Charting a new course: The global deal that aims to make shipping green

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Eklavya Gupte:

Welcome to the Energy Evolution Podcast, where we explore the critical moments shaping our energy future.

I'm your host, Eklavya Gupte. In this episode we will be discussing the outcome from the recent International Maritime Organization meeting, where parties approved new regulations aimed at charging for greenhouse gas emissions from ships. This move will have a rippling effect on not just the maritime sector and its decarbonization initiatives, but also on global trade and the broader energy transition.

After weeks of tense, high-pressure talks with strong opposition from several countries, notably some key oil and gas producers, draft regulations that set a mandatory marine fuel standard and a mechanism for greenhouse gas emissions pricing for shipping were agreed, but getting to this decision was not without contention. The US withdrew from the discussions, citing concerns that the regulations would impose an economic burden. Saudi Arabia, alongside other fossil fuel dependent nations, also opposed the rules, but the vote ultimately passed with a significant majority, which can be viewed as a triumph of multilateralism.

To speak with us in more detail on the complexity of these regulations, we have Max Lin, a senior journalist in our EMEA news team. Welcome, Max. Now, you've been following these IMO meetings for several years now, so it would be great to find out what were some of the achievements from this session, and what do they mean for the maritime sector?

Max Lin:

Thank you, Eklavya. Yes, indeed as you say, this is a landmark achievement by the International Maritime Organization because this is going to be a regulation that will be imposed by more than 100 countries on international shipping. This is the first sector-wide greenhouse gas emission rules on international maritime transportation.

What we are going to see is that shipping companies will need to use marine fuels with lower greenhouse gas emissions intensities, and that this is because the International Maritime Organization has set decarbonization targets for 2030, 2040, and then all the way to a net zero by 2050. We are going to see the bunker industries struggle to prepare all those low carbon fuels because right now, those low carbon fuels are very scarce, and they cost much more, two or three times more than conventional fuels. This is a very significant development for shipping and the bunker companies, and obviously, as you mentioned, there have been contentious debates among older member states of the IMOs. We are still going to look to whether the US and Saudi Arabia will do something more to prevent the adoption of this regulation in the IMOs next meeting in October.

Eklavya Gupte:

Thanks, Max. Some of the reaction so far has been centered around the complexity of the regulations and also on the fact that these regulations will still need to be adopted. What is your take on that?

Max Lin:

Yes, Eklavya. I think in my 10 years of reporting on this topic, this is probably the most complex regulation that I have ever accounted. We are going to have two sets of greenhouse gas emission standards for marine fuels at any given year. At the same time, the ship operators that could meet the highest standard, which means if they're burning zero emission fuels, they will even be able to generate something called surplus unit, which is kind of like a carbon equity, for the shipping industry. They can sell those to under-compliant ship operators.

We are going to see the shipping company face a very difficult choice between which fuels to use. This is something that they have been thinking over for the past few years because they are trying to figure out whether they should stay with oil, or they should shift to LNG or ammonia or even methanol. We are going to see the shipping company putting more money into studying what kind of fuels is the best for them economically. I think, more importantly, we will also need to recognize that this is a significant achievement in terms of environmental protection, especially as they are trying to make a move in countering climate change. This is a very big change from industry that has been criticized for being a laggard in low-carbon transition.

Eklavya Gupte:

Thanks a lot, Max. Max and I were lucky to speak to two experts on their reactions from this landmark decision. First, we spoke to Edmund Hughes, the IMO representative at the International Bunker Industry Association. Edmund, welcome to Energy Evolution. To kick things off, it would be great to get a sort of insider view into some of the drama that unfolded at the recent MEPC meeting, in what looked like quite tense negotiations, but with a successful outcome in the end, some would say.

Edmund Hughes:

Yes, and thank you very much indeed for inviting me. Indeed, it was tense, but then that's a result of when you get 176 or so member states coming together to negotiate international global rules for international shipping.

