New Study Shows that Only Targeted Subsidy for e-Fuels Coupled with a GHG Levy Would Ensure e-Fuel Early Adoption

January 31, 2025

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(UMAS) A high GHG price in combination with targeted e-fuel subsidies are the key policy components that can close the competitiveness gap between scalable zero emission fuels (e.g. e-fuels such as green ammonia) and other early compliance options such as LNG, biofuels and CCS.

A new report from UCL Energy Institute Shipping and Oceans Research Group and UMAS reveals significant risk in some of the options the International Maritime Organization (IMO) is considering, for enabling shipping's energy transition. The analysis comes at a crucial time as the IMO prepares for key negotiations in February and April 2025 to finalise the mid-term measures for reducing GHG emissions.

The study finds that a fuel standard (the GFS - Global Fuel Standard) in combination with a flexibility mechanism, even with a multiplier that ‘boosts’ the credit given to e-fuels, is unlikely to start an e-fuel transition before 2040. Only policies with targeted incentives for e-fuels, such as a subsidy/reward which can be derived from the revenues generated by a GHG price or levy, can effectively bridge the gap between e-fuels and low-cost early compliance options, such as LNG, biofuels, Carbon Capture and Storage (CCS), to promote shipping's energy transition in the critical 2027-2035 period. Without such measures, the industry risks becoming locked into alternatives that could make long-term decarbonisation goals more difficult and expensive to achieve. This finding is consistent with work done last year by DNV for the IMO in its Comprehensive Impact Assessment, which identified the lowest cost energy transition occurred in the scenario with a combination of a GFS and a high universal GHG price (levy).

Analysis shows that GHG pricing starting at $150 per tonne of CO2e, could generate sufficient revenue to support both the energy transition and ensure a just and equitable transition for affected communities. GHG pricing starting at $30 per tonne of CO2e, look unlikely to provide certainty of support to enable the energy transition to start and scale through the 2027-2035 period, and certainly would be unable to additionally support a just and equitable transition.

Dr Tristan Smith, Professor of Energy and Transport at the UCL Energy Institute, said: “The IMO’s fuel standard is critical for the longer-term certainty of demand, and longer-run investment. But under this policy alone, this new analysis shows that the market will struggle to make an e-fuel business case before 2040, and therefore e-fuels such as green ammonia will not be available for shipping’s use in any volume. Some suggest that the role of a GHG levy is only for addressing equity, this study shows that it is not the only role, it is also a critical enabler of shipping’s energy transition and for minimising the long-run costs to trade.”

This study’s analysis directly relates to the viability and costliness of IMO’s Revised Strategy targets. With such little time for an energy transition, unless the policy is able to immediately start the transition to e-fuels, the sector can easily lock into a vicious cycle – lack of clear business case will undermine investment and prevent learning, cost reduction, supply chain development and e-fuels will remain scarce and expensive, depriving the sector of sight of its transition pathway. Conversely a clear signal from the IMO’s mid-term measures can unlock long-run investment, stabilise returns and asset values, and unlock myriad co-benefits, including in the context of a just and equitable transition.

Deniz Aymer, Senior Consultant at UMAS, said: “TCO modelling is a powerful tool for assessing the implications of different policy scenarios on technology and fuel choice under a compliance regime at the ship level. It can assist in testing investment decisions and optimal fuel strategies in the face of huge uncertainty over the future price and availability of alternative fuels and the efficacy of technologies. From this study, several clear themes emerge. Scenario modelling is highly sensitive to input assumptions - particularly future spreads in the abatement costs of alternative fuels. However, the required stringency of the global fuel standard implies that whatever mid-term measures are introduced, the early low-cost routes to compliance could become uncompetitive within a decade. The analysis also makes clear that while a global fuel standard will oblige incremental decarbonisation towards the IMO’s net zero goals, early action taken in parallel to support e-fuels is needed to ensure that the latter half of shipping’s energy transition is less painful.”

Using the total cost of ownership (TCO) approach, this study models a 14,000 TEU container vessel with different technology and fuel options to evaluate the effects of policy combinations (including a GHG Fuel Intensity (GFI) requirement, flexibility mechanism, and a levy and subsidy/reward mechanism) currently under discussion at the IMO. It builds on previous modelling by DNV for the IMO's Comprehensive Impact Assessment but incorporates more conservative estimates for bioenergy costs and CCS capture rate.

