Following on from our original report on the IMO’s Net Zero Framework, this short study looks at the implications of the interaction between the IMO’s proposed framework and current EU regulations (FuelEU Maritime and the EU ETS). Across four scenarios, which assess partial and full exposure to the EU’s policies, TCO analysis is used to explore the relative cost burden of additive EU measures for ships operating under both regulatory environments.
Increasing exposure to the EU has two primary outcomes:
- FuelEU Maritime’s high penalty fee means the aggregate cost of non-compliance with both the IMO and EU’s fuel standard ratchets up quickly.
- The EU ETS adds to the cost of shipping, but it also widens the spread in TCOs depending on:
a. Whether the lowest TCO utilises minimum volumes of low emission fuel (e.g. to comply with FuelEU Maritime’s fuel standard or the IMO’s Base target) or maximum volumes (which can result in SU credits being generated). Minimum volumes of low emission fuel result in higher EU ETS costs and this is sometimes sufficient to make maximum fuel use the lowest TCO when the higher fuel costs is offset by lower EU ETS costs and SU revenues.
b. The tank-to-wake emissions intensity of the fuel. The lowest TCO for the dual fuel ammonia ship is to use maximum volumes of blue ammonia to generate SU revenues and the low tank-to-wake emissions intensity of ammonia gives it an advantage over LNG.
Lowest TCO for each ship type with no ZNZ rewards applied
The report then derives the ZNZ rewards that would be required to bridge the TCO gap for bio-MGO, bio-LNG and e-ammonia across all four scenarios. With FuelEU Maritime penalties incorporated, no reward is needed by bio-MGO to match the non-compliance option, even with only 35% exposure to the EU. For bio-LNG and e-ammonia, the rewards that bridge the TCO gaps to LNG fall as exposure to the EU rises as the EU ETS increases the LNG TCO. However, the reward to bridge the TCO gap between blue ammonia and e-ammonia remains constant across all four scenarios as the tank-to-wake emissions intensity is the same for all types of ammonia and, therefore, so is the EU ETS cost.
Derived ZNZ rewards that bridge the TCO gap between ZNZ and reference fuels
This suggests that entities operating in the EU will be a key source of demand for ZNZ rewards (if delivered under a fixed mechanism) or be in a position to outbid those operating elsewhere (if delivered under a competitive mechanism such as an auction). However, when applied in conjunction with exposure to the EU ETS, ZNZ rewards are more likely to trigger scenarios where the lowest cost TCO is based on maximum use of the ZNZ fuel. This means that the EU ETS could incentivise a disproportionate drawdown (relative to total fuel consumption) of ZNZ rewards.
The EU is reviewing alignment with IMO policies, but it is the EU ETS which will largely influence the business case for rewarded ZNZ use. If that remains in place, the IMO may need to contend with the optics of globally collected revenues disproportionately flowing into the EU, unless the IMO restricts access to ZNZ rewards in some way. On the other hand, by allowing the EU ETS to effectively subsidise those rewards, the IMO would get more ‘bang for its buck’, rewarding a greater volume of ZNZ fuel overall.
Link to the report: Assessing the Combined Impact of IMO NZF and EU maritime regulations