Really, the two-week process that we had in London recently was the culmination of nearly two years work following the adoption of the IMO strategy in 2023 that set the levels of ambition including to reach net zero by around 2050. The fact is that international shipping and these rules that have been agreed will impact not just shipping, but have a knock-on effect at the production of fuels and technologies to support the net-zero goal as we go forward.

This, again, has significant geopolitical issues because trade also has an impact on many countries. All these were at play really in terms of the consideration of the governments who made the decisions. As I said, I think it really demonstrates, ultimately, a positive for both IMO and international shipping, but also multilateralism, which is a very good outcome.

Eklavya Gupte:

Definitely, especially in a time where you're having so many geopolitical tensions and the sort of tariff drama that we're seeing unfold. In terms of the reaction from the shipping industry, I know it's a bit too early to tell, but what have been some of the immediate reactions from the sector?

Edmund Hughes:

Yeah, indeed. I mean the industry itself and the individual companies within the industry are very much still digesting the outcome and working out the implications on a company basis across the sector. I think in general, most players within the sector are very happy with the outcome because, importantly, what it does is give certainty to the future. One thing that many were calling, including myself, was the need for certainty because without the regulatory certainty, whilst we had the goals, they were understood, without the regulatory certainty, it gives certainty to the investment decisions that are going to be needed, whether that be a fuel producer, an equipment manufacturer, a shipbuilder, a ship owner primarily who are making the investments, but also the investors as well who support the sector and the producers.

Ultimately, it was a clear signal to them that we are able to move forward now on the basis of mandatory requirements. That is a significant difference, and why, again, going back to your first question, why there was a lot on this meeting. Those mandatory requirements give that certainty, but if they hadn't been agreed to this session, then frankly, we had real risk of missing not just the 2030 target, but likely the 2040 and the 2050 target. This is why it was such a big meeting.

Max Lin:

Hi, Edmund. I was also thinking because we have a rather complex regulatory piece. We have two tiers of penalty. We have a carbon trading mechanism. Do you think that bunker companies will also need to adjust their commercial strategies to face this kind of new business environment?

Edmund Hughes:

Undoubtedly. I think one of the things that came out of the event, and I represent IBIA, the International Bunker Industry Association, at the IMO. One thing that IBIA's membership is very aware of is the change that this whole regulatory framework will bring to the marine fuel supply chain, in that we are moving away from where we just focused on tank-to-wake emissions. That is once the fuel is supplied to the ship, it's just the emissions that come out of the stack of the ship. All the way now, we're now looking at a world-to-wake governance regime whereby we also have to take into account the upstream emissions from the production of the fuels and energy sources, and those have to be incorporated into the calculation of the attained fueling intensity for the ship. That involves, therefore, a whole process of information flowing from upstream through the bunker supplier or the energy supplier through to the ship.

That will change the governance regime, not just for the ship owner, but also the supplier of the fuel, but also the fuel producer and IBIA and its membership, and we represent stakeholders across that whole marine fuel supply chain, are going to have to understand the implications for them because many of them will have to now be certified by recognized certification bodies for these fuels, for the sustainability aspects of these fuels and for the ability to provide that information that's going to be needed. The whole supply chain is going to have to be reconfigured to enable and ensure this information can be received by the vessel.

Max Lin:

Obviously, those new rules are going to implement from 2028. How do you see that between now and the 2028, how should the industry start to prepare for these rules?

Edmund Hughes:

I think at this stage, people are assessing the rules and their implications. We still have a hurdle to overcome in October with the adoption of the rules, and that, I would imagine, will end up with another vote because that is the nature of these things. We know that it's already been signaled by countries that that's likely to happen. Again, the dynamic slightly changes in October because whereas this decision was made on Friday was by all the members of the Marine Environmental Protection Committee of IMO, any government who was in attendance could vote, when it comes to adoption of these rules, it'll only be the parties to the Annex VI, which is where these rules will sit under.

