White Paper: A Market Approach to Ship Decarbonization

Author(s): Andrei Marcu, Michael Mehling

ERCST’s paper was prepared in response to the invitation extended at the IMO’s ISWG-GHG 22 session to explore ways of bridging differences over the draft amendments to MARPOL Annex VI. It is intended as an independent and constructive contribution to reaching an agreement at the upcoming MEPC sessions in December 2026.

ERCST considers a successful outcome of the IMO negotiations to be one of the most significant potential developments in international climate policy in 2027. With this in mind, ERCST has followed the negotiations closely, carefully examined the proposals put forward by different countries, and drawn on its extensive experience in international climate negotiations and climate policy development in the EU and globally.

Following the adoption of the 2023 IMO Strategy on Reduction of GHG Emissions from Ships, MEPC 83 approved, in April 2025, draft amendments to MARPOL Annex VI establishing the IMO Net-Zero Framework.

The proposal seeks to preserve the elements of the draft framework that enjoy broad support, including the well-to-wake GFI metric, sustainable fuels certification schemes, the reporting and verification cycle, and the IMO GFI Registry. It focuses instead on the issues where significant differences remain, proposing a single annual GFI target, a broader range of compliance options, a GFI Implementation Facility operating through two distinct windows, and enforcement at the national level.

A central feature of the proposal is flexibility in compliance. Ships would be able to meet their annual GFI targets through one or a combination of the following options:

• On-board GFI reductions, with over-performance generating surplus units (SUs);
• Pooling, allowing ships within a fleet or across companies to balance compliance positions using SUs generated elsewhere or banked from previous reporting periods;
• Purchase of SUs from other ships;
• Market stability units (MSUs), consisting of eligible carbon credits. From 2031, MSUs would be procured centrally through auctions. A mandatory contribution, levied upon the retirement of SUs and at a higher rate for MSUs, would finance the General Window of the Facility;
• Investment equivalent units (IEUs), obtained through direct investment in programmes, projects or activities approved by the Committee, with their value determined by reference to the price of SUs. Investments could be made directly or through the Facility’s Investment Window, where a fixed share of [20] per cent of profits would be allocated to ZNZ rewards. IEUs would be subject to the same combined limit as MSUs.

By providing several pathways to compliance, the proposal seeks to accommodate different national priorities and concerns. Importantly, it offers a pathway to compliance that does not require compulsory payments, while maintaining incentives for emissions reductions and investment in the sector’s transition.