ISWG-GHG 16

DEVELOPMENT OF A BASKET OF CANDIDATE MID-TERM GHG REDUCTION

MEASURES
Fact sheet

Name of the candidate International Maritime Sustainable Fuels and Fund

measure(s): (IMSF&F) mechanism

Reference document(s): ISWG-GHG 16-2-13 (Argentina et. al.)

ISWG-GHG 16-2-14 (Argentina et. al.)

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

***
 ISWG-GHG 16

1 GHG fuel intensity (GFI) values setting

1.1 Methodology/approach The default GHG intensity (TtW value 2) of a specific fuel
for setting GFI trajectory pathway (established based on inputs from the technical
and baseline work on life cycle GHG assessment (LCA)) will be set by the
Committee as the reference GFI value. As an example, the
default value of fuel pathway #5 (ULSFO), i.e. [76.2]
gCO2eq/MJ as presented in Appendix 2 to the LCA
Guidelines (pending further approval by the Committee) can
be set as the reference value.

Methodology/approach for setting GFI trajectory has not

been explicitly provided, but it should be determined by the
Committee in line with the levels of ambition set out in the
Strategy.

1.2 Proposed GFI An example of required GFI trajectory is provided for

trajectory/pathway/values demonstration purposes, as follows:
from entry into force to
2050 𝐺𝐹𝐼𝑡𝑎𝑟𝑔𝑒𝑡 = (1 − 𝑍/100) ∙ 𝐺𝐹𝐼𝑅

Year Z (%)
2027-2029 [2]
2030-2034 [5]
2035-2039 [15]
2040-2044 [35]
2045-2049 [65]
2050- [85]

The final Z factors will be adjusted to align with the Strategy

and take into account of the outcome of the comprehensive
impact assessment (CIA).

1.3 How to take into As the WtT GHG emissions, which are beyond the control of
account GHG emissions of the shipping industry, should be covered by national GHG
marine fuels and emissions inventory and may have been charged under
sustainability aspects as national GHG pricing mechanisms or policies, the IMO
addressed in the LCA should not directly regulate the WtT (and consequently WtW)
Guidelines? Rationale for GHG emissions, nor make the shipping industry pay for the
the approach? upstream emissions.

In order to “take into account the well-to-wake GHG

emissions of marine fuels”, as determined in paragraph 3.2
of the 2023 IMO GHG Strategy, and address other
sustainability aspects while keeping quantitative
requirements on a TtW basis, a sustainability framework is
introduced as an integral technical element of the IMSF&F
mechanism.

The attained TtW GFI value of fuels will be adjusted in

accordance with the WtW GHG emissions reduction potential
and other associated sustainability aspects, so that fuels with
high WtW emissions will be gradually phased-out whilst the
uptake of alternative fuel technologies in new builds will be
 ISWG-GHG 16

incentivised. This approach is aligned with the 2023 IMO

GHG Strategy.

The aforementioned adjustment will be based on a

sustainability categorization system. The detailed
explanations of this approach can be found in paragraphs 7
to 17 of document ISWG-GHG 16/2/14. A demonstration of
the adjusted TtW GFI values following this approach is
presented below:

Demonstration of adjusted GFI of fuels in different categories

1.4 How to ensure Ships are allowed to use any fuel/energy/ technology to
fuel/technology neutrality comply with the goal-based GFI requirements, including
in the process of alternative fuels, shore power, wind/solar energy, as well as
identifying onboard carbon capture.
compliant/eligible
fuels/technologies? What To incentivize the uptake of alternative, more sustainable,
considerations have been marine fuels, the following considerations have been taken:
taken to incentivize the
production of alternative 1. The goal-based GHG fuel intensity requirements can
marine fuels? regulate the phased reduction of the marine fuel's
GHG intensity and send a clear signal of demand for
alternative fuels;

2. Fuels that contain no carbon in their composition

(such as Hydrogen and Ammonia) and those
produced from biogenic carbon and captured carbon
(such as bio-methane and synthetic methanol) will be
significantly incentivised because their GHG emission
factor (TtW Value 2) would be zero or near zero;

3. To differentiate fuels with the same TtW value but

that are significantly different in the lifecycle GHG
emissions and other aspects related to their
performance, a sustainability framework is introduced
as an integral technical element of the IMSF&F
mechanism, so that only fuels with sufficient WtW
GHG reduction potential will be incentivised; and
 ISWG-GHG 16

4. To ensure the uptake of alternative fuel technologies

in new builds (such as ships powered by ammonia
and hydrogen), the use of certain alternative fuels
with high WtW emissions (such as grey ammonia) will
be allowed initially for a short period. This will send a
clear signal to incentivise the production of these
fuels through more sustainable pathways.

