The EU must stand by ambitious IMO policy to secure competitiveness

The International Maritime Organization (IMO) MEPC83 negotiations will help determine the future marine fuel mix. The EU must not miss this chance to ease the barriers on its e-fuel industry and accelerate its Clean Industrial Deal goals by backing ambitious measures: a strong fuel standard and a high-price levy.

Years of negotiations on international shipping’s path to net zero are coming to a head this week. Delegates will return to the International Maritime Organization (IMO) for a second round of meetings to finalise the economic and technical details of regulations that will fundamentally determine the future of clean shipping.

But the jury’s still out on whether the IMO will deliver the right incentives to drive the greenest fuels or instead welcome unsustainable biofuels and fossil fuel lock-in. Going into next week’s negotiations, the EU must wake up to the fact that securing an ambitious outcome is a rare chance to accelerate its Clean Industrial Deal competitiveness goals in maritime and beyond.

Why green hydrogen wins out amongst alternative fuels

It’s a given that shipping must move away from the heavy oils it has forever consumed. But amongst the alternative fuels it could adopt, only those derived from green hydrogen can reduce emissions at the pace and scale needed.

Liquified natural gas (LNG) is often slated as a “transition fuel”, yet any carbon emissions it saves at the point of combustion compared to conventional fuels are more than offset by methane leaks across its supply chain. It may be even more polluting than heavy oils and its investments are expected to wind up as stranded assets.

Biofuels are another contender, enjoying relatively low costs and high technological advancement. But the availability of truly sustainable biomass is severely limited, making its cost-competitiveness likely short-lived. Using unsustainable biomass will incur high upstream emissions from deforestation and land use changes, not to mention biodiversity destruction.

On the other hand, green hydrogen fuels, produced via renewable electricity and either burnt directly or made into synthetic ‘e-fuels’ like e-ammonia and e-methanol, promise the smallest adverse climate and environmental impact. But these fuels are currently hampered by high prices and EU policy that favours LNG and biofuels. The measures soon to come out of the IMO could be the boost the industry needs, and nobody is better set to capitalise on it than EU industry.

The shipping industry needs ambitious IMO regulations

The IMO measures in question will consist of “technical” and “economic” elements, both of which will play an integral role in signalling to the industry and financiers what fuels to put their money on.

The technical element will set a goal-based marine fuel standard to regulate emissions reductions from ships. This will push ships to drop dirty fuels in favour of zero or near zero (ZNZ) emission fuels. But the IMO is yet to define ‘ZNZ’. A weak set of criteria could include biofuels and LNG, to which the shipping sector would likely wed itself to avoid cost and risk. Once a fuel is crowned a frontrunner it will be hard to unseat, and a lenient ZNZ definition could lock in LNG and biofuel investments for decades, locking out e-fuels. Such a scenario would hamstring the industry’s long-term competitiveness: ultimately shifting to truly green e-fuels, as it will inevitably have to, shipping will leave only sunk costs and stranded assets in its wake.

The economic element will also influence fuel uptake. One option is a universal flat rate levy, basically a tax on all shipping’s GHG emissions. The alternative structure is a ‘pay to pollute’ credit trading system that allows early movers to sell unused emissions allowances, and polluters to offset excess emissions by buying them.

A high-price levy would best incentivise the industry to adopt ZNZs and narrow the price gap between e-fuels and conventional fuels to help them compete. It would also create new, substantial and stable revenues which can both finance e-fuel development and ensure the transition is just and equitable. Conversely, a credit system would provide a weaker incentive ultimately benefiting the more stable incumbents LNG and biofuels, their questionable environmental and economic sustainability notwithstanding. With emissions prices set in part by the market under such a regime, revenues would be smaller and less predictable, another blow to e-fuels’ business case that depends on stability.

Climate and industry alike depend on IMO measures promoting e-fuels as the future marine fuel – but there is no shipping sector better placed to capitalise on such an outcome than the EU’s.

Boosting EU clean competitiveness

European shipping e-fuel producers have the capacity to meet FuelEU Maritime targets by supplying as much as 1.06 million tonnes of oil equivalent in shipping e-fuels by 2030. But production is perpetually stalled by hesitant investment and uncertain demand. Ambitious IMO regulations would help overcome both obstacles. A strong ZNZ definition and a high-price levy would derisk the nascent e-fuels market the EU has a significant head start in, attracting private investment and curtailing the need for subsidies to uplift this untapped industry-in-waiting. EU shipping’s long-term competitiveness would be guaranteed while making pace on its climate targets.

Segments of the shipping industry itself are calling for climate ambition for just these reasons. The EU has a unique opportunity to jumpstart its Clean Industrial Deal competitiveness goals in maritime and beyond. To do so it must stand by its commitment to climate ambition at the IMO this week.

Find out more about on our IMO negotiations primer.