ISWG-GHG 16

DEVELOPMENT OF A BASKET OF CANDIDATE MID-TERM GHG REDUCTION

MEASURES
Fact sheet

Name of the candidate Greenhouse Gas Fuel Standard with its Flexibility
measure(s): Compliance Mechanism (the technical element), in
combination with a Greenhouse Gas Pricing
Mechanism Covering all GHG Emissions (the
economic element)

Reference document(s): ISWG-GHG 15/3/1 (Austria et al.): GFS, including

MARPOL Amendments)
ISWG-GHG 16/2/7 (Austria et al.): GFS Guidelines
ISWG-GHG 16/2/8 (Austria et al.): GFI trajectory
ISWG-GHG 16/2/10 (Austria et al.): Flexibility
Compliance Mechanism
ISWG-GHG 16/2/9 (Austria et al.): Greenhouse Gas
Pricing Mechanism Covering all GHG Emissions
ISWG-GHG 15/3/2 (Austria et al.): combining a GFS
and a levy
ISWG-GHG 13/4/8 (Austria et al.): combining a GFS
and a levy

Are the technical element and The technical and economic element are two
economic element integrated intrinsically linked measures.
into a single measure or
developed as separated
measures?

***
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1 GHG fuel intensity (GFI) values setting

1.1 Methodology/approach The GFI trajectory is set by:
for setting GFI trajectory
and baseline • Establishing as baseline the 2008 WtW GHG
emissions of the fleet that will be subject to the GFS;

• Applying the GHG reduction targets and checkpoints

(for 2030, 2040 and 2050) from the 2023 Strategy to
the 2008 WtW GHG emissions in order to establish a
GHG emissions pathway in absolute terms;

• Projecting energy demand of the fleet until 2050,

taking into account the impacts of the CII and of the
GHG Pricing Mechanism on the energy-intensity of
the fleet; and

• Combining the GHG pathway with the energy

demand projections to calculate the required GFI.

1.2 Proposed GFI Quantification of the GFI trajectory can only be done after
trajectory/pathway/values agreeing on the GHG Pricing Mechanism, because the
from entry into force to energy demand projections depend on the level of the levy
2050 (amongst other factors), which drives energy efficiency
improvements and reduces the price gap.

1.3 How to take into The attained GFI will be calculated on the basis of WtW GHG
account GHG emissions of emissions, as defined in the LCA Guidelines.
marine fuels and
sustainability aspects as Taking into account WtW emissions (and not only TtW
addressed in the LCA emissions, for example) ensures that decarbonisation of the
Guidelines? Rationale for shipping sector does not result in an increase in upstream
the approach? emissions, which would counteract or even eliminate the
climate benefit of reducing TtW emissions. This risk is
especially pertinent for synthetic fuels.

1.4 How to ensure The 2023 Strategy makes a distinction between low GHG
fuel/technology neutrality fuels on the one hand and zero and near-zero GHG fuels on
in the process of the other, with a specific level of ambition for the uptake of
identifying the latter.
compliant/eligible
fuels/technologies? What Our proposal envisages that all low, near-zero and zero GHG
considerations have been fuels can be used to meet the required GFI and to participate
taken to incentivize the in the FCM.
production of alternative
marine fuels? In order to incentivise early development of the zero- and
near-zero emission fuels, while keeping technology
neutrality, it is important that the use of zero- and near-zero
GHG fuels, of low GHG fuels and of fossil fuels are made
similarly attractive from an economic point of view.

Our proposed flexibility compliance mechanism together with

the GHG pricing mechanism will help bridge the price gap
between fossil fuels and low GHG fuels.
 ISWG-GHG 16

Because zero and near-zero GHG fuels are considerably

more expensive than low GHG fuels, the ambition to have a
5-10% uptake of these fuels by 2030 requires an additional
policy. Our proposal is to use a share of the revenues of the
GHG Pricing Mechanism to provide a reward for zero and
near-zero GHG fuels. The reward should be targeted to fuels
that reduce WTW emissions by at least 90% relative to
VLSFO and amounts to several hundreds of dollars per
tonne of CO2e avoided. The reward would be provided on the
basis of the WtW GHG intensity of the fuels, and be
proportional to the difference between the GFI of the fuel and
the GFI of VLSFO. The reward would not be directed to
specific zero or near zero GHG emission fuel types.