The TCO analysis illustrates how fuel prices and technology cost and performance determine optimal outcomes in response to different policy scenarios and how adjustments to those assumptions can drive materially different outputs to the results presented in the IMO’s Comprehensive Impact Analysis. Changes to the most competitive technology and fuel combinations can then fundamentally shift the expected energy mix. Adjusting the biofuel costs and CCS capture rate in line with recent studies produces significantly different outcomes in all scenarios relative to those derived by DNV, shortening and reducing the viability of these two options (albeit with them still providing compliance at competitive costs early in the transition). Ammonia (blue and then e-ammonia) becomes the most cost-effective fuel/technology choice from the mid-2030’s. Across the wider range of fuel types, e-fuels have the least cost of compliance through the 2040s, i.e. they are the key for minimising the long-run cost of operation.

Link to full report: https://www.u-mas.co.uk/wp-content/uploads/2025/01/How-IMO-mid-term-measures-might-shape-shippings-energy-transition-final.pdf

About UCL Energy Institute
The UCL Energy Institute hosts a world leading research group which aims to accelerate the transition to an equitable and sustainable energy and trade system within the context of the ocean. The research group’s multi-disciplinary work on the shipping and ocean system leverages advanced data analytics, cutting-edge modelling, and rigorous research methods, providing crucial insights for decision-makers in both policy and industry. The group focuses on three core areas: analysing big data to understand drivers of historical emissions and wider environmental impacts, developing models and frameworks to explore energy and trade transition to a zero emissions future, and conducting social science research to examine the policy and commercial structures that enable the decarbonisation of the shipping sector. For more information visit www.shippingandoceans.com

About UMAS
UMAS is an independent commercial consultancy dedicated to catalysing the decarbonisation of the shipping industry. With our deep industry expertise, exceptional analytical capabilities and state-of-the-art proprietary models, we support our clients in navigating the complexities of this transition by providing groundbreaking data, analyses and insights. Internationally recognised for our work, UMAS delivers bespoke consultancy services for a wide range of clients including regulators, governments, NGOs and corporates. For more information visit www.umas.co.uk

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Report: Targeted Subsidies, Hefty GHG Levy Needed to Ensure E-Fuel Adoption (Maritime Executive)
New TCO analysis finds that only targeted subsidy for e-fuels coupled with a GHG levy would ensure e-fuel early adoption (Green Car Congress)
Shipping industry calls for global GHG fee in new proposal (Offshore Energy)
MEPC 81: Lion’s share of countries throw support behind global GHG price for shipping (Offshore Energy)

Excerpt from Offshore Energy:

As informed, 34 countries, both developing and developed states from across the Pacific, the Caribbean, Africa, Europe and North America, expressed support in the meetings for a universal GHG price, e.g. a levy as a separate measure.

The Caribbean Island states, many of which spoke at IMO for the first time, helped to secure this majority.

On the other hand, fourteen countries continued to favor a weaker mechanism as part of other measures, as opposed to a separate, universal GHG levy.

This represents a huge increase in the number of supporters of a GHG levy since the last round of talks in 2023, while the opposing/less ambitious group remains roughly stable.

As a result, the IMO for the first time has agreed a draft outline of the legislative framework for an economic measure (GHG pricing) and a global fuel standard (GFS) that mandates a growing share of green energy used in ships, both via an amendment to the MARPOL treaty.

Two Caribbean Islands delegates to the IMO commented on the outcome of MEPC 81:

“Belize is a climate-friendly country that stands upon a firm commitment to protect 30% of its ocean spaces. No one can, therefore, question the sincerity of our decarbonization efforts at the IMO. Whereas we are delighted that the IMO adopted a revised GHG strategy last year, we continue to caution that a goal-based fuel standard alone will not be sufficient to achieve the ambitions of the 2023 GHG Strategy. Belize, therefore, supports, in addition to a GFS, a universal levy of $150/tonne of CO2e with a ratchet clause that would disincentive the continued use of fossil fuels and helps incentivize an early and rapid transition to zero/near zero emission fuels,” Major Lloyd Jones, Chairman of the Belize Port Authority and Head of Delegation for Belize, commented.

“We were delighted to have been joined by a substantial number of CARICOM member states at ISWG16/MEPC81 and we are humbled that they allowed Belize to coordinate our joint efforts. We have collectively agreed to remain engaged with the processes at IMO to ensure that a basket of measures is adopted, in good time, that truly provides for a just and equitable transition. That means that Caribbean perspectives must not just be heard but must be taken into full account.”

