Will new regulatory cornerstones speed up investment in green fuel and engine design?

Five leading shipping lines made headlines late last year when their CEOs announced that the International Maritime Organisation’s (IMO) 2023 GHG Strategy didn’t do enough to incentivise investment in alternative fuels and engine design.

In a statement made at COP 28 by the CEOs of A.P. Moller, CMA CGM Group, Hapag-Lloyd, Mediterranean Shipping Company (MSC), and Wallenius Wilhelmsen, they showed a clear intent to decarbonise, but stated they require more clarity in order to move forward.

“While the IMO’s emissions targets signal progress, they alone may not be sufficient to drive investment in lower emission fuels and engines,” notes Wolfram Guntermann, Hapag-Lloyd’s director of regulatory affairs. “A comprehensive approach is needed to effectively encourage such investment.”

The joint declaration called for the establishment of four regulatory cornerstones, which they believe will accelerate the transition to greener fuels. Here we take a look at the CEOs recommendations, whether they’re viable, and how the IMO has responded to this call for further clarity.

Experts agree that a clear greenhouse gas (GHG) intensity standard timeline is essential, as coherent regulation is required to develop the infrastructure for lower emission fuels. However, not everyone believes that setting a hard end date is the right path of action. 

“Although it may sound appealing, it’s better to focus on a clear and technology-neutral regulatory path for new low and zero-GHG fuels in an energy lifecycle perspective,” says Anders Kryger, chief strategist at MAN Energy Solutions’ two-stroke business. 

We need targets and policies that will support the decarbonisation effort, but Ryan Bax, lead consultant at Lloyd’s Register, recommends regulators and politicians steer away from telling industry how to achieve their decarbonisation goals.

“We’ve seen quite a lot of discontent in other sectors, such as automotive, where – depending on your viewpoint – regulators have overextended their mandate. Setting targets and providing funding to support these is essential, but ultimately, providing the industry with the tools, without dictating how, will likely lead to the optimum outcome,” he says.

In regards to the IMO, member states have agreed on an illustration of a possible draft outline of a net-zero framework for cutting GHG from international shipping.

“As agreed in the 2023 GHG Strategy, the framework will include a goal-based marine fuel standard regulating the phased reduction of the marine fuel’s GHG intensity and an economic mechanism(s) to incentivise the transition to net-zero,” says Natasha Brown, head of public information services at the IMO.

“The exact details, such as a timeline, are still to be worked out.”

Financial incentives, such as subsidies and carbon pricing mechanisms, will drive innovation and competitiveness on a global scale, and make clean technologies more economically viable says Guntermann.

Bax agrees this is just as important as setting a clear GHG fuel intensity standard to make green fuel competitive with fossil fuel during the transition phase when both are used.

“It’s essential to create a level playing field. As far as the shareholders are concerned, this is a business, and so the managers are concerned about the bottom line. Therefore, we need to put measures in place to facilitate the transition from a financial standpoint.“

As highlighted previously, the IMO plans to develop economic mechanisms to incentivise the move to green fuels, and Bax says we can expect to see the organisation settle on some form of GHG tax combined with a fuel standard. 

The third cornerstone concept is a vessel pooling option for GHG regulatory compliance, where the performance of a group of vessels could count instead of only individual ships.

This regulation idea, which came from the EU’s FuelEU Maritime regulation, would not only ensure that businesses focus their investments where they’ll achieve the largest GHG reductions, but also provide a level of flexibility that enables smaller carriers to participate in decarbonisation more actively.

“We fully support a vessel pooling mechanism, because it will lead to a faster transition, where a shipowner can invest in one fully optimised ship and thus possibly achieve compliance for their fleet,” says Kryger. “This will accelerate the energy transition faster than suboptimising a whole fleet of old ships incrementally.”

“Similarly, the fuel supply and infrastructure need time to catch up, and the pooling option supports this. It’s a really interesting policy,” Bax adds.

The IMO isn’t ruling this idea out, but as it currently stands: “Any such proposal would have to come from a member state,” says Brown. “We have an outline for the framework, but at the moment the exact details of the measures and modalities of the pricing mechanism are still to be developed.”

Regulations based on well-to-wake (WtW) – the entire process of fuel production and delivery, to using fuel on ships and all the emissions produced across the chain – could help align investment decisions with climate interests and mitigate the risk of stranded assets.

According to Guntermann, a WtW – or lifecycle GHG regulatory basis – ensures that investors operate with a full understanding of environmental impacts, which fosters informed decision-making and maximises efficiency.

Bax agrees this is essential, noting that there’s little point in focusing solely on tank-to-wake (TtW), which includes just the emissions derived from onboard fuel combustion, and he expects the IMO to adopt a WtW outlook for its mid-term measures.

“WtW is much more effective, especially if you look at LNG; the production process has got a terrible record of methane leaks,” he notes.

“There is a real need to focus on the full lifecycle, and that can also provide competitiveness for certain producers. If they invest in technology that reduces their production-related emissions that gives them a competitive edge, but the reality is we all benefit.”

Guidelines on lifecycle assessment (LCA) have already been implemented by the IMO and continue to be regularly updated. For example, MEPC 81 adopted revised guidelines on the lifecycle GHG intensity of marine fuels, which included revised calculations for default emission factors, an update to Appendix 4 on the template for well-to-tank (WtT) default emission factor submission and a new Appendix 5 template for TtW emission factors.

“Further work on these guidelines as a living document is underway,” Brown adds.

The MEPC also agreed to establish a GESAMP (group of experts on the scientific aspects of marine environmental protection) working group on the lifecycle GHG intensity of marine fuels. This will be tasked with providing scientific and technical assessments of issues related to the implementation of the LCA guidelines.

“Two correspondence groups have been established, which will report to MEPC 83,” says Brown. “The first is tasked with creating a work plan on the development of a regulatory framework for the use of onboard carbon capture systems and to look into TtW methane and nitrous oxide emissions. The second will look into social and economic sustainability themes and aspects of marine fuels for possible inclusion in the guidelines.”

These are not the only steps the IMO is taking to accelerate the transition to lower-emission fuels, there are several projects underway, including some aimed at supporting developing countries with this initiative.

The organisation is also keen to collaborate and learn from industry trailblazers. “Early movers are welcome – they can take the leap and show the way forward, bringing back their experience to the IMO,” Brown concludes.