MEPC 81: A global carbon tax on shipping is getting closer

IMO Secretary-General Arsenio Dominguez says MEPC 81 made "very important progess" on decarbonization. [Photo: IMO]

As IMO’s MEPC 81 was going on in London last week, ABS Chairman and CEO Christopher J. Wiernicki was telling a session of the CERAWeek energy conference in Houston that a universal, global carbon tax on shipping is coming, as alternative blue fuels made with carbon capture emerge as a critical step in the energy transition at sea.

“We need to recognize that there is an intermediate step in the energy transition,” he said. “Last year the conversations were focused on going from oil to a green fuel economy. Today, we are seeing the emergence of the blue economy that addresses carbon management, carbon capture, carbon pricing and carbon credits and offsets, as an essential stepping-stone. The EU has recognized the importance of this intermediate economy with Fuel EU Maritime, and I believe you will see a universal carbon tax emerging as the IMO and the EU will synch together.”

Meantime, everyone seems to agree that the MEPC 81 session produced progress in that direction, even though nobody seemed to be mouthing the words ”global carbon tax,” preferring terns such as ”economic mechanisms.”

The official IMO handout said the Marine Environmental Policy Committee session had “agreed an illustration of a possible draft outline of an ‘IMO net-zero framework’ for cutting greenhouse gas emissions (GHG) from international shipping.” Outside of IMO, an “illustration” of a “possible draft” of a “framework” would seem to be a pretty tenuous thing. Still, IMO Secretary-General Arsenio Dominguez told the committee that “this week you made very important progress.”

And, as we’ll see below, an analysis by the UMAS advisory service (which is associated with University College of London) sees MEPC 81 as progressing things to the point where a policy of “wait and see” on decarbonization measures is becoming risky for shipowners and other stakeholders.

According to IMO, the draft outline illustration lists regulations under the International Convention for the Prevention of Pollution from Ships (MARPOL), which will be adopted or amended to allow for a new global fuel standard and a new global pricing mechanism for maritime GHG emissions.

These may include a proposed new Chapter 5 of MARPOL Annex VI containing regulations on the IMO net-zero framework, to include:

• a goal-based marine fuel standard regulating the phased reduction of the marine fuel’s GHG intensity; and
• an economic mechanism(s) to incentivize the transition to net-zero.

The goal-based marine fuel standard and pricing mechanism are mid-term GHG reduction measures specified in the revised IMO Strategy on the Reduction of GHG Emissions from Ships, adopted in July 2023. Several different proposals of what these measures should entail are currently being considered.

The possible draft outline “will be used as a starting point to consolidate the different proposals into a possible common structure, to support further discussions with the understanding that this outline would not prejudge any possible future changes to it as deliberations progress.”

• You can read the full IMO summary of the meeting HERE

RISKY TO “WAIT AND SEE”

UMAS says that MEPC 81 was not, itself, a point of adoption for measures, but was a chance to test whether the member states of the IMO were as committed to advance and implement policy measures capable of delivering the Revised GHG Strategy adopted in July 2023.

“Many reactions to the adoption of the IMO’s Revised GHG Strategy in 2023 can be summarized as ‘good to have this, but I’m waiting for the measures in 2025’, and many seem convinced that IMO was unlikely to succeed in implementing measures capable of delivering the strategy’s level of GHG reductions – and speed of change,” says Dr Tristan Smith, director of UMAS and associate professor at UCL Energy Institute. “This meeting’s development of a new MARPOL chapter, and good progress and momentum towards a timely and robust implementation of robust IMO policy, including an effective GHG levy, seriously questions the wisdom of commercial strategy of ‘wait and see’, or that is dependent on IMO not delivering what it committed to in 2023.”

UMAS says that while the new draft for a chapter in the Annex VI of MARPOL on “regulations on the IMO net-zero framework” is just a framework of subheadings for now, it includes all the elements needed to adopt any of the GHG policy options currently under consideration,There was positive momentum built at the meeting, with an increased number and diversity of countries supporting a GHG levy, which supports both the energy and equitable transition agendas. The meeting has clarified both an expert workshop (on the modeling and analysis base of the measures) and the agenda for the next IMO Working Group meeting (late September), which has been se tup to advance the substance and detail in the new MARPOL Chapter 5 drafting.

“Given the outcomes achieved there is a general lowering of risks to timely and robust policy, but risks still remain given the complexity and novelty of policy-design work the IMO is undertaking,” says UMAS.

Annika Frosch, a researcher at UCL Energy Institute and a consultant at UMAS said: “Though unanimous in agreeing to a common framework for the amendment of MARPOL Annex VI Chapter 5 amendment, the diversity of member states’ preferences on key measures signals a complex journey ahead. Yet, this shared commitment lays a hopeful foundation for the negotiations required to achieve agreement on the measures as outlined in the Revised GHG Strategy.”

COMMERCIAL RISK

“The meeting increases the commercial risk for those who adopt a ‘wait and see’ approach. Although the direction of shipping’s transition was primarily set at MEPC 80 with the Revised GHG Strategy, any transition creates uncertainty and risk relating to timing. Investors in the assets (the fleet, infrastructure such as ports, energy supply chains) that enable both the incumbent fossil fuel paradigm, and that will be needed in the future zero GHG emission paradigm, face both technology risk (uncertainty about which zero emission technology will be most competitive and when), and political risk (uncertainty about exactly how policy will disincentivize fossil fuels and incentivize zero emission fuels). One risk management strategy is to ‘wait and see’ so that decisions are only made when certainty has arrived. However, this is not risk-free as at the same point when the fate of fossil fuel technology becomes absolutely clear, and/or the opportunity for zero emissions technology becomes absolutely clear, opportunities to manage risks related to asset disposal values and to take future market share opportunities will have already been passed over. The meeting’s generally progressive outcome, and politically collaborative spirit, evidences that the risks of ‘wait and see’ have further increased.”

• Read the UMAS MEPC 81 readout HERE