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On 11 April 2025, on the last day of the 83rd session of the MEPC, a large majority of the Committee agreed the draft text for a new IMO Net Zero Framework. While observers have noted that the penalties may not be sufficient to meet the IMOs 2023 reduction targets, it is undeniably an impressive feat for the IMO to agree on the first binding emission limits and the first financial penalties to cover the shipping industry. The measure is planned for final adoption at the next MEPC session in October 2025.
The new IMO Net Zero Framework (“NZF”) forms part of the 2023 IMO GHG Strategy. It consists of a global fuel standard (“GFS”) and certain economic measures linked to the emission limits set under the GFS. From the perspective of shipping companies, the following main NZF features should be highlighted:
This new measure is to be complied with on an annual basis, 2028 being the first year, and is underpinned by extensive requirements relating to, for instance, the verification process and certification of the fuel. We will in this newsletter describe the main legal characteristics. We will consider also how this new measure is similar to but also different from the system under the FuelEU Maritime Regulation (“FuelEU”) and consider the wider implications for the various stakeholders and for the typical vessel contracts.
For a general outline of the NZF and comments to the economic and political aspects, we refer to the newsletter circulated by the Maersk Mc-Kinney Møller Center today (link).
The measure will apply to all ships of GT 5,000 or above, excluding non-self-propelled ships and all platforms such as FPSOs, FSUs and drilling rigs (regardless of the manner of the propulsion) and semi-submersible vessels. The NZF is thus (unlike the FuelEU) not limited to vessel carrying cargo or passengers and the NZF will thus for instance apply to other offshore and dredging vessels.
All major greenhouse gases (GHG), i.e. carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O), are covered, as with the FuelEU, and the emissions will be measured in CO2 equivalents (CO2eq)[1].
The NZF will apply worldwide irrespective of vessel flags. While states are permitted to make exceptions for vessels operating under its own flag and which are only active within their territorial waters, these vessels are still intended to be covered by the main requirements “as far as reasonable and practicable”.
The NZF will provide incentives to lower the GHG fuel intensity of the fuel consumed onboard by providing penalties for not meeting the targets (under-compliance) but also rewards for exceeding the targets (over-compliance). This GHG fuel intensity (the “GFI”) is measured in grams of CO2eq per megajoule energy (MJe). The NZF also uses the concept of a ‘Compliance Balance’ (which is also applied under FuelEU) which is a measure of a vessel’s net compliance with the targets set out in the NZF in absolute terms considering the amount of the emissions (in tonnes of CO2eq) in respect of a calendar year (‘reporting period’).
The GFI and compliance balance are based on certain formulas. Basically, the more GHGs a vessel emits (gCO2eq) compared to the energy it consumes onboard (MJe), the worse the GFI score will be. Furthermore, the greater the net emissions (or savings) are for the vessel (gCO2eq), the greater the potential penalties (for a deficit) or rewards (for a surplus) will be. The vessel can improve its GFI score and limit or avoid the financial penalties (or even obtain rewards) by switching from fossil fuels to lower-carbon alternatives.
The NZF is a two-tier system comprised of two targets for the GFI score, i.e. the ‘Base Target’ (the higher target) and the ‘Direct Compliance Target’ (the lower target). The targets will be lowered on an annual basis (as shown on the trajectory profile) until 2035, with a 65% reduction per 2040. Depending on the GFI score of the vessel in any given year, the vessel will be granted once-transferable surplus units (SUs) or may be obliged to acquire non-transferable remedial units (RUs) to ensure compliance with the NZF targets. The RUs are to be paid by making monetary contributions to a Net-Zero Fund to be set up by the IMO.
The GFI targets, the applicable units and the compliance actions are summarised below:
| Attained GFI score | Effect (units) | Compliance action |
| Below Direct Compliance Target (Surplus Tier) | Grant of one SU for positive compliance per tonne CO2eq. | No action needed but SUs may be transferred to other vessels. SUs not transferred will be automatically banked on vessel.
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| Above Direct Compliance Targets (Deficit Tier 1) | One RU (Tier 1) applicable to each negative tonne of CO2eq (cost of USD 100 per RU). | Deficit to be balanced through RUs acquired by contribution to IMO Net-Zero Fund.
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| Above Base Target (Deficit Tier 2) | One RU (Tier 2) per negative tonne of CO2eq (cost of USD 380 per RU). | Deficit to be balanced through:
– Use of SUs banked from previous reporting periods; – SUs transferred from other vessels; or – RUs acquired by contribution to IMO Net-Zero Fund.
