The Z-factor, a key element in maritime decarbonization, determines the penalty for ships failing to meet emission reduction targets. It needs to be set at a level that incentivizes sustainable practices without hindering progress. Models like NavigaTE can help assess the effectiveness of Z-factors in achieving the IMO’s GHG Strategy, reports Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping.
Decarbonization Goals
The Global Market-Based Measure (GMBM) within the International Maritime Organization (IMO) focuses on reducing a ship’s emissions intensity rather than its total annual emissions. This means that determining the appropriate Z-factors (a key element of the GMBM) to achieve the desired absolute emissions reductions outlined in the IMO’s GHG Strategy depends on the future growth of global shipping activity.
The Fourth IMO GHG Study projects an overall increase in global maritime trade, although some sectors may experience a decline (e.g., dry bulk carriers for coal). This growth necessitates more stringent GFI requirements than those solely aimed at absolute emissions reductions to account for the expanding shipping industry.
The base Z-factors, as proposed in the Comprehensive Impact Assessment report by DNV, appear to be a suitable starting point for aligning the GMBM with the IMO’s GHG Strategy. These base Z-factors align with the less ambitious indicative checkpoints in the Strategy and are also the foundation of the Z-factor proposals put forward by the EU and Japan in the IMO-GHG 17/2/2 document. In contrast, the other proposals considered in this analysis do not explicitly specify Z-factors.
Various Versions
To assess the effectiveness of the base Z-factors in achieving the IMO GHG Strategy’s indicative checkpoints, the NavigaTE model was used. A scenario within NavigaTE that assumes ample availability of sustainable fuels, allowing us to isolate the impact of the Global Market-Based Measure (GMBM) on shipping emissions, independent of fuel supply constraints was used. In this analysis, the Reference Unit (RU) value is set at 450 USD/tCO2eq.
Three variations of the GMBM based on existing Member State proposals were evaluated:
- GFS with Flexibility and Adjusted TTW: This proposal features a Global Fuel Standard (GFS) with the flexibility to trade surplus units. The emissions scope is tank-to-wake (TTW), adjusted using well-to-wake (WTW) scaling factors.
- GFS with Flexibility, Levy/Reward, and WTW: This proposal includes a GFS with flexibility, a levy with a reward mechanism, and a WTW emissions scope. We assumed a levy contribution of 100 USD/tCO2eq and a reward scheme that applies only to e-fuels, starting at 400 USD/tCO2eq abated and declining to 200 USD/tCO2eq abated by 2040.
- GFS with No Flexibility, Levy, and WTW: This proposal features a GFS without the ability to trade surplus units, includes a levy, and adopts a WTW emissions scope. We assumed a levy contribution of 150 USD/tCO2eq.
Striking Balance
Unlike a levy, the primary goal of a Global Fuel Standard (GFS) is not to impose costs for greenhouse gas (GHG) emissions, but rather to incentivize a transition to sustainable energy sources within the shipping sector. However, if the Z-factors (which determine the amount of emissions reductions required) are set excessively high, exceeding the global fleet’s capacity to adopt sustainable alternatives, the GFS will likely result in significant Reference Unit (RU) payments with minimal actual emissions reductions. This potential outcome necessitates careful consideration during the design of the Market-Based Measure (MBM).
Unrealistic targets that fail to drive a practical transition to sustainable energy, while simultaneously imposing substantial costs on the shipping industry, could lead to regulatory rollbacks. Such rollbacks would erode stakeholder confidence in the long-term viability of the measures, ultimately hindering decarbonization efforts.
History provides examples of this risk. The US Renewable Fuel Standard, with its ambitious biofuel blending targets, encountered challenges due to slow production of advanced biofuels, ultimately necessitating adjustments to the mandates. Similarly, the UK revised its initial ban on the sale of new petrol and diesel cars due to infrastructure and market challenges.
In the shipping context, setting Z-factors beyond practical feasibility carries a similar risk of rollbacks. Overly ambitious targets may encounter significant obstacles, including the need to upskill the workforce, adapt port infrastructure, compete with other sectors for limited sustainable fuels and feedstocks, and address constraints in shipyard capacity for newbuilds and retrofits.
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Source: Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping
