IMO 2028: How Much Is it Going to Cost?

The IMO 2028 deal approved last week makes shipping the first international industry to have a framework for how to charge it for its GHG emissions. 

Initial estimates compiled by Ship & Bunker indicate the shipping industry can expect to pay about $76/mt extra in IMO 2028 compliance costs for every tonne of VLSFO consumed in 2028, moving up to $653/mt by 2035.

The framework is more complex than previous regulations covering ships' emissions, and less ambitious than some had hoped. 

It takes a tiered approach, charging one levy for emissions above a 'base target' and another for those above a 'direct compliance target'. The targets have been set out in terms of grams of CO2 emissions per megajoule of energy consumption (gCO2/MJ).

Carbon accounting expressed in these terms will for now be an unfamiliar prospect for many. For most in the shipping and bunker industries, the question will be how much the regulation will add per tonne of fuel consumed.

This article sets out how that calculation can be made, and what the compliance cost may look like for every year between 2028 and 2035.

How the Deal Works

The framework sets a 'base target' and 'direct compliance target' for well-to-wake carbon intensity reductions, with varying penalties for not meeting these targets, and the targets are made progressively tougher every year from 2028.

In 2028, for every megajoule (MJ) of fuel consumption, the first 77.44 grams of CO2 equivalent emissions will not be charged for. The next 12.13 g (up to 89.57 gCO2/MJ) will face a levy of $100/mtCO2e, and any emissions beyond 89.57 gCO2/MJ will be levied at $380/mtCO2e.

The $100/mtCO2e and $380/mtCO2e charges will apply from 2028 to 2030, after which they will be revised.

This amounts to a 4% reduction in carbon intensity from the reference level for the base target in 2028, and 17% for the direct compliance target, with these numbers increasing steadily as the years go by.

Overcompliance - consuming fuel with carbon intensity below 77.4 gCO2/MJ in 2028 - will generate 'surplus units' that can be banked for up to two years or traded.

Funds raised for the charges on emissions above target will ultimately be used to subsidise those using zero- or near-zero carbon fuels, deemed to be those with carbon intensity below 19 gCO2/MJ in the years up to 2035 and below 14 gCO2/MJ after that.

Complicating Factors

The regulation is complex, and many factors have yet to be decided.

Most importantly, the IMO has yet to determine what it will set as the default carbon intensity values for the various fuel grades. Rough estimates can be made based on current figures used in the market, but any difference to what the IMO chooses to set as default values will result in different costs.

The IMO deal will allow for the use of shore power, wind and solar power or propulsion systems and carbon capture systems to reduce a ship's bill for its emissions. Details on how this will work are thin on the ground thus far, and the use of these systems is excluded from this analysis.

The $100/mtCO2e and $380/mtCO2e charges have been set for the years 2028 to 2030, and will be revised after that. For the purposes of this analysis we have assumed that they will remain at those levels up to 2035, but in reality they may well be revised upwards.

Beyond all of that, the biggest complicating factor is that this deal has yet to be formally adopted by the IMO. That challenge will come up at an extraordinary meeting of the MEPC in October, and for a politically contentious measure like this one, it's not impossible that changes to the framework may emerge in order for it to pass a vote.

Calculating Costs Per Tonne of VLSFO Consumed

The deal sets the following carbon intensity targets for the years 2028 to 2035:

Image Credit: Ship & Bunker

VLSFO typically comes with well-to-wake emissions of about 91 gCO2/MJ, and energy density of about 42.7 MJ/kg. The IMO may set different default values in time, as set out above, but these figures can be used for rough estimates for now.

Using those figures, here are the extra costs for IMO 2028 compliance per tonne of VLSFO consumed:

Image Credit: Ship & Bunker

Ship & Bunker's G20-VLSFO Index of VLSFO prices at 20 key bunkering locations has averaged at $604.50/mt over the year to April 11.

Leaving that average price static, here's how much consuming one tonne of VLSFO might cost in the coming years including IMO 2028 compliance (but excluding the EU-ETS and other regulations):

Image Credit: Ship & Bunker

As can be seen from the tables, the cost of the regulation is relatively modest at first. 

Consuming one tonne of VLSFO in 2028 will cost a shipping company about $76/mt in 2028, or about 12.6 % over the fuel price based on the recent average VLSFO price. For comparison, compliance with the EU's emissions trading system on a voyage between the EU and elsewhere will cost about $116/mt in 2028, based on EUA prices over the past 12 months. 

But with the extra IMO 2028 cost ramping up to about $653/mt by 2035, or 108% of the fuel price, this should provide a firmer incentive to shift into using lower-carbon fuels.