A global carbon levy - at a price

What you need to know

• Shipping's international regulatory body the UN International Maritime Organisation (IMO) has approved historic measures to cut ships' carbon intensity. The new measures are expected to be adopted as a new chapter to MARPOL Annex VI in October 2025, with an entry into force date of 1 March 2027.
• A major milestone, the agreement includes a levy that could fund commercialisation of green marine fuels and accelerate their uptake.
• A multilateral single regulatory framework is a rational model for a mobile, global industry.

What you need to do

• There will be widespread implications of carbon pricing for sea freight. Existing long term contracts will likely need to be renegotiated, while new contracts should include provisions for renegotiation to comply with a globally enforceable regime.
• A wide range of businesses must consider transport emissions under new mandatory corporate reporting requirements.
• Many businesses have some element of international supply chain dependency. As the measures are developed businesses should consider the service terms of their transport, incentivise fuel efficiency and audit their fuel related surcharges.

The IMO, which serves as the global regulatory body for shipping, has recently approved a set of historic measures aimed at significantly reducing the carbon intensity of ships. These measures represent a major step forward in the global effort to combat climate change and reduce greenhouse gas emissions from the maritime sector.

The greenhouse gas reduction measures passed on 11 April 2025 (Measures) are expected to be adopted as a new Chapter to MARPOL Annex VI (Prevention of air pollution from ships), at an extraordinary session of IMO's Marine Environment Protection Committee in October 2025 for entry into force on 1 March 2027. The IMO Net-zero Framework is the first in the world to combine mandatory emissions limits and GHG pricing across an entire industry sector.  The irony is that IMO has reconfigured its framework just as competing regional regulations, such as those developed by the EU, are beginning to bite.

A global system of regulation – or a stew of schemes?

One of the strong spurs to IMO action has indeed been the spectre of multiple different regimes around the world without regard to the IMO's role as the global regulator of shipping. IMO's system for adherence is based on the flag States' responsibility for individual ships. This is a proven regulatory framework already operating for other legal and safety compliance matters. Of course if regional regulations persist this will add another burden for global trading supply chains and possibly highlight that revenue is also an outcome of regional lawmaking. The EU explicitly extended its emissions trading system (ETS) regime to international shipping due to the shipping sector's perceived slow progress toward decarbonisation. Fuel EU regulations are also in effect from January 2025 including a further set of assessment, compliance and penalty mechanisms. As an noteworthy example, the IMO Framework introduces more stringent measures from 2030 compared to the Fuel EU targets.

A ship may need to comply with all these schemes simultaneously and may face different costs and incentives depending on the route, fuel and technology used.

On the horizon, there is also a UK ETS regime in an advanced stage of development (see our 20 December 2024 alert, "UK ETS Maritime Expansion Consultation: Top 10 takeaways for the Maritime Industry").

Two cheers, not three for the Measures

That the Measures were approved at all has taken many by surprise. As the cost of compromise, the Measures are seen by some as too weak and slow but by others as too stringent. For small island nations, the threat of rising sea levels is existential and a timeline for entry into force in 2027 is too slow. Criticism has already been levelled at the lack of a workable carbon pricing mechanism, and for effectively endorsing continuing current levels of emissions until 2028. For early adopters of green alternative fuels like methanol, the horizon over which their investment would now be expected to repay has possibly been lengthened, but against this the Measures deliver a tangible opportunity to sell emissions units to operators who have failed to meet obligatory reductions. Objectors who voted against the Measures included United Arab Emirates, Saudi Arabia, Russia, Iran, Iraq and Malaysia. China voted in favour.

How does it work?

The Measures will apply to ships of 5,000 gross tonnage and above; however, ships operating exclusively in the waters of their flag state, ships not using mechanical propulsion, and FPSOs, FSUs, drilling rigs and semi-submersible vessels will be exempt. All ships must pay an administrative fee for the upkeep of a central IMO greenhouse gas fuel intensity Registry, which will ensure the working of compliance balancing and issue of surplus units. Baselines have already been set under MARPOL for the amount of fuel each type of ship burns relative to its cargo capacity. These baselines serve as a reference point for measuring and managing the carbon emissions of maritime vessels. The Measures will require operators to reduce their carbon emissions intensity by 17 per cent from 2008 baselines by 2028, rising to 21 per cent by 2030. Further figures are expected to be set in 5-yearly reviews. Failure to reduce emissions in line with the baselines engages the obligation to pay to the IMO Net-Zero Fund $100 for every tonne of carbon dioxide in excess of the target level. If less than an 8 percent reduction is achieved by 2030, those operators will face higher rates escalating to $380 per tonne. Ships that attain an emissions intensity of less than the direct compliance target will generate 'surplus compliance,' which may then be purchased by operators that fail to reach the emissions reduction targets, as remedial compliance.

How will the money raised by this levy be used?

Revenues from IMO Net-Zero Fund are intended to be disbursed to: 

• Reward low-emission ships; 
• Support innovation, research, infrastructure and just transition initiatives in developing countries;
• Fund training, technology transfer and capacity building to support the IMO GHG Strategy; and
• Mitigate negative impacts on vulnerable States, such as Small Island Developing States and Least Developed Countries.

Implications for fleet assets and valuations

Given the complexity and uncertainty of the carbon emission schemes, the shipping industry and finance providers must plan ahead. One big question is whether to retrofit or buy new ships to adapt to the low-carbon transition. This question is not easy. Retrofits may be a quick solution but retrofitting may not be economical for old ships and may also pose challenges with ships under charter, either due to necessary time off hire or to contractual risk and uncertainty about future speed and performance of the ship as warranted under the charterparty. On the other hand, replacing the existing fleet with newbuild is also challenging due to the availability of shipyard slots, relatively unproven or uncommercialised technologies and green fuel supply and price uncertainty. In second hand markets, the compliance and penalty history of a vessel will require careful due diligence.

There is presently no indication how carbon offsets can be used (if at all) in achieving IMO's baseline compliance obligations. This will be an important consideration for those companies that have already contracted to purchase carbon offsets on a forward basis to reduce their emissions footprint.

Strategic planning for ports

Transition to zero or net zero emissions fuel sharpens the need for strategic planning of bunkering infrastructure, which presents opportunities as well as threats. IMO has also progressed its technical measures on nitrous, sulphurous and particulate emissions. Ports in populated areas or using trade lanes alongside them are increasingly on notice of the wider environmental effects of shipping emissions and the IMO framework is a reference point for wider sustainability responses.

Conclusion

IMO's broad membership has produced a multilateral new direction for shipping – against expectations, and despite looming geopolitical disruption to trade and supply chains. Although the Measures remain to be further developed they are a milestone change unlikely to be reversed. This is so despite, notably, IMO council member the United States of America warning of retaliatory action. It is likely that a second vote will be held at the extraordinary session in October when a two-thirds majority of MARPOL Annex VI parties will need to vote positively for the regulations to enter into force. The sustainability goals of trade reliant businesses ultimately stand to benefit from the Measures – as long as they are not undercut through regional unilateralism.