At the moment, there's 108 parties to MARPOL Annex VI, and of those parties do you require a two-thirds majority for them to be passed, which would effectually means 72 of working majority to get these rules passed. Now, if you think on Friday, 63 governments supported approval, I haven't done the analysis, by far, the majority of them were parties to Annex VI, so there's still a few states short, but then there were a lot of abstentions on Friday, I think about 20 abstentions from the vote. Frankly, it wouldn't take many of those states who, and I fully expect several of them to recognize that this framework is one they can work within in terms of achieving the net-zero goal and therefore, would support them come October. That's the next stage.

For industry itself, obviously, that then will help provide, again, the signal and certainty that we are looking for, which I've already alluded, to move forward in terms of investment decisions. Again, this is why I say people are having to sit down now and really understand the implications because they're going to have to work out a strategy frankly. If you're a ship owner, you're going to have to look at your fuel strategy. If you are a fuel supplier, it may now enable you to go forward with investments [inaudible 00:12:44] fuel production. All these things, over the next few months, will come to fruition, and we'll see greater clarity, but I think at this stage, people are still just getting over the fact that we've made this great movement forward.

Max Lin:

Thanks a lot. Obviously, the regulation needs to also involve two standards of greenhouse gas emission intensity at any given year. Just wondering whether this is also going to make the fuel procurement strategy more difficult because you don't really know when can you have achieved the lowest complying cost at any given time. You need to take your precision on any fuel.

Edmund Hughes:

No, you're right. It's a very good question, and this is, frankly, that we're going to move into an age where we're probably going to have to employ fuel managers and strategists to enable sort of understanding. I think initially, to be frank, we don't have, particularly, the net-zero fuels in great supply at scale globally. For many, it's going to be a case of dealing with the fuels we have today, working with those to achieve optimal compliance.

The reality is there will be costs involved, increased costs, because many ships and many will not necessarily be able to achieve compliance. However, one option, certainly in the shorter term, is if you have a ship owner and you have several ships, is for maybe have a ship that's gone beyond compliance, beyond the direct compliance threshold, you can accrue surplus units, which is what the mechanism enables you to do. There's this flexible compliance within it, and those surplus units can be then shared with other ships within your fleet, or you can take a strategy where you can have a ship that even goes beyond that, but this is to be seen. We know that may be one option for companies, particularly if, as I said, they have more than one fleet. There may be pooling as well, that will be happening. That's again, permitted under the rules, whereby ships will share their compliance options.

Max Lin:

Thanks. Just great to have you with us today and just sharing the insights from bunker industry. Obviously, it's a quite landmark piece, and we will watch out for how the shipping and bunker industries are going to react.

Eklavya Gupte:

Now, we hear from Georgios Kasimatis, the director of regulatory affairs at DNV Maritime, which is a ship classification society, who gives us some more details on some of the regulations that were agreed at the recent meeting. Hello, Georgios, welcome to Energy Evolution. Thank you very much for joining us today. Obviously, we've had some really big news for the shipping sector, but some of these regulations agreed by the IMO look like extremely complex, so I just wanted your views on that.

Georgios Kasimatis:

Thank you for having me here. I understand that this is a question that people wonder about. I guess we will go into the details of what we call the net-zero framework. We might as well start with discussing some of the basics of the new measures. We have, as you mentioned, the carbon intensity in the core of a combined technical measure, the GFI, as we call it, which is also linked with an economic measure. GFI stands for greenhouse gas intensity of the fuel. That's GFI for short. The GFI gives us a metric for evaluating the intensity of the carbon emission, the carbon footprint if you want, of the energy used on the ship. Of course, we can foresee that there will be some complexity with respect to operations, with respect to, let's say, administrative procedures and also the economic complexities around ensuring compliance with the net-zero framework requirements.