2 Flexible compliance strategies

2.1 How to The difference between the target annual GFI and the
incentivize/reward over- attained annual GFI of a ship will generate Surplus Units
compliance vs. (SUs) for over-compliance and Deficit Units (DUs) for under-
penalize/remedy under- compliance, expressed in tonnes of CO2eq. Note that only
compliance? fuels categorized as sustainable are allowed to generate
SUs.

The SUs of an over-compliant ship can be transferred to

under-compliant ships, banked for use in the following
reporting period, or used for claiming a reward from the
Sustainable Shipping Fund (SSF). The SUs transferred to
other ships or used to claim the reward will economically
benefit the ship, thereby narrowing the cost gap between
business-as-usual and the necessary investment in GHG
reductions.

The DUs of an under-compliant ship must be balanced by

the SUs banked from the last reporting period of the same
ship and/or obtained from over-compliant ships in the same
pool, and/or by Remedial Units (RUs) obtained through
making monetary contributions to the Sustainable Shipping
Fund. The price of the RUs will be higher than the cost gap
between under-compliant fuels and compliant fuels to
prevent under-compliant ships from taking advantage by
paying for RUs instead of investing in reducing GHG
emissions.

2.2 Main objectives and The fund contribution system of the IMSF&F mechanism is
functioning of a applicable to under-compliant ships that hold a certain
reward/contribution amount of DUs. The main objectives are two-fold:
system.
1. To dissuade ships from being under-compliant and
prevent under-compliant ships from taking advantage
by paying for RUs instead of reducing GHG
emissions (the cost of under-compliant fuels will be
higher than compliant fuels after fund contributions);
and

2. To raise revenues to reward over-compliant ships and

for other purposes as defined by the IMO and
member parties, while contributing to a level playing
field and a just and equitable transition.
 ISWG-GHG 16

The rewards will only be provided to over-compliant ships

that holds a certain amount of SUs. The main objective is to
narrow down the cost gap between over-compliant fuels and
compliant fuels. To maintain a level playing field for all ships
and to encourage the scaling up of the production of
sustainable fuels while reducing the production cost, the
reward price for the SUs shall be lower than the RUs.

2.3 How to set the
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?
The price of SUs and RUs is suggested to be determined by
the Committee before compliance periods begin.
To prevent under-compliant ships from taking advantage by
paying for RUs instead of reducing GHG emissions, the price
of RUs (in USD/t CO2eq) should be higher than the cost
difference, which can be set at a certain percentage above
the upper limit of the plausible range of the cost differences
between a reference conventional fuel (e.g. VLSFO) and the
widely available compliant fuels.

To maintain a level playing field for all ships and to

encourage the scaling up of the production of sustainable
fuels while reducing the cost of production, the reward price
for the SUs generated through over-compliant performance
shall be lower than the RUs, such as [75%] of the price of
RUs.

2.4 Other possible flexible
compliance approaches
(e.g. pooling of ships,
banking of units across
several compliance
periods, etc.) envisaged in
the proposal.
Pooling compliance is allowed and document ISWG-GHG
16/2/15 provides a possible way to streamline the process,
minimise administrative burden and remove barriers faced by
smaller companies.
Over-compliant ships are also allowed to bank their Surplus
Units (SUs) for use in the following reporting period.
However, ships are not allowed to borrow any credits in
advance from the coming reporting period.

Besides, over-compliant ships can opt to cancel their SUs on

a voluntary basis with a view to further contributing to the
reduction of GHG emissions from shipping.

3 Reporting and verification requirements

3.1 How to ensure a DCS will be updated to add a new Part B to incorporate GFI
centralized management related data (the original DCS requirements are referred to
of the information? Role of as Part A), such as the attained annual GFI, amount of SUs
a central registry? Role of and DUs before any flexible compliance approaches are
the IMO DCS? applied, as well as the initial compliance balance. SEEMP
can be updated accordingly to add a new part to provide
guidance on GFI related data collection and report.

