Prospects and Challenges of Market Based Measuresfor International Shipping

Seijiro Morimoto
Senior Researcher, Japan Maritime Center
1st September 2022

Introduction• Market-based measures are expected as key policy measures to fill theprice gap between conventional fuels and zero-emission fuels.
• There are challenges that need to be addressed in order to adopt a global
market-based measure at the International Maritime Organization (IMO).
Projections of Fuel Price in 2030
50

Assembly

40

USD/GJ

Structure of IMO

Council30
price gap
20

MMMC forZCS
RicardoMaritime Safety Committee (MSC)

10

Marine Environment ProtectionCommittee (MEPC)

0Legal Committee
LSFO orMDO

greenammonia

Source: MMMC for ZCS (2022), Ricardo (2022)

Technical Cooperation Committee
Facilitation Committee

2GHG Emissions from International Shipping• International shipping accounts for around 2-3% of global GHG emissions.
• Demand of international shipping, which serves as the backbone of trade,is expected to increase, and GHG reduction measures are needed.
International Shipping’s GHG Emissions

Global CO2 Emissions in 2019
International
Aviation 623 (2%)

900

CanadaChinaOthers580 (2%)
9,985
7,964
Iran 589(29%)
23%(2%)SouthKorea
EUUS591 (2%)
2,703 4,821
Indonesia(8%) (14%)
596 (2%)
India
Germany 654
2,372Japan
Italy 315
1,066 (3%) Russia (7%)
France 301
Poland 293
1,652(5%) EU others 906 Spain 235
Source: IEA (2021a)

2008 estimate

800

Million tonnes CO2

International
Shipping 692 (2%)

700
600
500
400
300
200
10002005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Estimate by 4th IMO GHG Study
Pathway to 2050 Target

Source: Faber et al (2020) as estimate for 2008, 2012-2018. 3

GHG Emissions Reduction Targets• In 2018, IMO adopted the Initial IMO GHG Strategy, setting out the visionand levels of ambition as reduction targets for international shipping.
• Work is undertaken at MEPC to revise the Strategy, under its commitment
to strengthen the levels of ambition, with a view to adoption in mid-2023.
Initial IMO strategy on the reduction of GHG emissions from ships
Vision:
IMO remains committed to reducing GHG emissions from international shipping and,as a matter of urgency, aims to phase them out as soon as possible in this century.
Levels of ambition:
1. carbon intensity of the ship to decline through implementation of further phasesof the energy efficiency design index (EEDI) for new ships;
2. carbon intensity of international shipping to decline by at least 40% by 2030
compared to 2008; and3. GHG emissions from international shipping to peak and decline by at least 50%
by 2050 compared to 2008.
4Measures to Improve Energy Efficiency• The IMO has adopted measures including EEDI, EEXI and CII rating,which are expected to improve energy efficiency of ships.
• These measures are necessary to reduce GHG emissions from ships, but
further measures to promote adoption of alternative fuels are needed toachieve net zero GHG emissions.

Energy Efficiency
Design Index (EEDI)

Newly built ships are required to achieve a certain level ofdesign efficiency. The requirements came into effect from 1January 2013.

Energy Efficiency
Existing Ship Index(EEXI)Existing ships (pre-EEDI ships) are required to achieve acertain level of design efficiency. The requirements will comeinto effect from 1 January 2023.

Carbon Intensity
Indicator (CII) Rating

Ships are required to calculate their annual operational
efficiency (CII) and rated against a benchmark. The
requirements will come into effect from 1 January 2023.
5

Zero Emission Fuels for Ships• Zero-emission fuels such as ammonia, hydrogen, biofuels and synthetic
fuels are considered viable candidates to achieve net zero emissions.
• Collaborative works are undertaken in order to overcome technical andeconomic barriers and to address supply-chain issues to deploy these fuels.
Shipping Energy Demand

Challenges of Zero-Emission Fueled Vessels

1210Electricity
Synthetic fuelBioenergy
HydrogenAmmonia
GasOilEJ

86420Ammonia(NH3)• Corrosion and leakage
prevention• N2O reduction measures

Hydrogen(LH2)• Control technology for abnormalcombustion• Fitting to resist lowtemperatures and hydrogen
embrittlement

Synthetic fuel(e-methanol,e-methane)• Accounting methodologies todetermine net zero emissions
from onboard use

2020 2030 2040 2050
Source: IEA (2021b)

Source: SZEP (2022)

6

LCA Guidelines• MEPC is working to develop draft lifecycle assessment (LCA) guidelines,
aiming for adoption by MEPC 80 in 2023.
• The LCA guidelines allow for calculation of GHG emissions from fuelproduction to end-use by ship (Well-to-Wake), which results fromcombination of Well-to-Tank (from production to carriage of fuel to ship'stank) and Tank-to-Wake (combustion or conversion onboard ship).