On the other hand, I can also say that the concept itself is fairly simple, perhaps the most straightforward to implement for governments. it is simpler for governments perhaps because it enforces penalties against failing to reach a certain performance, as opposed to imposing a tax on every ton of CO₂ produced. That would be the case for the other alternatives that many had anticipated. The LLevy as we call it, a flat levy mechanism. It also creates a more, how can I say, a more straightforward, a simpler perhaps, signal for investing into new fuels, zero or near zero-emission fuels, as we call them, the ZEFs.

These are all also things we must bear in mind when we think about complexities around the requirements. Of course, the picture gets more nuanced once we start looking into the details of implementation.

Max Lin:

How do you think a shipping company should comply with, because obviously, as you mentioned that there's a high level of complexity in both. There's different sets of greenhouse gas emission standard for marine fuels at any given year, and what's your suggestion for a shipping company?

Georgios Kasimatis:

Looking closer into the regulation, understanding which technology fits your compliance strategy best is important, and also bringing the competence of the company up to speed with more technical and operational needs. The administrative and commercial realities related to the GFI, securing enough fuel that is low emission or zero or near zero-emission technologies. All these things are important to have under control. Once this is under control, the GFI is designed to make it easier for ships to comply. There are two elements that have, let's say, the GFI requirement to do this. Namely, there is a two-tier compliance approach and also a built-in flexibility in the requirement itself.

Max Lin:

Yes, indeed. Especially, I think you just mentioned a keyword, it's two tiers. Obviously, a ship owner can have a very strong ambition, just go directly to zero-emission fuel. It can be have lower ambition, or you can have no ambition at all, and they pay a hefty fine. Do you think it's actually creating a quite interesting but also complicated fuel procurement environment because you can obviously aware that there are so many potential options there for ship owners?

Georgios Kasimatis:

The GFI has two tiers of compliance, and this is also something that is different from the fuel EU. Then the annual greenhouse gas intensity of the fuel used by the ship is required to meet a base target and a direct target. The direct compliance target is more stringent than the base one. We keep in mind that the higher the attained GFI, the worse it is for the ship. The base target is below the reference line of 2008, and the direct target is even lower. The lower the GFI, the better.

Now, all ships must meet with the direct target, the most stringent target, but there is a difference on how, let's say, the deficits are handled, depending on which tier the annual GFI of the ship lies in.

If the annual attained GFI is below the direct targets, then the ship over complies. Then, as you said, if we have access to low carbon fuels, then surplus units are generated, or as we call them, SU. If the annual GFI is above targets but below the base, then the ship has Tier One deficits and then we need to buy what we call remedial units or RUs. If the GFI of the ship is above base as well, then the ship has a compliance deficits in both tiers, and it has to buy remedial units for both Tier One and Tier Two or trade with surplus units, as we call them, from over-compliant ships. It's important to note that the Tier One and Tier Two remedial unit prices are different. Tier One is lower, it's about, or not about, it's at $100 per ton of CO₂ equivalent, while the RU for Tier Two is much higher, at $308 per ton of CO₂.

You see that then we have different compliance options, and of course for some, it might be easier to have access to low-carbon fuels, but for others it will be harder. If you have access to low-emission fuels and can go below direct, then you might as well go for it and trade it after, trade the over compliance as surplus units or bank those surplus units for using at the later point where the emission reduction requirement will be stricter.

Max Lin:

Thank you very much, Giorgios. It's great to have you with us.

Eklavya Gupte:

All right. That's going to do it for this episode. Please stay up to date by subscribing to Energy Evolution on Apple, Spotify, or whatever you prefer to listen in. If you have ideas for guests or topics, please email energyevolution@spglobal.com.

Now, before we sign off, I want to give a shout out to our other podcast team members that includes Taylor Kuykendall, Dan Testa, Camilla Naschert, Christopher Coats, and Karen Willenbrecht. Also, a huge shout out to our agency partner, the 199 and the Commodity Insights Digital Content Team. Thank you all for listening.

