ISWG-GHG 16

DEVELOPMENT OF A BASKET OF CANDIDATE MID-TERM GHG REDUCTION

MEASURES
Fact sheet

Name of the candidate Simplified Global (GHG) Fuel Standard with energy
measure(s): pooling compliance mechanism

Reference document(s): ISWG-GHG 16/2 (ICS and IBIA)

Are the technical element and To be developed as a technical measure as a separate

economic element integrated Chapter under MARPOL Annex VI, together with a
into a single measure or separate maritime GHG emissions pricing mechanism
developed as separated (economic measure).
measures?

***
1 GHG fuel intensity (GFI) values setting
1.1 Methodology/approach The trajectory for the simplified GFS proposed by ICS and
for setting GFI trajectory IBIA is based on the goals of the 2023 IMO GHG Strategy,
and baseline and what, realistically, is both practicable and feasible.

The [5%] reduction in GFI for the GFS tentatively proposed

for 2030 is based on the agreed level of ambition for 5% to
10% of the energy used by international shipping to come
from zero/near-zero GHG sources by 2030, but will be
subject to a review, to be completed in 2028, of the
availability and cost of compliant fuel before a final decision
is taken to proceed with implementation.

This is similar to the approach used for the IMO 2020

(sulphur) limit, which ICS and IBIA consider to be appropriate
as, to keep the measure simple, they are proposing an
absolute GHG intensity standard which all marine fuels will
need to meet if they are to be used by any ship which is in
compliance with the GFS.

The [30%] reduction in GFI tentatively proposed for 2040

would also be subject to a review prior to implementation,
and the GFI reduction suggested is the maximum considered
likely to be plausible whilst being compatible with achieving
the net zero goal by or close to 2050.

The baseline year is 2019 based on the latest year for which
data from the Fuel Oil Data Collection System (DCS), as
approved by the Committee, is currently available, although a
more recent year can be used once the data for that year has
been approved by the Committee.

1.2 Proposed GFI ICS and IBIA have tentatively proposed a [5%] reduction in
trajectory/pathway/values GFI by 2030, and a [30%] reduction by 2040. However,
from entry into force to unlike more complex proposals, ICS and IBIA are proposing
2050 an absolute fuel standard, so this is the minimum
improvement in GHG intensity that would be achieved by the
fleet, subject to fuels with the required GFI being available in
sufficient quantities.

Additional reductions in GFI would be achieved by the

accelerated production and uptake of zero/near-zero GHG
fuels that would be incentivized by the separate maritime
GHG emissions pricing mechanism (such as the ZESF Fund
and Reward (Feebate) Mechanism set out in document
ISWG-GHG 16/2/3, which ICS has also co-sponsored).

While the GFS might achieve the GFI agreed for 2030,
through, for example, increased use of sustainable biofuel
blends or LNG, this will not itself (without a separate maritime
GHG emissions pricing mechanism) achieve the IMO level of
ambition for 5% to 10% of the energy used by international
shipping to come from zero/near-zero GHG sources, so that
more aggressive reductions in GFI will be possible after
 2030, which will be necessary to achieve the 2040 indicative
check point and the (by or close to) 2050 net zero goal in the
2023 IMO GHG Strategy.

1.3 How to take into The regulations set out in the annex to document ISWG-
account GHG emissions of GHG 16/2 are not explicit on whether the GFI should take
marine fuels and account of life-cycle emissions. But it should be noted that
sustainability aspects as the current (2019) baseline proposed is calculated by IMO on
addressed in the LCA a TTW basis.
Guidelines? Rationale for
the approach? As the simplified GFS does not involve financial penalties for
under-compliance with the required GFI, taking account of
life-cycle emissions, as may be determined by the LCA
Guidelines, would not be incompatible with the principle that
ships should not be charged for life-cycle emissions that are
the responsibility of other sectors.

1.4 How to ensure The simplified GFS is fuel/technology neutral as the

fuel/technology neutrality regulations set an absolute reduction in the GFI of fuel that
in the process of must be used by a ship, without specifying the fuel type or
identifying technology that must be used.
compliant/eligible
fuels/technologies? What Compliance with the GHG intensity requirement could also
considerations have been be achieved using technologies such as carbon capture and
taken to incentivize the storage (CCS), and other technologies, pursuant to
production of alternative regulation 4 of MARPOL Annex VI on "Equivalents" – and a
marine fuels? provision for this has been included in the suggested draft
regulatory text in the annex to document ISWG-GHG 16/2.

