Is the IMO Turning the Tide on Transition?

With global trade highly dependent on shipping, achieving net zero may put wind in the sails of other industries’ climate ambitions. 

According to the International Maritime Organization’s (IMO) mission statement, the UN agency’s work centres around promoting “safe, secure, environmentally sound, efficient and sustainable shipping through cooperation”.  

As an international regulator armed with the support of 175 member states, the IMO has the potential to enact tide-altering sustainable change across the shipping industry – which is sorely needed if the sector is to reach net zero by 2050. 

“Whilst the shipping industry is one of the most carbon-efficient means of transportation, it remains a huge carbon emitter,” Sam Thomas, Sustainable Investment Analyst at Schroders, tells ESG Investor. 

International shipping accounted for 2% of global energy-related CO2 emissions last year, according to the International Energy Agency (IEA). This is largely because shipping is responsible for between 80-90% of global merchandise trade by volume, the IEA said, noting that freight ships burn around 300 million metric tonnes of dirty bunker fuel every year, producing one billion tonnes of CO2. 

The Organisation for Economic Co-operation and Development (OECD) has estimated that maritime trade volumes will triple by 2050.  

Decarbonising the shipping industry is expected to cost over US$1 trillion by 2050, according to a report published by maritime consultancy firm UMAS and the UN Climate Change High-Level Champions.  

“The global economy is hugely dependent on shipping, so it’s an especially important sector to get right,” says Mark Lutes, Senior Global Climate Policy Advisor at WWF International.  

“If we can crack the nut on decarbonising shipping, it will pave the way for progress and success across other sectors.” 

The IMO has one of the biggest roles to play in cracking that nut and facilitating the alignment of national policies and capital flows with a 1.5°C temperature pathway. 

“In this sector, we know what needs to be done, we have major actors who are ready to move in both the private and public sectors, and we have a single global regulator – the IMO – that can set rules that will drive change,” says Susan Ruffo, Senior Advisor for Ocean and Climate at the UN Foundation. 

But, as has often been highlighted in ESG Investor coverage, nothing about the climate transition is ever simple. 

This explainer considers progress made by the IMO to date, how it compares to national efforts, and where investors fit into the sustainable shipping puzzle.  

What progress has the IMO made?  

On 7 July, at the 80th Meeting of the Marine Environment Protection Committee (MEPC 80), IMO member states endorsed the regulator’s ‘2023 IMO Strategy on Reduction of GHG Emissions from Ships’. 

The new strategy introduces crucial new “indicative checkpoints”: a 20-30% reduction in emissions from international shipping by 2030, and a minimum 70% reduction in emissions by 2040, relative to 2008 levels.  

The 2040 target will require a 90-95% reduction in an average ship’s GHG intensity. Emissions reductions must account for the full life-cycle (well-to-wake), meaning the IMO will consider fuel production, delivery and usage onboard ships, as well as emissions produced thereafter.  

Zero or near-zero GHG emission technologies, fuels and/or energy sources must represent at least 5% (striving for 10%) of the energy used by international shipping by 2030, the IMO has pledged. 

For the first time, the IMO has also agreed on an overarching objective to achieve net zero greenhouse gas (GHG) emissions by or around 2050. 

Ruffo further welcomes the strategy’s recognition of the importance of accounting for impacts on the most vulnerable nations, seafarers and other maritime workers, noting this is a crucial part of ensuring a “just and equitable” transition.

The short- and medium-term implementation mechanisms to achieve these new targets have yet to be finalised, but the IMO has confirmed it will develop a global GHG fuel standard to ensure a phase-out of unsustainable fuels, as well as phasing in a pricing mechanism for GHG emissions.  

Both measures are due to be finalised in 2025 and come into force from 2027. 

“The adoption of the [strategy] is a monumental development for the IMO and opens a new chapter towards maritime decarbonisation,” said IMO Secretary-General Kitack Lim.  

“At the same time, it is not the end goal. It is in many ways a starting point for the work that needs to intensify even more over the years and decades ahead of us.” 

The IMO’s previous 2018 target was to halve the shipping sector’s annual CO2 emissions by 2050. It also introduced the Carbon Intensity Indicator (CII) and Energy Efficiency Ship Index (EEXI), which came into force on 1 January. 

