Ricardo Sustainability, Clean Energy and Environment

IMO policy progress in April 2025 to influence vessel strategic fuel choices

26 Mar 2025

The maritime industry is at a critical juncture with clarity expected from the international regulator that will influence long-term energy transition decision-making. Ricardo’s total cost of ownership modelling can assist vessel owners with their strategic fuel choices.

Within the EU, there is already environmental legislation in place to provide long-term incentives for the maritime sector to switch fuels. That comes in the form of the EU Emissions Trading System (EU ETS) and the FuelEU Maritime Regulation.

The former puts a price on total GHG emissions, so therefore incentivises all efforts by vessel owners and operators to reduce GHG emissions, including using less energy (via energy efficiency measures, operational efficiency gains), cleaning up emissions, and switching energy sources. Clearly, the higher the price of emitting, the more commercial business cases stack up for making investments. To date, with the EUA allowances mostly and recently trading in the range €60-90/tonne, this isn’t leading yet to the significant changes needed for mass-market switching to zero-GHG fuels.

The latter FuelEU places incentives more specifically on switches of energy sources, through legislating the metric of GHG intensity of energy used on board. This more targeted legislation is helpfully complemented by an additional ‘first-mover incentive’ to use renewable fuels of non-biological origin (RFNBOs, or often referred to as electrofuels) before 2034. The trouble is, again, the stringency of FuelEU isn’t enough to be pushing for significant switches to zero-GHG fuels.

But FuelEU does come close to providing enough of an incentive.

The penalties for negative compliance balances increase significantly into the 2040s. When the maths are done on the additional legislative costs if conventional fuels continue to be used, then – assuming bunker prices remain at today’s levels (a big assumption!) and EU ETS prices remain at today’s levels (again!), then the cumulative fuel costs until 2050 for operations within EU ETS and FuelEU scope rise ~2.6 times after adding in EU ETS costs (adds nearly 50%) and FuelEU penalties (adds ~110% costs) to bunker costs.

One of the reasons this still isn’t proving to be enough of an incentive is because the policy scope affects EU shipping and only half of movements coming to EU ports from outside the EU. For an international sector, that is not a level playing field.

But even more importantly, the EU legislation isn’t leading to the changes needed yet because:

it’s not stringent in the short-term: the increments in stringency today and in the near-term of the 2030s are only small – there are many years until the policy “bites”.
it doesn’t reach net zero in the long-term: the end objective of FuelEU (-80% by 2050) is not as stringent as getting the sector to net zero
there are many permutations to comply: there are many ways to comply with FuelEU from a regulatory perspective (banking, borrowing, pooling internally, pooling externally), let alone the potential choices among sustainable fuel options that can lead to paralysis in decision-making
sustainable fuel supply is nascent: the need to change from a fuel procurement process of buying conventional fuels on the spot market to needing to secure long-term offtake agreements in advance, is commercially very difficult.
Uncertainty about future fuel availability, GHG intensity and prices adds risk to commercial decision-making.

This is why, as an industry, we are looking forward to hearing agreement at MEPC83 when it convenes at the IMO in early April on its more ambitious policy measures to tackle GHG from shipping. The industry needs more clarity to inform its investment decisions – both from a fuel supply perspective as well as from a vessel owner perspective.

The IMO is on the cusp of agreeing:

a more stringent, and globally applicable, version of the EU’s FuelEU Maritime, in the form of a global GHG Fuel Standard (GFS).
an economic measure that puts enough of a price on emissions to generate a sufficiently large fund that can support the energy transition for certain countries or early adopters.

The expectation (and hope!) is that these technical and economic measures together provide the incentive needed to a) reach net zero by 2050, and b) do so fast enough that the transition doesn’t encourage short-term investments that lead to overall higher costs of transition or lock-in technologies incompatible with a pathway to net zero by 2050 – i.e. encourage the pathway for using zero GHG fuels. By agreeing these measures internationally, it will provide the global level playing field that the EU legislation could not ever achieve.

This will provide additional clarity for vessel owners & operators’ commercial decisions for their fleets: when to retrofit; when to newbuild; when to secure offtake agreements; whether to lead by example through e.g. green shipping corridors.

But it’s not a panacea. The IMO’s legislative progress will still leave an environment where strategic decision-making is hard due to, among other things, the number of policy compliance permutations, and the choices among different fuels and technologies.

Total cost of ownership modelling, as carried out by Ricardo for its customers, remains a cornerstone evidence used by vessel owners/operators to inform their commercial decision-making. We help by anticipating, through narrative scenarios, the possible range of futures that commercial business will be operating in, and then evaluate all costs and benefits over vessel/fleet lifetimes. As well as this financial analysis, the wider commercial considerations of fuel availability, operational flexibility, safety & risk, and potentially accessing first-mover innovation funding together provides decision-makers with the best available evidence to inform their choices. The risk of not acting soon enough, including securing long-term offtake agreements for future fuel needs, is needing to rely on non-compliant conventional fuels and paying significant penalties in the longer-term as a result. We understand the well-to-wake reporting needed under the legislation, and have insights from evaluating that the lifecycle GHG intensities look like for different fuels.

Ricardo’s expertise from our insights and understanding of the policy measures as well as from our direct engineering R&D experience has been relied upon by maritime sector clients needing to have the best available evidence to inform their strategic investment decisions.