Source: https://www.imo.org/en/OurWork/Environment/Pages/Lifecycle-GHG---carbon-intensity-guidelines.aspx 7

Tank-to-Wake (TtW) and Well-to-Wake (WtW)• Measures to address WtW GHG emissions are necessary to incentivize
fuels that have less environmental impact from the lifecycle perspective.
• Such a measure would require certification and verification of WtW GHGemissions.
TtW and WtW GHG Emission Factors
LSFO
LNG
methanolgrey ammonia
green ammonia
grey hydrogengreen hydrogen0204060
WtW

80100120140
gCO2eq/MJ

TtW

Source: Ricardo (2022) for green ammonia and green hydrogen, EC (2021) for other fuels.

8

Levy System and Emission Trading• Levy system would assign a price per ton of CO2 or GHG emitted andrequire payment in accordance with ship’s emission.
• Emission trading assumes setting the overall cap and allocation ofallowances, which may be traded. Allowances equivalent to ship’semissions need to be surrendered.
• Both system would require a feasible mechanism to ensure complianceand to setup and manage a fund for using revenues.
Levy system
Strengths

Challenges

Emission trading• Easier to control the impact
as price is fixed• Easier to administer• Easier to control the reductionlevel as cap is set• Needs to adjust the price tocontrol the reduction level• Price would fluctuate• Needs administration of allocation(auctioning) and trading ofallowances
9Impacts on States• The Initial IMO GHG Strategy states that a measure’s impacts on Statesshould be assessed and taken into account before adoption.
• Market based measures may well affect transport costs and trade costs,
by putting a price on CO2 or GHG. Therefore, careful consideration isnecessary to find ways to minimize their impacts on States.
Impact of a carbon price on the determinants of maritime transport costs

Source: Rojon et al (2021)

10

Feebate System• Simple levy to fill the price gap may raise the cost of conventional fuels atpunitive levels.
• Feebate system, which aims to fill the price gap by providing rebate usingrevenues raised by levy, would minimize the cost increase of conventional
fuels, while providing sufficient incentives for zero-emission fuels.

priceFundPayment of levy

Levy only
LSFO

Levy and rebate(Feebate)

Fossil fueled vessels

RebateZero emission vessels

zero-emission fuelSource: Japan (2022)11

Further Work on Market Based Measures• MEPC 78 last June had acknowledged the advancement from Phase I toPhase II of the Work Plan to develop mid- and long-term measures, andencouraged member states to submit new or refined proposal.
• Progress on the development of market based measures would provide
signals to stimulate deployment of zero-emission fuels.
Work Plan to develop mid- and long-term measures
Phase I (Spring 2021 to Spring 2022): Collation and initial consideration of
proposals for measures, along with considerations of their potential impacts on
States.
Phase II (Spring 2022 to Spring 2023): Assessment and selection of measure(s) tofurther develop as a priority. Decision will be based on an assessment of proposed
measures, in particular their feasibility, the effectiveness to deliver long-term
reduction target, and their potential impacts on States.
Phase III (target date(s) to be agreed): Development of (a) measure(s) to be
finalized within (an) agreed target date(s).
12Summary• A global market based measure is needed to provide incentives for theuptake of zero-emission fuels while ensuring a level-playing field.
• Key challenges are; addressing Well-to-Wake emissions, developing afeasible mechanism to ensure compliance, set up and manage a fund touse revenues, and minimizing impacts on states.
• Prospects of fair and just transition will improve by overcoming thesechallenges, which will provide signals to stimulate deployment of zeroemission fuels including hydrogen-derived fuels.

13Reference
1.

European Commission (2021) Proposal for a Regulation of the European Parliament and of the Council on
the use of renewable and low-carbon fuels in maritime transport and amending Directive 2009/16/EC

2.

Faber, J., Hanayama, S., Zhang, S., Pereda, P., Comer, B., Hauerhof, E., Schimvan der Loeff, W., Smith, T.,Zhang, Y., Kosaka, H., Adachi, M., Bonello, J.-M.,Galbraith, C., Gong, Z., Hirata, K., Hummels, D., Kleijn, A.,Lee, D.S., Liu, Y.,Lucchesi, A., Mao, X., Muraoka, E., Osipova, L., Qian, H., Rutherford, D., Suárezde laFuente, S., Yuan, H., Velandia Perico, C., Wu, L., Sun, D., Yoo, D.-H. &Xing, H. (2020) Fourth IMO GHG
Study 2020. MEPC 75/7/15. InternationalMaritime Organization, London.

3.

International Energy Agency (2021a) GHG Emissions from Energy.

4.

International Energy Agency (2021b) Net Zero by 2050. A Roadmap for the Global Energy Sector.

5.

Japan (2022) Proposal for a Market-based Measure (MBM) to incentivize GHG emission reduction and tomake equitable transition with an overview of mid- and long-term measures. MEPC78/7/5.

6.

Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping (2022) Ammonia as a marine fuel. Prospects forthe shipping industry. Documentation of assumptions for Navigate 1.0 (2021)

7.

Ricardo (2022) Technological, Operational and Energy Pathways for Maritime Transport to Reduce
Emissions Towards 2050.

8.

Rojon, I., Lazarou, N.-J., Rehmatulla, N., Smith, T. (2021) The impacts of carbon pricing on maritime
transport costs and their implications for developing economies. Marine Policy 132, 104653.

9.

Shipping Zero Emission Project (2022) Toward Achieving Net Zero GHG Emissions from International
Shipping by 2050.

14