“The Caribbean Team also agreed to continue the work intersessionally to encourage attendance by all CARICOM member states and to develop strategies to strengthen our position, including coordinating with other SIDs and LDCs. Decarbonization of shipping is, first and foremost, about climate change. We can’t afford to let the world forget that!”

“The Grenada delegation’s presence at the MEPC-81/GHG negotiations is a testament to our leadership ambitions for our region and our profound dedication to protecting “Our Ocean” and our economic future. Our engagement underscores the critical urgency required to confront the distinctive challenges our region and other Small Island Developing States (SIDS) face due to climate change and various environmental threats. Through our advocacy, we aim to champion sustainable maritime practices that resonate with our overarching vision for a resilient and thriving Caribbean,” Jerry Enoe, Advisor, Blue Economy for the Government of Grenada, said.

” … We strongly advocate for the implementation of a universal levy of $150.00 USD per tonne of CO2 equivalent emissions, as proposed in Belize’s submission. We see this approach as the best way forward in the IMO GHG strategy to incentivize the shipping industry to reduce its GHG emissions. It would also generate the necessary revenue for the industry and all countries to transition to net-zero GHG emissions and address the consequences of climate change, to which the shipping industry has significantly contributed over the years.”

Clean Shipping Coalition: Support for pricing greenhouse gas emissions from shipping grows but important pieces of puzzle still missing

The Clean Shipping Coalition has welcomed the growing support for a GHG emissions levy but warned that IMO member states must also maintain focus on other key issues.

According to the coalition, issues such as the GFS and the improvement of how energy is used in ships via the carbon intensity indicator (CII) should also be the center of attention of the IMO member states.

“MEPC81 reaffirmed to us that countries clearly back a GHG emissions levy rather than weaker alternatives, which sends a strong signal for further developing the policy,” said Clean Shipping Coalition President John Maggs.

“However the IMO must not lose sight of the other, equally important measures, namely agreeing on a clean energy standard (GFS) and improving the energy efficiency of ships through the Carbon Intensity Indicator (CII). On the latter in particular, I was delighted to see IMO member states this week firmly reject the shipping industry’s attempt to downgrade the CII rules. This is a good omen not just for the CII’s big moment at MEPC 82 this October, but the whole discussion on measures to deliver the 2023 GHG Strategy emissions reduction goals.”

“The UN is on the edge of adopting the world’s first-ever global emissions price, but the policy will only be as successful as countries make it to be”, Sandra Chiri, Shipping Manager, Ocean Conservancy, pointed out.

“The March talks at the IMO gave us hope that a clear majority of countries—the Caribbean, the Pacific, Africa, but also the EU and Canada—understand the huge opportunity of pricing shipping emissions for the industry’s clean transition and for making sure this transition benefits all developing countries.”

“It’s regrettable that a small but persistent minority strives to water down this vital climate measure, with a proposal of their own that we know is not ambitious enough. As the IMO negotiations move forward, I hope to see countries engage constructively in designing the future GHG price in a way that protects our oceans, livelihoods and the planet,” she added.

“The IMO agreed last year that some form of emission pricing is necessary to meet shipping’s climate commitments, and during these last two weeks we were pleased to see an overwhelming majority of countries backing a fully-fledged Greenhouse Gas emission price – i.e. a levy, with the Caribbean Island states in particular putting a new wind in the sails of this key climate policy,” Anaïs Rios, Shipping Policy Officer, Seas At Risk, noted.

“The Pacific Islands and Belize proposal for a levy of $150/tonne of GHG emissions is the most mature and ambitious proposal on the table, and we urge governments to work constructively over the summer ensuring it prioritises equity and fosters a just transition for all involved.”

“The IMO negotiations this week achieved a near consensus to move ahead with a global fuel law that will create demand for green fuels,” said Faig Abbasov, Shipping Director, Transport & Environment.

“However, the success of the fuel standard rides on proper accounting of emissions across the supply chain. Negotiators must take lifecycle emissions into account so that the likes of grey hydrogen, LNG and biofuels do not simply lead to one bad fuel replacing another. And a green fuels standard alone is not enough. Carbon pricing will ensure that polluters pay, while efficiency standards can ensure that ships start getting cleaner today, not just in 2050.” READ MORE