Eklavya Gupte:

Welcome to the Energy Evolution Podcast, where we explore the critical moments shaping our energy future.

I'm your host, Eklavya Gupte. In this episode we will be discussing the outcome from the recent International Maritime Organization meeting, where parties approved new regulations aimed at charging for greenhouse gas emissions from ships. This move will have a rippling effect on not just the maritime sector and its decarbonization initiatives, but also on global trade and the broader energy transition.

After weeks of tense, high-pressure talks with strong opposition from several countries, notably some key oil and gas producers, draft regulations that set a mandatory marine fuel standard and a mechanism for greenhouse gas emissions pricing for shipping were agreed, but getting to this decision was not without contention. The US withdrew from the discussions, citing concerns that the regulations would impose an economic burden. Saudi Arabia, alongside other fossil fuel dependent nations, also opposed the rules, but the vote ultimately passed with a significant majority, which can be viewed as a triumph of multilateralism.

To speak with us in more detail on the complexity of these regulations, we have Max Lin, a senior journalist in our EMEA news team. Welcome, Max. Now, you've been following these IMO meetings for several years now, so it would be great to find out what were some of the achievements from this session, and what do they mean for the maritime sector?

Max Lin:

Thank you, Eklavya. Yes, indeed as you say, this is a landmark achievement by the International Maritime Organization because this is going to be a regulation that will be imposed by more than 100 countries on international shipping. This is the first sector-wide greenhouse gas emission rules on international maritime transportation.

What we are going to see is that shipping companies will need to use marine fuels with lower greenhouse gas emissions intensities, and that this is because the International Maritime Organization has set decarbonization targets for 2030, 2040, and then all the way to a net zero by 2050. We are going to see the bunker industries struggle to prepare all those low carbon fuels because right now, those low carbon fuels are very scarce, and they cost much more, two or three times more than conventional fuels. This is a very significant development for shipping and the bunker companies, and obviously, as you mentioned, there have been contentious debates among older member states of the IMOs. We are still going to look to whether the US and Saudi Arabia will do something more to prevent the adoption of this regulation in the IMOs next meeting in October.

Eklavya Gupte:

Thanks, Max. Some of the reaction so far has been centered around the complexity of the regulations and also on the fact that these regulations will still need to be adopted. What is your take on that?

Max Lin:

Yes, Eklavya. I think in my 10 years of reporting on this topic, this is probably the most complex regulation that I have ever accounted. We are going to have two sets of greenhouse gas emission standards for marine fuels at any given year. At the same time, the ship operators that could meet the highest standard, which means if they're burning zero emission fuels, they will even be able to generate something called surplus unit, which is kind of like a carbon equity, for the shipping industry. They can sell those to under-compliant ship operators.

We are going to see the shipping company face a very difficult choice between which fuels to use. This is something that they have been thinking over for the past few years because they are trying to figure out whether they should stay with oil, or they should shift to LNG or ammonia or even methanol. We are going to see the shipping company putting more money into studying what kind of fuels is the best for them economically. I think, more importantly, we will also need to recognize that this is a significant achievement in terms of environmental protection, especially as they are trying to make a move in countering climate change. This is a very big change from industry that has been criticized for being a laggard in low-carbon transition.

Eklavya Gupte:

Thanks a lot, Max. Max and I were lucky to speak to two experts on their reactions from this landmark decision. First, we spoke to Edmund Hughes, the IMO representative at the International Bunker Industry Association. Edmund, welcome to Energy Evolution. To kick things off, it would be great to get a sort of insider view into some of the drama that unfolded at the recent MEPC meeting, in what looked like quite tense negotiations, but with a successful outcome in the end, some would say.

Edmund Hughes:

Yes, and thank you very much indeed for inviting me. Indeed, it was tense, but then that's a result of when you get 176 or so member states coming together to negotiate international global rules for international shipping.

