INSIGHT: How Will The EU React to the IMO Net-Zero Framework?

The shipping industry should not necessarily expect a rapid shift in policy from the EU once the IMO adopts its net-zero framework. File Image / Pixabay

The International Maritime Organization (IMO) is set to adopt its Net Zero Framework (NZF) for the decarbonisation of the shipping industry at this week's emergency meeting of the Marine Environment Protection Committee (MEPC).

The MEPC approved this NZF in April this year. If approval is achieved this week, then the necessary implementation details will be drafted and agreed over the next two to three years, with the first reporting year under the NZF being 2028.

The challenges of implementation are substantial.

The document setting out the NZF is not a complete regulatory text; it is a framework. The IMO Secretariat has identified over twenty different work streams where guidance, guidelines, or amendments to existing regulations are needed to implement the NZF.

These details apply to the most critical elements of NZF, such as the pricing mechanism or the Net-
Zero Fund, and the possible rewards for the use of zero-to-near-zero emissions fuels, all of which are to be developed and approved by late 2026.

Work on developing the framework has been ongoing since April and will continue in Inter-Sessional Working Groups at the IMO from next week. But a big question about the implementation of the IMO NZF is: what is the EU going to do?

The IMO's Framework will overlap with the EU's Emissions Trading System (EU-ETS).

From January 2024, the EU-ETS has applied to maritime carbon emissions, with 2025 being the first year of payments into the system. The EU-ETS applies to 100% of emissions for voyages between EU ports and 50% of the emissions for voyages that start or end in the EU.

IMO Secretary-General Arsenio Domínguez and a wide range of IMO member states and other stakeholders have warned that shipping needs a single global framework.

Different regional or national regimes will lead to fragmentation in decarbonisation efforts and increase costs for the maritime industry, which will ultimately be passed on to consumers. The solution, according to many, is for the EU to adapt its maritime fuel policies to the IMO's or somehow merge the EU ETS into the IMO NZF.

Further, many stakeholders say this needs to be done quickly to minimise reporting burdens.

However, reforming EU law is not a quick process, as it must be carried out in line with the EU's political and legal processes. Many of the calls for quick action seem to overlook this, expecting the EU to change things right away or assuming it is easy for the EU to give the IMO system precedence.

Neither is an accurate way of looking at how matters are likely to proceed.

Both the EU-ETS (Article 3ggg) and FuelEU Maritime (Article 30) have triggers for when the IMO adopts the NZF. Once the measures are adopted, the Commission is required, within 18 months, to "present a report to the European Parliament and to the Council".

This report needs to examine how the IMO system contributes to the objectives of the Paris Agreement; assess the "overall environmental integrity" of the measures; and examine the coherence of the two systems.

Likely, the EU is already working on this, and a report can be completed in under 18 months. That is just the start.

If the report contains proposals to remove maritime from the EU ETS, that would be a significant step requiring changes to existing legislation.

That means the Commission will need to engage the Council and Parliament in drawing up the proposals for reform, have a public consultation, and then go through the legislative process with the Council and the Parliament.

The EU statement this week, issued by the Directorate-General for Mobility and Transport, only reiterates that the EU will be reviewing the situation; that is all for now.

In an interview earlier this year, Magda Kopczyńska, Director-General for Mobility and Transport at the European Commission, made clear that if the IMO adopts the NZF this October, the EU will only be considering what to do next, as the EU's legal obligations only extend to "looking into the matter".

Kopczyńska explained that the EU will need to see what the entirety of the NZF looks like, which includes the twenty-plus guidelines and guidance to be adopted by the IMO over the next two years. She also made clear that the EU will want to see the IMO system in practice, in particular, how compliance and enforcement work out.

As the EU-ETS is viewed as a cornerstone of the EU's climate ambitions, it is difficult to see the Commission accepting that another organisation has created a more effective system for decarbonising a hard-to-abate industry without extensive evidence from practice.

Plus, there will also be resistance from Member States about limiting the intake of funds under the EU-ETS, as EU-ETS funds are shared among all Member States, not just maritime states, and can be used for climate action more broadly.

Funds from the IMO NZF are for support in areas specific to shipping.

Hopefully, the NZF will be adopted this week. But that only creates an initial hurdle for the EU to determine - when will the IMO's Framework be a completed piece of regulation?

On the IMO's workplan for the NZF, all the guidelines should be adopted by the end of 2026, the NZF will enter into force on 1 March 2027, with the first year of reporting and fund collection being 2028.

During 2028, matters such as finalising certification systems and the appointment of the governing board for the Net-Zero Fund will occur. If all that goes to plan, 2029 could be the first year of disbursements from the framework; this is yet to be decided.

Ensuring the NZF is working may not be completely clear after two years of operations.

The EU requires three years of implementation data before a review can be carried out of its own legislation. That means the maritime dimension of ETS may be subject to a review in 2027, and there is a review of FuelEU Maritime scheduled for December 2027.

These will provide the European Commission with the opportunity to outline its views on how the EU and IMO systems can be aligned. But again, this is just the start of the process, the EU will not just change its ETS system following IMO adoption of the NZF this week.

In the meantime, shipowners are going to have to get used to the idea of multiple regulatory and reporting systems. The UK and China are both moving forward on their versions of emissions trading systems applicable to shipping.

The EU can consider discounts, rebates, or other financial measures to minimise the impact on shipping from the different regulatory systems, but again, these will take time to develop.

The procedural and political complexities of the EU mean that it will not quickly align with the IMO's global Framework without question. The EU supports the IMO NZF, but it has its own demanding legislative requirements and a strong desire to retain regulatory control.

The EU will, as it has said, review its existing regulations, but this will take time.

Shipowners and consumers should expect, at least, a few years of overlapping regulations, as meaningful alignment is unlikely in the near future.