2 Flexible compliance strategies

2.1 How to It is important to allow for flexibility in the GFS, because not
incentivize/reward over- all ships will be able to sail on fuels that meet the required
compliance vs. GFI, and because first movers should be incentivised.
penalize/remedy under-
compliance? The Flexibility Compliance Mechanism allows ships that
cannot meet the required GFI to contribute to the energy
transition of the fleet by teaming up with over-compliant ships
(implicit pooling), buying Flexibility Compliance Units (FCUs)
from other ships, or, if the two former options are not
possible, buying Greenhouse gas Remedial Units (GRUs).

The proceeds of sales of GRUs are invested in emission

reductions in the value chain of maritime fuels to ensure the
environmental integrity of the GFS.

2.2 Main objectives and The flexibility system should:

functioning of a
reward/contribution • For under-compliant ships, not be financially more
system. attractive than using fuels with the required GFI, as
the environmental integrity of the GFS needs to be
ensured;

• Be accessible to all ships under similar conditions.

Were this criterion not met, ships with limited or no
access to compliant fuels would be disadvantaged;

• Incentivize the use of best performing zero and near-

zero GHG fuels from the start. Were this criterion not
met, the fuel transition would be delayed and it would
become much more costly to reach the goals of the
2023 IMO GHG Strategy; and

• Maintain a level playing field between ships and

ensure that all ships contribute to achieving the fuel
transition, regardless of whether they can use
compliant fuels or not.
 ISWG-GHG 16

2.3 How to set the The price of FCUs should not be regulated. They can be
value/price of surplus and exchanged between ships at a price that is agreeable to both
remedial/deficit units to the buyer and the seller.
incentivize first movers
and address the cost The price of a GRU (per tonne of CO2e) should be sufficient
difference between to reduce emissions in the value chain of marine fuels by at
conventional and least 1 tonne of CO2e, in order to ensure the environmental
compliant fuels? integrity of the GFS. It should be based on the difference in
Suggested value/price, if price per MJ between zero- and near-zero GHG fuels and
any? VLSFO (exact formulation, also taking into account the
emission factors of the fuels, is provided in ISWG-GHG
16/2/7).

2.4 Other possible flexible The FCM allows to establish unequivocally whether
compliance approaches individual ships are compliant or not, as is common in
(e.g. pooling of ships, MARPOL.
banking of units across
several compliance The FCM register allows ships to bank FCUs for use in up to
periods, etc.) envisaged in [five] subsequent compliance periods.
the proposal.
The FCM register can be used by voluntary pools to
administer the pool, while retaining the feature that the
compliance status of individual ships can be established at
all times.

3 Reporting and verification requirements

3.1 How to ensure a All ships will be required to report their fuel consumption, per
centralized management type of fuel, to their Administration, including the WtW GFI of
of the information? Role of the fuels used. This reporting will be done through the IMO
a central registry? Role of DCS.
the IMO DCS?
Ships that meet the required GFI do not need to use the GFS
Register.

Ships that have an attained GFI unequal to the required GFI,

and wish to use the flexibility compliance mechanism (in the
case of over-compliant ships) / need to use the flexibility
compliance mechanism (in the case of under-compliant
ships), have to share their DCS report with the central
register, so that they can receive or submit FCUs or GRUs.

3.2 Chain of custody Fuel suppliers can use mass balancing in their quantification
procedures envisaged in of WtT emission intensity of the fuels they supply. Mass
the implementation of the balancing allows fuel producers to blend sustainable and
measure? conventional fuels, as long as their sales of sustainable fuels
do not exceed the mass of sustainable fuels blended in the
mix.

3.3 Proposed measures to The GFS and FCM use the DCS in order to avoid duplicating
limit administrative burden data collection and reporting.
and cost?
The same is true for the GHG pricing mechanism, which will
use data reported through the DCS to establish the amount
 ISWG-GHG 16

due by each ship, as well as the amount of reward to which

ships are entitled for using zero- and near-zero GHG fuels.

