Navigating IMO Net-Zero Framework: Potential Challenges and Refinements

12 August 2025

 

Highlights:

  • The IMO Net-Zero Framework is a significant step toward maritime decarbonization but raises concerns about incentive adequacy, cost gap closure, and long-term sustainability.
  • Analysis shows potential under-utilization of surplus units (SUs) under the current system, which may weaken financial signals for investing in zero and near-zero emission (ZNZ) fuels.
  • Refinements such as Reverse Compliance Trading (reversing SU trading flexibility from Tier-2 to Tier-1) or Differentiated Deficit Balancing (using uniform RU pricing but requiring multiple SUs or RUs to balance each Tier-2 deficit) can improve SU utilization, increase investment certainty, and strengthen decarbonization incentives.
  • The ability to maintain sufficient and predictable revenue flows to the IMO Net-Zero Fund is crucial for funding ZNZ rewards and just transition measures, especially under varying fleet compliance strategies.
  • A more flexible and targeted compliance structure can help avoid over-subsidization of transitional fuels (e.g., biofuels) and ensure robust, equitable support for long-term, sustainable shipping decarbonization.

 

This working paper critically assesses the recently approved IMO Net-Zero Framework, which sets out both Base and Direct Compliance (Strive) greenhouse gas intensity (GFI) targets for international shipping from 2028 onwards. While the framework represents an important milestone in the sector’s decarbonization journey, there remain substantial questions about its effectiveness in closing the cost gap between conventional fuels and zero and near-zero emission (ZNZ) alternatives, as well as its ability to provide predictable incentives and secure sufficient revenue to fund a just transition.

The analysis draws on a range of future fuel transition scenarios published by DNV and Lloyd’s Register, covering both conservative and ambitious pathways. It highlights several structural challenges in the current mechanism, such as the risk of surplus compliance units (SUs) under-utilization that introduces uncertainty for shipowners investing in cleaner fuels, and the potential over-subsidization of biofuels. In practice, these issues may reduce the mechanism’s effectiveness in stimulating early and deep decarbonization, slow industry investment in greener technologies, and threaten the financial sustainability of the Net-Zero Fund. Scenario modelling demonstrates that, without careful calibration, the current framework could inadvertently lock in less sustainable fuels or limit the sector’s ability to exceed even the minimum (Base) compliance targets.

To address these challenges, the paper proposes two targeted refinements to the compliance structure. First, introducing Reverse Compliance Trading—where Tier-1 deficits can be met with SUs, complemented by SU buyback option—would help ensure SUs are fully utilized, providing shipowners with greater certainty and value for investing in over-compliance. Second, Differentiated Deficit Balancing, where Tier-2 compliance requires multiple SUs or RUs per deficit unit but at a uniform RU price across both tiers, could improve SU utilization, minimize over-subsidization, and deliver more predictable revenue flows. Together, these refinements aim to create a more robust, equitable, and flexible regulatory environment—one that aligns industry incentives with long-term decarbonization goals and supports a smoother, more confident transition to sustainable shipping.

For a more in-depth understanding, you can access the working paper here.

 

Authors:

Iman JAFARI, Irfan SOUDAGAR, Szu Hui NG  
   

 

 

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