Really, the two-week process that we had in London recently was the culmination of nearly two years work following the adoption of the IMO strategy in 2023 that set the levels of ambition including to reach net zero by around 2050. The fact is that international shipping and these rules that have been agreed will impact not just shipping, but have a knock-on effect at the production of fuels and technologies to support the net-zero goal as we go forward.

This, again, has significant geopolitical issues because trade also has an impact on many countries. All these were at play really in terms of the consideration of the governments who made the decisions. As I said, I think it really demonstrates, ultimately, a positive for both IMO and international shipping, but also multilateralism, which is a very good outcome.

Eklavya Gupte:

Definitely, especially in a time where you're having so many geopolitical tensions and the sort of tariff drama that we're seeing unfold. In terms of the reaction from the shipping industry, I know it's a bit too early to tell, but what have been some of the immediate reactions from the sector?

Edmund Hughes:

Yeah, indeed. I mean the industry itself and the individual companies within the industry are very much still digesting the outcome and working out the implications on a company basis across the sector. I think in general, most players within the sector are very happy with the outcome because, importantly, what it does is give certainty to the future. One thing that many were calling, including myself, was the need for certainty because without the regulatory certainty, whilst we had the goals, they were understood, without the regulatory certainty, it gives certainty to the investment decisions that are going to be needed, whether that be a fuel producer, an equipment manufacturer, a shipbuilder, a ship owner primarily who are making the investments, but also the investors as well who support the sector and the producers.

Ultimately, it was a clear signal to them that we are able to move forward now on the basis of mandatory requirements. That is a significant difference, and why, again, going back to your first question, why there was a lot on this meeting. Those mandatory requirements give that certainty, but if they hadn't been agreed to this session, then frankly, we had real risk of missing not just the 2030 target, but likely the 2040 and the 2050 target. This is why it was such a big meeting.

Max Lin:

Hi, Edmund. I was also thinking because we have a rather complex regulatory piece. We have two tiers of penalty. We have a carbon trading mechanism. Do you think that bunker companies will also need to adjust their commercial strategies to face this kind of new business environment?

Edmund Hughes:

Undoubtedly. I think one of the things that came out of the event, and I represent IBIA, the International Bunker Industry Association, at the IMO. One thing that IBIA's membership is very aware of is the change that this whole regulatory framework will bring to the marine fuel supply chain, in that we are moving away from where we just focused on tank-to-wake emissions. That is once the fuel is supplied to the ship, it's just the emissions that come out of the stack of the ship. All the way now, we're now looking at a world-to-wake governance regime whereby we also have to take into account the upstream emissions from the production of the fuels and energy sources, and those have to be incorporated into the calculation of the attained fueling intensity for the ship. That involves, therefore, a whole process of information flowing from upstream through the bunker supplier or the energy supplier through to the ship.

That will change the governance regime, not just for the ship owner, but also the supplier of the fuel, but also the fuel producer and IBIA and its membership, and we represent stakeholders across that whole marine fuel supply chain, are going to have to understand the implications for them because many of them will have to now be certified by recognized certification bodies for these fuels, for the sustainability aspects of these fuels and for the ability to provide that information that's going to be needed. The whole supply chain is going to have to be reconfigured to enable and ensure this information can be received by the vessel.

Max Lin:

Obviously, those new rules are going to implement from 2028. How do you see that between now and the 2028, how should the industry start to prepare for these rules?

Edmund Hughes:

I think at this stage, people are assessing the rules and their implications. We still have a hurdle to overcome in October with the adoption of the rules, and that, I would imagine, will end up with another vote because that is the nature of these things. We know that it's already been signaled by countries that that's likely to happen. Again, the dynamic slightly changes in October because whereas this decision was made on Friday was by all the members of the Marine Environmental Protection Committee of IMO, any government who was in attendance could vote, when it comes to adoption of these rules, it'll only be the parties to the Annex VI, which is where these rules will sit under.

At the moment, there's 108 parties to MARPOL Annex VI, and of those parties do you require a two-thirds majority for them to be passed, which would effectually means 72 of working majority to get these rules passed. Now, if you think on Friday, 63 governments supported approval, I haven't done the analysis, by far, the majority of them were parties to Annex VI, so there's still a few states short, but then there were a lot of abstentions on Friday, I think about 20 abstentions from the vote. Frankly, it wouldn't take many of those states who, and I fully expect several of them to recognize that this framework is one they can work within in terms of achieving the net-zero goal and therefore, would support them come October. That's the next stage.

For industry itself, obviously, that then will help provide, again, the signal and certainty that we are looking for, which I've already alluded, to move forward in terms of investment decisions. Again, this is why I say people are having to sit down now and really understand the implications because they're going to have to work out a strategy frankly. If you're a ship owner, you're going to have to look at your fuel strategy. If you are a fuel supplier, it may now enable you to go forward with investments [inaudible 00:12:44] fuel production. All these things, over the next few months, will come to fruition, and we'll see greater clarity, but I think at this stage, people are still just getting over the fact that we've made this great movement forward.

Max Lin:

Thanks a lot. Obviously, the regulation needs to also involve two standards of greenhouse gas emission intensity at any given year. Just wondering whether this is also going to make the fuel procurement strategy more difficult because you don't really know when can you have achieved the lowest complying cost at any given time. You need to take your precision on any fuel.

Edmund Hughes:

No, you're right. It's a very good question, and this is, frankly, that we're going to move into an age where we're probably going to have to employ fuel managers and strategists to enable sort of understanding. I think initially, to be frank, we don't have, particularly, the net-zero fuels in great supply at scale globally. For many, it's going to be a case of dealing with the fuels we have today, working with those to achieve optimal compliance.

The reality is there will be costs involved, increased costs, because many ships and many will not necessarily be able to achieve compliance. However, one option, certainly in the shorter term, is if you have a ship owner and you have several ships, is for maybe have a ship that's gone beyond compliance, beyond the direct compliance threshold, you can accrue surplus units, which is what the mechanism enables you to do. There's this flexible compliance within it, and those surplus units can be then shared with other ships within your fleet, or you can take a strategy where you can have a ship that even goes beyond that, but this is to be seen. We know that may be one option for companies, particularly if, as I said, they have more than one fleet. There may be pooling as well, that will be happening. That's again, permitted under the rules, whereby ships will share their compliance options.

Max Lin:

Thanks. Just great to have you with us today and just sharing the insights from bunker industry. Obviously, it's a quite landmark piece, and we will watch out for how the shipping and bunker industries are going to react.

Eklavya Gupte:

Now, we hear from Georgios Kasimatis, the director of regulatory affairs at DNV Maritime, which is a ship classification society, who gives us some more details on some of the regulations that were agreed at the recent meeting. Hello, Georgios, welcome to Energy Evolution. Thank you very much for joining us today. Obviously, we've had some really big news for the shipping sector, but some of these regulations agreed by the IMO look like extremely complex, so I just wanted your views on that.

Georgios Kasimatis:

Thank you for having me here. I understand that this is a question that people wonder about. I guess we will go into the details of what we call the net-zero framework. We might as well start with discussing some of the basics of the new measures. We have, as you mentioned, the carbon intensity in the core of a combined technical measure, the GFI, as we call it, which is also linked with an economic measure. GFI stands for greenhouse gas intensity of the fuel. That's GFI for short. The GFI gives us a metric for evaluating the intensity of the carbon emission, the carbon footprint if you want, of the energy used on the ship. Of course, we can foresee that there will be some complexity with respect to operations, with respect to, let's say, administrative procedures and also the economic complexities around ensuring compliance with the net-zero framework requirements.