The EEXI requires ships with over 400 gross tonnage (gt) in capacity to determine their energy efficiency compared to a baseline (which varies depending on the size of the ship). The IMO said a ship’s EEXI must be lower than the required EEXI for its size to ensure the ship meets the minimum energy efficiency standard. The CII determines the annual decarbonisation rate needed to ensure continuous improvement in a ship’s operational carbon intensity. 

The revised 2023 strategy now offers the industry “a clear direction, a common vision, and ambitious targets to guide us to deliver what the world expects from us”, according to Lim.  

Does the new strategy go far enough? 

As an international regulator, the IMO has “enormous leverage” that does not exist almost anywhere else in international climate work, says Ruffo. 

There is nonetheless a question mark over the IMO’s climate-related ambition.  

For major players in the shipping industry that already have net zero targets, the new strategy is unlikely to prompt any major change to their transition plans, admits Thomas from Schroders. 

“But the rest of the industry will now be forced down a far stricter decarbonisation pathway,” he notes. 

WWF’s Lutes says he is “somewhat critical” of the strategy because it’s not truly aligned with 1.5°C. 

He points to the updated strategy’s leniency, as it stipulates net zero should be achieved “by or around” 2050, thus suggesting there is some leeway for shipping companies to fall short.  

Lutes acknowledges the updated strategy is nonetheless “a huge step forward” and “sends a strong signal to the shipping sector and its fuel suppliers”. 

On paper, the new targets are aligned with keeping global warming well below 2°C by 2050, but the international shipping industry will still overshoot the more ambitious 1.5°C temperature pathway, according to research by the International Council on Clean Transportation (ICCT).  

The report noted that the full implementation of the 2023 strategy will result in international shipping exceeding its current share of the world’s 1.5°C carbon budget by 2032. However, the sector will remain around 1.7°C “if it follows the emissions reduction pathway implied by this revised strategy”.  

The true impact of the 2023 strategy, however, won’t be felt until the IMO finalises the aforementioned fuel standard and emissions pricing mechanism.  

“The fact that the IMO is actively considering putting a price on emissions is potentially a game-changer well beyond the maritime sector,” Ruffo tells ESG Investor, suggesting that having a mandatory price on carbon in such a major sector “could help to set a precedent in other areas”. 

Impact assessments for the fuel standard and emissions pricing will be carried out over the course of 2024. Following the slated 2027 enforcement date for these mechanisms, the IMO plans to review the 2023 strategy at MEPC 86 in the summer of 2027, completing the review and adopting the 2028 IMO strategy by autumn 2028.  

“The IMO has put the shipping sector into the right ballpark, but its current timeline doesn’t give the sector much time to make an impact on its 2030 target,” says Lutes.  

Ruffo adds that the maritime sector now has a chance to “be a model for how the energy transition should happen” – provided the IMO’s new strategy is fully implemented. 

How does the IMO’s strategy compare to national approaches?  

On a positive note, there has been an increasing amount of activity from governments on the issue of decarbonising shipping at a national and regional level.  

“The IMO’s strategy sets the bar for what national plans should aim to achieve,” says Ruffo from the UN Foundation. 

As with many other facets of climate-related regulation, the EU has been one of the frontrunners in developing and implementing its sustainable maritime strategy.  

This year, the EU reached two important agreements.  

The first concerns the inclusion of shipping in the EU Emissions Trading System (ETS), which will implement a gradual phase out of ‘free carbon allowances’ for the sector between 2024-26, ensuring the industry phases out emissions to avoid increased expense.  

The EU’s FuelEU Maritime initiative is also set to apply from 1 January 2025. It will impose constraints on the average annual GHG intensity of onboard energy used by ships. Starting at a 2% reduction in 2025 compared to 2020 intensity levels, it will increase to 6% by 2030, and eventually reach 80% in 2050. 

Meanwhile, the US Inflation Reduction Act (IRA), which was signed into law last year, includes direct support for port emissions reductions through electrification and will further contribute to building out the country’s domestic green ammonia supply chain through its clean hydrogen tax incentives. 

More recently, in June the International Maritime Pollution Accountability Act and the Clean Shipping Act 2023 were introduced to the US Senate. 