ISWG-GHG 16/2/10 provides empirical evidence that the

administrative burden of the Register will be low.

4 Revenue collection and distribution

4.1 Does the measure Yes, the GHG Pricing Mechanism, while aiming to reduce
generate revenue? emissions, generates revenues as a by-product.

The purchase of GRUs would also create revenue, though it

will be much lower, as the price of the GRUs should be set
never to make them the preferred solution over other
compliance methods (use of compliant fuels or purchase of
FCUs). The revenues from GRU sales are hypothecated to
reduce emissions in the value chain of marine fuels, in order
to safeguard the environmental integrity of the GFS.

4.2 What are the key The revenues should be used to help attain the goals and
objectives of the use of objectives of the 2023 IMO GHG Strategy. More specifically,
revenue and their possible revenues are used to:
distribution? How can
revenue raised help 1. Address disproportionally negative impacts on States
ensure the achievement of (D 3);
a just and equitable
transition as called for in 2. Contribute to a just and equitable transition by
the 2023 IMO GHG ensuring that all countries can participate in the fuel
Strategy? Please also transition and that the workforce is trained for working
refer to the 7 revenue with new fuels and technologies (D 6);
disbursement categories
(D1 to D7), see Working 3. Reward the use of zero and near-zero GHG fuels (D
document on value ranges 4); and
for scenario development
(the appendix to annex 4 4. Support R&D into zero GHG fuels and technologies
of document MEPC 81/7) (D 1).

4.3 Brief description and We do not propose a revenue raising mechanism, but a GHG
how to set the rate of a pricing mechanism. The main purpose of the mechanism is
proposed GHG revenue to incentivise the green transition of the sector, and revenues
raising mechanism? are a by-product.

The rate should be sufficient to send effective price signals to

the market players, promote energy efficiency, promote by
rewarding the use of zero- and near-zero emission fuels,
address disproportionate negative impacts as appropriate
and contribute to a just and equitable transition. The results
of the comprehensive impact assessment will be an essential
contribution to determine the appropriate rate.

4.4 What is a suggested The Comprehensive Impact Assessment analyses the

price/value, if any? How impacts of levies ranging from $2 per tonne of CO2e to $300.
much revenue is expected We want to await the results of the CIA before proposing a
to be raised annually? concrete value.
 ISWG-GHG 16

4.5 Which principles The revenue management and distribution should aim for
should govern revenue realisation of the 2023 Strategy, in particular by:
management and
distribution? • Sending a predictable signal to fuel suppliers and
traders, ship operators and investors;

• Reducing the price gap between fossil and zero-

emission fuels;

• Providing an incentive to improve energy efficiency

through both operational measures and investments
in more energy efficient ships and equipment;

• Incentivizing from the start the use of zero and near-

zero-GHG emission fuels, technologies and
behaviours;

• Addressing disproportionally negative impacts on

states, as appropriate; and

• Contributing to a just and equitable transition that

leaves no country and no one behind.

5 Assessment of the remaining work and indicative timeframe for development and
finalization of the basket of measures
5.1 Development of draft Draft MARPOL Amendments for the GFS/FCM have been
amendments to MARPOL submitted in ISWG-GHG 15/3/1. These draft amendments
Annex VI can be used as a base document for further negotiations,
with a view to adoption by MEPC 83.

Draft MARPOL Amendments for the GHG Pricing

Mechanism have not yet been submitted.

5.2 Development of Two guidelines have been submitted in ISWG-GHG 16/2/7:

guidelines/guidance
1. Draft guidelines on the calculation of the attained
Greenhouse Gas Fuel Intensity (GFI); and

2. Draft guidelines on the Greenhouse Gas Fuel

Standard (GFS).

The draft guidelines on the GFS register combine three

guidelines identified in ISWG-GHG 15/3/1:

1. Guidelines on the development and management of

the GHG Fuel Register;

2. Guidelines on the operation of the GHG Fuel

Register; and

3. Guidelines on the Flexibility Compliance Mechanism

and method of calculation of compliance surpluses
and compliance deficits for ships.
 ISWG-GHG 16

These guidelines can serve as a base document for further

negotiations, with a view to adoption by MEPC 83.

