the process of decarbonising the shipping industry is projected to cost trillions of dollars and will require the widespread commercialisation of low emission and zero emission fuels like green hydrogen, methanol and ammonia.

Impacts for users of shipping and consumers

According to research by the independent research and consultancy organisation CE Delft,Shipping GHG emissions 2030: Analysis of the maximum technical abatement potential, implementing the emission reduction measures already available to shipping companies could increase shipping costs by 6-14% on average, relative to current business as usual.

Flow-on effects to the global economy must follow because the international shipping industry is critical to world trade, carrying around 80% to 90% of traded goods. Increases in shipping costs will likely drive up the cost of raw materials and manufactured goods.

Evolution of IMO regulations

由国际海事组织估计,GH定期研究G emissions from shipping accounted for around 1.8% to 2.7% of total global GHG emissions between 2000 and 2014. However, until recently, the emissions from international shipping were not covered by international agreements like the Kyoto Protocol or the Paris Agreement. This is because emissions from shipping are difficult to attribute to a country, when the nation of the "flag state" (where a ship is registered), the owner, the crew and a ship's many ports of call are all different.

As it became clear emissions from shipping were expected to increase both in absolute and relative terms, pressure grew on the IMO to support the reduction of emissions in the industry. In 2016, an agreement was reached to develop a strategy, resulting in the adoption of the Initial Strategy in 2018. The 2023 Strategy was the first review of the Initial Strategy and another review will be released in late 2028.

It remains to be seen how stringently legally-binding energy-efficiency measures will be enforced. Checking compliance with maritime conventions has always rested heavily on the responsible authorities carrying out inspections when ships are in port. These inspections will need to be expanded and no doubt present additional challenges for regulators and shipowners. At the same time, the owners of efficient ships will have increasing attraction for freight users that are focused on their own carbon footprint.

Interplay with EU ETS and UK ETS expansions

Recent legislative amendments to the EU Emissions Trading System (EU ETS) include an expansion of the EU ETS to cover maritime transport emissions from 1 January 2024. This expansion is accompanied by a broadening of EU monitoring, reporting and verification requirements.

The UK ETS Authority has confirmed that the UK Emissions Trading Scheme (UK ETS) will be expanded to cover domestic maritime emissions from 2026 as part of its response to theDeveloping the UK Emissions Trading Schemeconsultation published in July 2023, which looks to tailor aspects of the UK ETS following Brexit.

We plan to publish a separate and more detailed update on the inclusion of shipping emissions in the EU ETS and UK ETS.

Authors:Hazel Brasington, Consultant; Jeff Lynn, Partner; James Nierinck, Senior Associate; Thea Walton, Graduate.