As a technical measure, the simplified GFS is a performance

standard, independent of fuel type, which may help increase
the production and uptake of all types of low-, near-zero an
zero-GHG fuels, including methanol, ammonia, hydrogen
and synthetic fuels, which some ships may start to use
before 2030, as well as sustainable biofuels. It is
emphasized, however, that significant production and
availability of such zero/near-zero GHG fuels is only likely to
occur after 2030 and will only be possible if the GFS is
complemented by an economic measure, such as the ZESF
Fund and Reward (Feebate) mechanism, as set out in
document ISWG-GHG 16/2/3.

2 Flexible compliance strategies

2.1 How to The simplified GFS is not intended to incentivize/reward
incentivize/reward over- over-compliance with the required GFI, as this will be better
compliance vs. achieved by a separate and more transparent economic
penalize/remedy under- measure with a guaranteed level of rewards to reduce the
compliance? cost gap with conventional fuel oil, which will be far more
effective in incentivizing the accelerated production and
uptake of zero/near zero GHG fuels (needed to achieve the
IMO target for 5% to 10% of the energy used by shipping to
come from zero/near-zero GHG sources by 2030), than an
uncertain level of rewards for over-compliance that might be
linked to a more complex GFS under which the level of
 rewards is not guaranteed, being linked instead to a
variable/volatile market and the uncertain availability of these
fuels.

Rewards via a separate economic mechanism can be more

effectively targeted at increasing the production and uptake
of those zero/near-zero GHG fuels which will be necessary if
the 2023 IMO GHG Strategy to succeed. This is because
rewards provided by an economic measure will incentivize
over-compliance with the separate GFS by providing rewards
for the use of zero/near-zero GHG fuels which will have a far
lower GFI than other fuel types that may comply with the fuel
standard which is likely to be agreed for 2030.

A problem with penalising under-compliance (e.g. through

the purchase of remedial units) is that under-compliance
may be due to factors beyond the ship’s control, such as the
availability of compliant fuel. This is also more likely to be an
issue for ships which are owned by or which serve the
economies of developing countries.

If the cost of under-compliance is uncertain, or the market

determines that the cost of under-compliance is low, and the
cost cap is not reduced by a guaranteed level of rewards for
the use of zero/near-zero GHG fuels, then shipping
companies may conclude that the cost of under-compliance
is less then investing in zero/near-zero GHG fuels. This
would have the effect of slowing down, instead of
accelerating, the transition to net zero by the entire
international shipping fleet.

This why ICS and IBIA have proposed a simplified GFS to be

supported by a separate economic measure which can
incentivize the accelerated production of zero/near-zero fuels
more effectively and transparently than an overly complex
GFS.

2.2 Main objectives and N/A

functioning of a
reward/contribution
system.