This means that one guideline is still required, namely a

guideline on Administration verification of the attained annual
GHG intensity. This guideline can be submitted to MEPC 82,
with a view to adoption by MEPC 83.

5.3 Time and resources The GFS Register would need to be developed. Several
required for the registries with similar functionality are in use today in
development of necessary different parts of the world. Assuming that the GFS enters
services/tools (e.g. central into force in 2027, as envisioned in the 2023 Strategy, the
Registry) and implications Register has to be operational by the start of 2028.
for the Organization?

6 Implementation of the measure

6.1 Timeline for As agreed in the 2023 Strategy, the GFS/FCM and the GHG
implementation of the Pricing Mechanism will enter into force in Spring 2027.
measures? Specific
provisions (e.g. review or The GFI trajectory will be included in MARPOL, in order to
ratchet clause)? provide maximal certainty to shipping companies, fuel
producers and bunker fuel suppliers.

The level of the GHG price can be subject to regular reviews,

e.g. once every five years. It could be subject to a ratchet
clause reflecting the fact that the social cost of GHG
emissions will continue increasing between now and 2050.

The price of a GRU (per tonne of CO2e) should be sufficient

to reduce emissions in the value chain of marine fuels by at
least 1 tonne of CO2e, in order to ensure the environmental
integrity of the GFS. It should be based on the difference in
price per MJ between zero- and near-zero GHG fuels and
VLSFO (exact formulation, also taking into account the
emission factors of the fuels, is provided in ISWG-GHG
16/2/7).

6.2 Respective The combination of the measures is designed to deliver on

contributions of the the levels of ambition and the intermediate checkpoints of
proposed technical and the 2023 IMO GHG Strategy and to promote effectively the
economic elements in energy transition of shipping and providing the world fleet a
delivering on the levels of needed incentive while contributing to a level playing field
ambition of the 2023 IMO and a just and equitable transition.
GHG Strategy and in
effectively promoting the The quantitative parameters of the GHG pricing mechanism
energy transition of and of the GFS/FCM must be defined to achieve on the
shipping and providing the objectives of the 2023 IMO GHG Strategy, notably in line with
world fleet a needed the guidelines proposed in ISWG-GHG 16/2/7.
incentive while
contributing to a level The GHG Pricing Mechanism incentivises energy efficiency
playing field and a just and improvements and helps achieving the 2030 GHG emission
equitable transition? reduction goal of the 2023 Strategy.
 ISWG-GHG 16

The GFS and its FCM ensures that the GHG emissions
pathway of the 2023 Strategy is achieved and that the
energy transition towards zero GHG fuels will be completed
by 2050.

In combination, the GHG Pricing Mechanism, the GFS and

the FCM provide the world fleet and the fuel producers with
the needed incentives to transition towards zero GHG fuels.

The Flexibility Compliance Mechanism (and the reward)

ensure a level playing field between ships, regardless of
whether they use zero GHG fuels, fuels with the required GFI
or conventional fuels.

The use of a share of the revenues of the GHG Pricing

Mechanism to reward the use of zero and near-zero GHG
fuels ensures that the 2030 fuel uptake goal of the 2023
Strategy is met.

The use of a share of the revenues of the GHG Pricing

Mechanism to ensure that no country and no one is left
behind, ensures that the measures contribute to a just and
equitable transition.

6.3 Possible synergies In addition to the GHG Pricing Mechanism, the CII and EEXI
with existing measures? improve the energy efficiency of ships and contribute to
meeting the 2030 GHG emission reduction goal of the 2023
Strategy. The review of the short term measures should be
coordinated with the mid-term measures to ensure
complementarity and avoid conflicting incentives.

7 Scope of application
7.1 Which ship types and The measures apply to all ships above a certain size
sizes are covered by the engaged in international traffic that are subject to MARPOL
measure? How to take into Annex VI and that use fuel. The use of DCS is unavoidable
account other ship types to ensure the environmental integrity and enforceability of the
and ships below the size measures. In this respect, we are open to the application of
thresholds? the measures to ships below 5000 GT, under the condition
that the DCS is adapted in consequence.

7.2 Does the measure No.

contain differentiated
implementation aspects,
by flag or route?

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