An online data management platform, named GHG fuel

intensity Registry (the Registry), will be established to
facilitate the implementation of the IMSF&F mechanism,
where a company can open an account, register their ships,
transmit data, handle a compliance pool, transfer compliance

3.2 Chain of custody
procedures envisaged in
the implementation of the
measure?
3.3 Proposed measures to
limit administrative burden
and cost?
4 Revenue collection and distribution
4.1 Does the measure Revenues are expected to be generated through contributions
generate revenue? from the under-compliant ships to the Sustainable Shipping
Fund (SSF) to obtain Remedial Units (RUs).
4.2 What are the key
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)
ISWG-GHG 16
units, bank compliance units, claim rewards, pay SSF
contributions, be issued a Statement of Clearance, etc.
As the sustainability categorization relies on the WtW GHG
emissions reduction potential and other associated aspects
of the fuel, a chain of custody procedures will be needed.
However, the complexity varies under different scenarios:
• In the case where the default values are used, there
will only be a need to qualitatively verify the fuel
production pathway, including the feedstock structure
and conversion/production process;
• In the case where the actual values are used, a
rigorous quantitative verification will be needed and
so as much more detailed chain of custody
procedures.
As a sustainability categorization is based on the WtW GHG
reduction potential ranges (e.g. 70 – 90% WtW GFI reduction
for Category A) instead of a precise value, the default values
are expected to be used in most cases, unless a significantly
lower actual value can be justified. As long as the
sustainability category of a fuel (one from the 128 fuel
pathways identified in the LCA Guidelines) has been verified,
the adjusted TtW GFI of the fuel is readily available. In this
regard, a simple and less-burdensome chain of custody
procedure will be sufficient for most cases.
The Fund may also receive monetary voluntary contributions
from other sources, such as donations.
The revenues collected will be used as a priority to satisfy
reward claims for Surplus Units (D4). The remaining funds
will be allocated for the purposes such as applied research
and development (R&D) programmes and technology
transfer regarding alternative fuels and innovative
technologies (D1), in-sector capacity building (D2) and
negative impact mitigation in developing countries (D3),
while promoting a just and equitable transition (D6) in the
context of the 2023 IMO GHG Strategy, following the
principles to be determined by the Organization.
The Administration cost (D7) is expected to be balanced by
the annual administration fee of ships paid through GHG fuel
intensity Registry to the Sustainable Shipping Fund (SSF).
 ISWG-GHG 16

4.3 Brief description and To prevent under-compliant ships from taking advantage by
how to set the rate of a paying for RUs instead of reducing GHG emissions, the price
proposed GHG revenue of RUs (in USD/t CO2eq) will be set at a level higher than the
raising mechanism? cost difference between a reference conventional fuel and
the compliant fuels in terms of GHG emissions reduction
relative to the target.

In practice, it would be difficult to make a reliable estimate of

the accurate price of various compliant fuels, because the
market of alternative fuels would be highly fragmented
between regions and fuel types and the fuel prices may
fluctuate significantly within a year and over years, as well as
across regions. Therefore, a pragmatic way forward may be,
as a first step, to estimate a plausible range of the cost
differences between a reference conventional fuel and the
widely available compliant fuels. Then, the price of RUs can
be set a certain percentage above the upper limit of the
plausible range.

4.4 What is a suggested In general, potential income of the SSF will depend on the RU
price/value, if any? How price, the share of ships opting to buy RUs instead of reducing
much revenue is expected emissions or pooling with other ships, as well as the stringency
to be raised annually? of the target annual GFI. The share of ships will depend on the
RU price and the cost difference between conventional and
compliant fuels. If the price of RUs is low, there is a high
probability that many ships will purchase them. If the price of
RUs is high, fewer ships will buy them and only ships that are
neither able to obtain compliant fuels nor join a pool would buy
expensive RUs. It is anticipated that the annual revenues will
be relatively moderate (around one to two billion USD), as
shown below.

Estimations of annual revenue (in million USD) under various scenarios. The bold
numbers and line indicate a likely combination of price and share of ships using RUs.

4.5 Which principles The fund could be handled by the Organization and draw on
should govern revenue existing structures for fund management in the Organisation.
management and To ensure that decisions can be taken efficiently, a
distribution? Sustainable Shipping Fund Governing Board that has a
geographically balanced composition (the SSB) would need
to be set up to handle defined tasks and to provide oversight
on behalf of the Organization. The SSB would oversee the
management of the fund and safeguard the allocation of
funds according to the agreed principles and criteria in
mandatory regulations and related guidelines. The SSF and
 ISWG-GHG 16

its SSB would be subject to audit based upon these

principles and criteria.

To ensure an optimal functioning of the SSF, there may be

cooperation between the SSF and other institutions.

5 Assessment of the remaining work and indicative timeframe for development and
finalization of the basket of measures
5.1 Development of draft Draft amendments to MARPOL Annex VI related to the
amendments to MARPOL IMSF&F mechanism have been provided (Annex 1 to
Annex VI document ISWG-GHG 16/2/13), which can be taken as a
basis for further work.