2.3 How to set the N/A

value/price of surplus and
remedial/deficit units to
incentivize first movers
and address the cost
difference between
conventional and
compliant fuels?
Suggested value/price, if
any?
2.4 Other possible flexible
compliance approaches
(e.g. pooling of ships,
banking of units across
several compliance
periods, etc.) envisaged in
the proposal.
3 Reporting and verification requirements
3.1 How to ensure a N/A
centralized management
of the information? Role of
a central registry? Role of
the IMO DCS?
The simplified GFS includes provisions for an “energy
pooling compliance mechanism" that, if the ship’s
Administration permits, may be used on a voluntary basis by
ships to comply with the GFS, should fuels of the required
GFI not be available worldwide.
The draft requirements, as suggested in the annex to
document ISWG-GHG 16/2, would permit shipping
companies, with all sizes of fleet, to share their ability to
comply with the GFS should fuels of the required GHG
intensity not always be available to individual ships in
sufficient quantities.
The mechanism would permit a ship, or ships, which "over-
comply" with the required GFI – operated by the same or
different companies and registered with one or more flag
States – to share the "excess" required GFI with another ship
or ships in the "pool" that may be unable to comply fully with
the requirement.
As well as allowing ships to continue to trade, such an
approach would further help incentivize the uptake by ships
of near-zero and zero-GHG fuels, as shipping companies
investing in ships which use these fuels could transfer the
"excess" GFI to other ships in their fleet or in other
companies' fleets which might be unable to comply fully with
the required GFI.
When pooling the GFI with ships in other companies' fleets,
this would be done through a private commercial
arrangement, such arrangements being common, for
example, in the P&I insurance of ships. The approach used
for verification and certification of compliance by ships in an
approved "energy pooling compliance mechanism" would be
similar to that used under the ISM Code.
The voluntary "energy pooling compliance mechanism" will
provide the same flexibility as other proposals to enable
compliance should fuels of the required GHG intensity not
always be available. However, it would avoid the need for a
complex system where "compliance units" and "remedial
units" are traded and reported to, or purchased from, a
central IMO registry. This would avoid the considerable
administrative burden for the Organization, flag States and
ships entailed by an overly complex system.
3.2 Chain of custody
procedures envisaged in
the implementation of the
measure?
3.3 Proposed measures to
limit administrative burden
and cost?
As this is an absolute fuel standard (like the IMO 2020
sulphur regulation) ships would demonstrate compliance via
Bunker Delivery Notes (BDN) which will show that the fuel
supplied to the ship complies with the required GFI. There
would be no need for a more complex verification system or
central IMO registry.
Importantly, as the approach uses the BDN to demonstrate
compliance and not data collected pursuant to regulation 27
of MARPOL Annex VI – Data Collection System (DCS), then
the GHG fuel standard can be applied to ships of 400 GT
and above, unlike other more complex GHG fuel standard
proposals that rely on verification of data collected under the
DCS which then limits application to ships of 5,000 GT and
above only.
For ships using the "energy pooling compliance mechanism":
• The attained GFI of a ship participating in an
approved energy pooling compliance mechanism will
be the arithmetic mean GFI of the ships participating
in the pool, over the period the ship is a member of
the same energy pooling compliance mechanism.
• The attained GFI of each ship participating in an
approved energy pooling compliance mechanism will
be verified by the ship's Administration (or designated
RO).
• Each ship in the mechanism will be issued with a
Pooled Energy Intensity Compliance Certificate
(PEICC) by each of the flag States of the ships in the
pool. This is similar to the approach under the ISM
Code whereby a company has a single audit by an
RO which is recognised by all of the flag States of
the ships operated by the shipping company. Each of
these flag States then issue their own Document of
Compliance (in this case the “Pooled Energy Intensity
Compliance Certificate”) to the ships flying their flag,
which are carried on board for port State control
inspection purposes.
The simplified GFS would place no administrative burden on
Administrations, other than checking that the BDN
demonstrates that fuels of the required GFI have been
purchased for consumption (as they already do to enforce
IMO 2020 sulphur requirements).
The decision by Administrations to allow ships to use the
“energy pooling compliance mechanism" would be voluntary.
As mentioned above, the voluntary "energy pooling
compliance mechanism" will provide the same flexibility as
other proposals to enable compliance should fuels of the
 required GHG intensity not always be available. However, it
would avoid the need for a complex system where
"compliance units" and "remedial units" are traded and
reported to, or purchased from, a central IMO registry. This
would avoid the considerable administrative burden for the
Organization, flag States and ships entailed by an overly
complex system.

4 Revenue collection and distribution

4.1 Does the measure No.
generate revenue?

4.2 What are the key N/A

objectives of the use of
revenue and their possible
distribution? How can
revenue raised help
ensure the achievement of
a just and equitable
transition as called for in
the 2023 IMO GHG
Strategy? Please also
refer to the 7 revenue
disbursement categories
(D1 to D7), see Working
document on value ranges
for scenario development
(the appendix to annex 4
of document MEPC 81/7)

4.3 Brief description and N/A

how to set the rate of a
proposed GHG revenue
raising mechanism?

4.4 What is a suggested N/A

price/value, if any? How
much revenue is expected
to be raised annually?

4.5 Which principles N/A

should govern revenue
management and
distribution?

5 Assessment of the remaining work and indicative timeframe for development and
finalization of the basket of measures
5.1 Development of draft The annex to document ISWG-GHG 16/2 sets out draft
amendments to MARPOL amendments which will realistically be possible to finalize
Annex VI and approve by MEPC 83.

5.2 Development of Guidelines will need to be developed on the use of "energy

guidelines/guidance pooling compliance mechanisms" which it will be possible for
the MEPC to approve, either when the regulation is adopted
 or potentially later, given that compliance with the GFI will not
be required until 2030.

