IMO 2028: How Much Biofuel Will Be Needed to Avoid Penalties?

Biofuel requirements to avoid penalties will rise rapidly in the years to 2035. Image Credit: Ship & Bunker

The IMO 2028 GHG policy framework initially approved earlier this month looks set to deliver a considerable boost to biofuel bunker demand in the short term as shipping firms seek to avoid penalties for excess emissions. 

Initial Ship & Bunker analysis shows ships would need to use between 17.6% and 23.3% biofuel in B100 terms to avoid penalty charges in 2028, depending on carbon intensity, moving up to 49.2-65.1% in 2035 as the requirements become tougher over time.

This article sets out how biofuel bunker demand may change over time because of the IMO's incentives, and how using biofuel for compliance will compare to paying penalties in terms of costs.

The Targets

The framework sets out the following targets for well-to-wake marine fuel carbon intensity for the years 2028 to 2035:

Fuels with emissions below the direct compliance target (DCT) generate surplus units that can be banked for up to two years or traded to help other ships meet the base target (BT).

Image Credit: Ship & Bunker

Emissions between DCT and BT will incur a penalty of $100/mtCO2e, while emissions above BT face a penalty of $380/mtCO2e or will require the transfer of surplus units from another ship.

Our Assumptions

For this analysis we compare two different B100 fuels, one with lower GHG emissions at 14.1 gCO2/MJ and another with higher emissions at 32.9 gCO2/MJ, and both with energy density of 37.5 MJ/kg. The variance in carbon intensity has a significant impact on the results of the calculations.

VLSFO is assumed to have carbon intensity of 91 gCO2/MJ and energy density of 42.7 MJ/kg.

Surplus unit generation is excluded from this analysis, because either BT or DCT is targeted, and thus average carbon intensity will never be below DCT. Potential rewards from the IMO fund for using fuels below 19 gCO2/MJ are similarly excluded.

The purchase of surplus units is also excluded for simplicity. These units should be available at a lower cost than IMO penalties, and thus their inclusion would make the costs for using VLSFO alone slightly lower. For more information, click here.

The IMO BT penalty is kept at $380/mtCO2e and the DCT penalty at $100/mtCO2e throughout the years 2028-2035 in this model. In reality, the charges are due to be revised after 2030 and are likely to be increased.

Costs or benefits incurred under the EU's emissions trading system or FuelEU Maritime regulation are excluded from this analysis.

For bunker prices for the purposes of cost analysis here, we take a rough current global average price of $526.50/mt for VLSFO and $1,200/mt for B100 and keep them flat for the years 2028-2035. In reality, biofuel prices are likely to rise steadily versus VLSFO in those years, and prices for lower-GHG biofuels and higher-GHG biofuels should also diverge as the former become more valuable for compliance purposes.

Calculating Biofuel Requirements

Taking into account the above numbers, here is the percentage of a 14.1 gCO2/MJ B100 that should be used - with the remainder taken up by VLSFO - for the years 2028-2035, to meet BT and to meet both BT and DCT:

Image Credit: Ship & Bunker

And here are the same figures for a 32.9 gCO2/MJ B100:

Image Credit: Ship & Bunker

Converting to metric tonnes and taking into account energy density, here is how many tonnes of each type of biofuel a ship would need to consume per mt of VLSFO consumed.

Firstly for the lower-GHG biofuel:

Image Credit: Ship & Bunker

And here for the higher-GHG biofuel:

Image Credit: Ship & Bunker

As can be seen from the tables, the biofuel requirements rise rapidly over the years, up to the point where a buyer may need to consume as much as 2.3 mt of B100 per tonne of VLSFO in 2035 to avoid penalties.

Biofuel Costs Versus Penalties

Ships using VLSFO alone will pay IMO penalties, while those using the percentages of B100 outlined above in their fuel mix will pay no penalties but will pay more for their fuel.

Here is how those costs compare, firstly for a lower-GHG B100:

Image Credit: Ship & Bunker

And here for a higher-GHG B100:

Image Credit: Ship & Bunker

As can be seen from the tables, at current prices both types of B100 appear cheaper as a means of meeting the base target than paying IMO penalties for VLSFO consumption for every year.

But for meeting both the base and direct compliance targets, the higher-GHG B100 is consistently more expensive than the penalties, while the lower-GHG B100 only becomes cheaper than the penalties from 2033 onwards.

How this dynamic plays out will be a key element in both the implementation of the IMO framework and the development of the biofuel bunker market in the coming years.

To provide feedback on our models or suggest other aspects of the IMO 2028 deal to analyse, email jack@shipandbunker.com.