The International Maritime Pollution Accountability Act would impose a pollution fee of US$150 per tonne of carbon emissions produced by large shipping vessels at US ports, as well as fees for nitrogen oxides (US$6.30/lb) and sulphur dioxide (US$18/lb). The fee on carbon emissions would be phased out if the IMO implements its planned emissions pricing mechanism and sets a fee that is equal to or greater than the proposed US$150 per tonne of CO2.  

The Clean Shipping Act would direct the US Environmental Protection Agency (EPA) to set increasingly stringent carbon intensity standards for shipping fuel by 2040, in line with the goals of the Paris Agreement.  

Encouragingly, governments are also demonstrating a willingness to work together.  

At COP27, Norway’s Prime Minister, Jonas Gahr Store, and US Special Presidential Envoy John Kerry launched the Green Shipping Challenge to encourage actors in shipping value chains to make Paris-aligned net zero commitments and policymakers to support the advancement of green shipping corridors. 

Since then, a number of governments have announced plans to collaborate on green shipping corridors, including Singapore and Australia, the US and UK, and Portugal and Brazil.  

In May, Asela Peneueta, from the Government of Tuvalu’s Ministry of Communications and Transport, urged state actors to consider the equity of these green shipping corridors, noting that “none of the green corridors announced to date have included Small Island Developing States (SIDS), with the exception of Singapore”. 

While there is a lot of promise being shown nationally, Lutes from WWF International says anything other than a global strategy will be “less than ideal”, as it will lead to a fragmented global approach. 

“The best outcome is that the IMO installs strong regulations at the global level that set out a very clear direction for policy and expectations of companies,” he says. 

“Without that, the transition for shipping will be very uncertain and overly dependent on regional and national policies to drive things forward. Some companies will start acting and some won’t; there’s more risk of stranded assets.” 

What role should investors play? 

Where there’s a challenge (fulfilling the IMO’s 2023 decarbonisation strategy), there’s opportunity (investing in solutions that will enable the sector to achieve net zero).  

Essentially, vessels that do nothing to reduce emissions could face a triple hit of financial penalties, higher carbon taxes and reduced consumer demand,” says Thomas from Schroders.  

“We believe this presents some very interesting investment opportunities across the green shipping value chain.” 

In the short-term, a few examples of solutions include developing voyage performance and energy management systems, as well as redesigning shipping structures to be more energy efficient. 

In the longer term, one of the biggest areas of opportunity for investors lies in the development of sustainable fuels. 

The IEA report noted that, historically, oil-based fuels have met over 99% of total energy demand for international shipping. In a net zero world, this is far from sustainable, meaning there is opportunity to invest in the upscaling of alternative fuels, including biofuels, green hydrogen and ammonia.  

Last year, biofuels met less than 0.5% of global international shipping demand, the IEA said. To align with the agency’s 2050 Net Zero Scenario, low-emission fuels will need to represent around 15% of total energy demand by 2030. 

An additional 2021 report published by the International Renewable Energy Agency (IRENA) noted that green hydrogen-based fuels will need to be “the foundation of a decarbonised international shipping sector”, with the industry requiring 46 million tonnes (Mt) of green hydrogen by 2050. Seventy-three percent of this will be needed to produce e-ammonia, 17% for e-methanol, and 10% to be used directly as liquid hydrogen, IRENA said.  

The report added that up to 143 Mt of renewable ammonia could be utilised for international shipping by 2050, but, due to insufficient supply in the nearer term, “the immediate utilisation of renewable ammonia may be challenging”.  

As of May 2023, there were over 200 pilot and demonstration projects focused on zero-emission vessel technologies, according to the Global Maritime Forum. Over 50 of these were based on ammonia, 30 on methanol-fuelled vessels, and 15 on hydrogen combustion. 

Last year, 90 (11% by tonnage) new-build orders for ships were for ammonia-ready vessels, while 43 were for methanol-ready vessels and three for hydrogen-ready vessels. 

Oil and gas majors are also venturing into the space. Last month, BP invested US$10 million in US biofuels developer WasteFuel and entered a memorandum of understanding. 

Lutes from WWF International says there are plenty of avenues of opportunity, and much to feel positive about, but it’s time for the shipping industry to “get moving now”.  

“There’s no time for a transition full of fits and starts. 

“What the IMO has outlined in its new strategy should be the very minimum companies, investors and policymakers aim for. 

“True ambition will be aligning with a 1.5°C pathway.”

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