5.3 Time and resources N/A

required for the
development of necessary
services/tools (e.g. central
Registry) and implications
for the Organization?

6 Implementation of the measure

6.1 Timeline for Compliance with the initial [5%] GFI reduction will be
implementation of the required in 2030 with a [30%] reduction required in 2040.
measures? Specific However, the 2030 GFI requirement will be subject to a
provisions (e.g. review or review, to be completed in 2028, of the availability and cost
ratchet clause)? of compliant fuel before a final decision is taken by the
MEPC to proceed with implementation.

6.2 Respective
contributions of the
proposed technical and
economic elements in
delivering on the levels of
ambition of the 2023 IMO
GHG Strategy and in
effectively promoting the
energy transition of
shipping and providing the
world fleet a needed
incentive while
contributing to a level
playing field and a just and
equitable transition?
The simplified GFS is a technical measure which will help
achieve the level of ambition for 5% to 10% of the energy
used by shipping to come from zero/near-zero GHG sources
by 2030, as well as the indicative checkpoint to reduce the
total annual GHG emissions from international shipping by at
least 20%, striving for 30%, by 2030, compared to 2008.
However, any GFI which is fuel neutral, will be insufficient on
its own to achieve the 2030 the level of ambition for 5% to
10% of the energy used by shipping to come from zero/near-
zero GHG sources by 2030 unless it accompanied by
separate economic measure, such a the ZESF Fund and
Reward (Feebate) Mechanism, which will guarantee the
reduction of the cost gap in order to accelerate the
production and uptake of those zero/near-zero GHG fuels
which will be required by 2030 if the transition to net zero by
or close to 2050 is to succeed.

More aggressive reductions in required GFI of fuels will help

ensure achievement of the 2040 and (by or close to) 2050
goals.

The measure promotes a level playing field by setting an

absolute fuel standard with which all ships will comply,
including potentially ships of 400 GT and above (see 7.1
below).

The measure will promote a just and equitable transition by

avoiding penalties for under-compliance (as contained in
other proposals) which may largely be due to a lack of
availability of compliant fuel in many port worldwide which
may be beyond the ship’s control and which may be more
likely to affect ships trading with or between developing
countries, including LDCs and SIDS.
 With the “energy pooling compliance mechanism” it will be
possible for ships from smaller companies based in or
trading to developing countries to pool their compliance with
ships operated by companies in developed countries,
contributing to a just and equitable transition.

6.3 Possible synergies N/A

with existing measures?

7 Scope of application
7.1 Which ship types and This simplified GFS, as with IMO 2020, requires compliance
sizes are covered by the by the ship with an absolute fuel standard and, unlike other
measure? How to take into more complex GFS proposals, does not require data from
account other ship types the DCS to be verified to demonstrate compliance, so
and ships below the size avoiding the additional administrative burden for flag States
thresholds? which this would entail.

Should the Committee so decide, this approach could

therefore allow the requirement to comply with the GFS to
apply to ships of 400 GT and above. This would allow more
GHG emissions from international shipping to come under
the scope of the regulation enabling the levels of ambition in
the 2023 IMO GHG Strategy to be more readily achieved
across the wider international shipping fleet.

However, as this would be a decision for Member States, text

concerning the tonnage threshold for the GFS, as set out in
the annex to document ISWG-GHG 16/2, has been placed in
square brackets.

The more complex proposals for a GFS set a tonnage

threshold at 5,000 GT and above, although other provisions
with fuel standards under MARPOL Annex VI apply to ships
of 400 GT and above. Presumably this is because these
proposals require the use of the DCS so that data about the
GHG intensity of fuel can be reported and verified annually to
demonstrate compliance, and the requirement to use the
DCS is currently limited to ships of 5,000 GT and above.

However, the use of a 5,000 GT threshold would create a

two-tier market for the production and supply of marine fuel,
especially after 2030 when the permitted GHG intensity of
fuel is to be aggressively reduced.

Owing to the significant difference in cost between existing

fuels and those fuels with a lower GHG intensity as required
by the fuel standard, this could also lead to unfair
competition and perverse incentives, for example to
construct "paragraph" ships that would not be required to
comply with the GFS.

7.2 Does the measure No.

contain differentiated
implementation aspects,
by flag or route?
______