5.2 Development of A briefing of the associated guidelines, including new

guidelines/guidance documents to be developed and existing ones to be updated,
is provided in annex 2 to document ISWG-GHG 16/2/13.
Over time, some of the guidelines could be considered to
become part of a Code in order to make them mandatory.

The draft amendments to MARPOL Annex VI and

corresponding guidelines/guidance are outlines as follows:

Structure of the regulatory framework

 ISWG-GHG 16

5.3 Time and resources
required for the
development of necessary
services/tools (e.g. central
Registry) and implications
for the Organization?
An online data management platform, named GHG fuel
intensity Registry (the Registry), needs to be developed. This
task could be developed by the Secretariat or outsourced to
a private service provider. As the Registry is a database in
nature and not many advanced functions are envisaged, it
can be developed within one year. The cost is preferably met
through voluntary donations, with the remaining cost to be
balanced by the annual administration fee of ships paid
through GHG fuel intensity Registry to the Sustainable
Shipping Fund (SSF) or the revenue from the SSF.

6 Implementation of the measure

6.1 Timeline for The IMSF&F mechanism will be made mandatory through
implementation of the amendments to MARPOL VI and is expected to come into
measures? Specific force from 2027.
provisions (e.g. review or
ratchet clause)? A review shall be completed by 1 January [2030] by the
Organization to assess the effectiveness, stringency, flexible
compliant approaches, as well as the SSF, the Registry and
SSB.

6.2 Respective The IMSF&F mechanism is a combination of compatible

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?
technical and economic elements.
The technical element of the IMSF&F mechanism is a goal-
based marine fuel standard regulating the phased reduction
of the marine fuel's GHG intensity measured in "TtW GHG
intensity value 2", which is combined with a sustainability
framework to take into account the WtW GHG emissions and
other sustainability themes/aspects. This element can set a
trajectory towards fuel transition that is in line with the target
share of zero and near-zero fuels/energy/technology. For a
given transport demand and energy efficiency performance
of international shipping, this element can also deliver the
levels of ambition and the check points in terms of GHG
reduction.

The economic elements of the IMSF&F mechanism

comprises three components:

1. Aa flexible compliance mechanism including

Remedial Units (RUs) setting a reference price on
emissions, as well as other flexibility approaches, i.e.
pooling, banking;

2. A fund contribution/reward (comparable to a feebate);

and

3. The Sustainable Shipping Fund.

Pooling and Banking approaches can help reducing the

economic cost and administrative burden for compliance
while ensuring climate integrity. The Fund
contribution/reward will provide additional incentives for early
 ISWG-GHG 16

movers to achieve more GHG reductions beyond the targets

and raise revenues that can be used as defined by the IMO
and member parties, while contributing to a level playing field
and a just and equitable transition.

6.3 Possible synergies A GHG intensity fuel standard, either based on WtW or TtW,
with existing measures? will not overlap with EEDI/EEXI regulations, but will partly
overlap with the CII mechanism.

As the operational performance of a ship cannot be

continuously improved, switching to alternative fuels would
be the major option to improve CII ratings. As a
consequence, as it is already decided that a fuel standard
will be undertook by the IMO, CII regulations will need
reviewing, in order to avoid unnecessary and burdensome
duplications with the mechanisms set by the basket of
measures to be adopted.

In the reviewing, the CII can be adjusted to meet the

following purposes:

• Further incentivise the early uptake of the most

sustainable alternative fuels;

• Calibrate the amount of deficit or surplus units to be

assigned to ships, based on specific operational
particularities;

• Reward the early adoption of alternative propulsion

systems, such as wind-powered; and

• Incentivise energy efficiency in operation (energy

conservation).

Besides, the implementation of the IMSF&F will need to

update the existing regulations including DCS and SEEMP.
The implementation flow of the IMSF&F mechanism, as well
as its interaction with other regulations are shown below:
 ISWG-GHG 16

Implementation flow of the IMSF&F mechanism

7 Scope of application
7.1 Which ship types and The IMSF&F can be applied to all ships of [400] [5,000] gross
sizes are covered by the tonnage and above, pending further consideration by the
measure? How to take into Committee.
account other ship types
and ships below the size The application scope of the IMF&F mechanism would not be
thresholds? limited by the current scope of IMO DCS, because the IMO
DCS needs to be updated anyway and a new part of DCS
with a different coverage will not impede the current DCS
requirements (on fuel oil consumption and CII, etc).

7.2 Does the measure There is no differentiation by flag in the IMSF&F mechanism.
contain differentiated However, a differentiated implementation by route may be
implementation aspects, applied to address the disproportionate negative impacts on
by flag or route? certain states if the outcome of CIA and/or practical
experience shows the necessity to do so.

_________