On the other hand, I can also say that the concept itself is fairly simple, perhaps the most straightforward to implement for governments. it is simpler for governments perhaps because it enforces penalties against failing to reach a certain performance, as opposed to imposing a tax on every ton of CO₂ produced. That would be the case for the other alternatives that many had anticipated. The LLevy as we call it, a flat levy mechanism. It also creates a more, how can I say, a more straightforward, a simpler perhaps, signal for investing into new fuels, zero or near zero-emission fuels, as we call them, the ZEFs.

These are all also things we must bear in mind when we think about complexities around the requirements. Of course, the picture gets more nuanced once we start looking into the details of implementation.

Max Lin:

How do you think a shipping company should comply with, because obviously, as you mentioned that there's a high level of complexity in both. There's different sets of greenhouse gas emission standard for marine fuels at any given year, and what's your suggestion for a shipping company?

Georgios Kasimatis:

Looking closer into the regulation, understanding which technology fits your compliance strategy best is important, and also bringing the competence of the company up to speed with more technical and operational needs. The administrative and commercial realities related to the GFI, securing enough fuel that is low emission or zero or near zero-emission technologies. All these things are important to have under control. Once this is under control, the GFI is designed to make it easier for ships to comply. There are two elements that have, let's say, the GFI requirement to do this. Namely, there is a two-tier compliance approach and also a built-in flexibility in the requirement itself.

Max Lin:

Yes, indeed. Especially, I think you just mentioned a keyword, it's two tiers. Obviously, a ship owner can have a very strong ambition, just go directly to zero-emission fuel. It can be have lower ambition, or you can have no ambition at all, and they pay a hefty fine. Do you think it's actually creating a quite interesting but also complicated fuel procurement environment because you can obviously aware that there are so many potential options there for ship owners?

Georgios Kasimatis:

The GFI has two tiers of compliance, and this is also something that is different from the fuel EU. Then the annual greenhouse gas intensity of the fuel used by the ship is required to meet a base target and a direct target. The direct compliance target is more stringent than the base one. We keep in mind that the higher the attained GFI, the worse it is for the ship. The base target is below the reference line of 2008, and the direct target is even lower. The lower the GFI, the better.

Now, all ships must meet with the direct target, the most stringent target, but there is a difference on how, let's say, the deficits are handled, depending on which tier the annual GFI of the ship lies in.

If the annual attained GFI is below the direct targets, then the ship over complies. Then, as you said, if we have access to low carbon fuels, then surplus units are generated, or as we call them, SU. If the annual GFI is above targets but below the base, then the ship has Tier One deficits and then we need to buy what we call remedial units or RUs. If the GFI of the ship is above base as well, then the ship has a compliance deficits in both tiers, and it has to buy remedial units for both Tier One and Tier Two or trade with surplus units, as we call them, from over-compliant ships. It's important to note that the Tier One and Tier Two remedial unit prices are different. Tier One is lower, it's about, or not about, it's at $100 per ton of CO₂ equivalent, while the RU for Tier Two is much higher, at $308 per ton of CO₂.

You see that then we have different compliance options, and of course for some, it might be easier to have access to low-carbon fuels, but for others it will be harder. If you have access to low-emission fuels and can go below direct, then you might as well go for it and trade it after, trade the over compliance as surplus units or bank those surplus units for using at the later point where the emission reduction requirement will be stricter.

Max Lin:

Thank you very much, Giorgios. It's great to have you with us.

Eklavya Gupte:

All right. That's going to do it for this episode. Please stay up to date by subscribing to Energy Evolution on Apple, Spotify, or whatever you prefer to listen in. If you have ideas for guests or topics, please email energyevolution@spglobal.com.

Now, before we sign off, I want to give a shout out to our other podcast team members that includes Taylor Kuykendall, Dan Testa, Camilla Naschert, Christopher Coats, and Karen Willenbrecht. Also, a huge shout out to our agency partner, the 199 and the Commodity Insights Digital Content Team. Thank you all for listening.