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SUs are intended to create a financial incentive to exceed the targeted reductions. As the SUs may be transferred to other vessels, it grants shipping companies some flexibility to allocate biofuels to some vessels for commercial reasons and will thus not be forced to attain the exact same GFI score for all vessels. Somewhat similar to the principle under pooling under FuelEU (allowing surpluses to be ‘transferred’), SUs can be transferred to third party owners (against monetary consideration). SUs can, however, be transferred (and priced) wholly or partly to different vessels without the requirement for these vessels to be pooled as a whole. It will thus likely be a more flexible and manageable system than the FuelEU pooling.
The unit system will also have other benefits compared to pooling. It may for instance ease the allocation on a vessel between two consecutive time charters and make it easier to make deductions for off-hire based on the units, at least for accounting purposes. The same applies, for instance, to the allocation of units under a CoAs with several vessels doing different voyages. These are clear advantages compared to pooling under FuelEU as FuelEU only allows a vessel to be part of one pool in respect of any given reporting period.
Contrasting FuelEU, the NZF provided by the IMO does not allow shipping companies to advance borrowing (from the next reporting period) and banking is restricted to two years. If not used within this period, the SUs will be automatically cancelled as ‘voluntary mitigation’[2]. Most shipping companies would, however, presumably rather transfer the SUs to its other (deficit) vessels or sell the SUs to other shipping companies which would then avoid the costs of the Tier 2 RUs[3]. In any event, the fact that the system has fewer compliance options (such as borrowing) than FuelEU will likely make it easier to handle in practice.
Some things are though basically the same despite the terminology differences. The payment for the RUs, named ‘contributions’, is effectively the same as the ‘FuelEU Penalty’ under the FuelEU. It does not reflect any voluntary payment, nor any criminal sanction; it is simply a way of ‘paying-to-comply’ with the regulations. When the vessel has acquired all the required RUs (or balanced the deficit by using SUs in respect of Tier 2) the vessel will be compliant – i.e. the exact same effect as the FuelEU Penalty[4].
The funds received by the IMO are to be redistributed as ‘Rewards’ to vessels using “Zero or near-zero GHG emission technologies, fuels and/or energy sources”. In order to be eligible to such Rewards, the vessel will on an annual basis need to attain a GFI score of no more than 19.0 gCO2eq/MJ until 31 December 2034 or no more than 14.0 gCO2eq/MJ thereafter. While the draft text also provides that the IMO should use funds to help developing countries in the green transition, the guidelines for this distribution are yet to made.
Importantly, the costs for the RUs and the trajectory described above are not set in stone forever. No later than by 1 January 2028, the MEPC is to determine the price for the RUs from 2031 going forward and the detailed targets for the trajectory following 2034 is also to be set no later than 1 January 2032.
The compliance balance is, somewhat similar to the EU ETS and FuelEU, to be handled on an annual basis with a fixed reporting and verification cycle, though with a partly different timeline. The system relies on verification by independent verifiers, typically classification societies[5], and a worldwide database, the IMO GFI Registry, to record all the information and to execute decisions. As the first reporting period is 2028, the first regular verification cycle will be in 2029. In simple terms, the standard process is as follows:
The details of the verification cycle will depend on guidelines to be issued by the IMO. For more info on the verification cycle under FuelEU, see our newsletter of 11 March 2024 (link).
The most challenging legal element in creating an efficient global system and market for biofuels – on which the NZF relies – is perhaps the certification process. In this respect, the NZF follows the ambitious principles set out in the 2024 LCA Guidelines (adopted at MEPC 81). As provided in these guidelines, the GFI score is to be assessed and certified on a life cycle (‘well-to-wake’) basis. This entails that the GFI score is to take into account the GHG emissions relating to the entire pathway of the particular fuel that is being consumed, including the extraction/cultivation, processing and transportation of the fuel prior to it being delivered to the vessel (‘well-to-tank’) and the emissions emanating from the burning of the fuels onboard (‘tank-to-wake’). This follows the certification principles of FuelEU, also based on ‘well-to-wake’ emissions[6].
Similar to the FuelEU, the fuels are to comply with certain sustainability requirements. While the draft text is light on the specific requirements, the guidelines to be adopted are likely to follow principles set out in the 2024 LCA Guidelines. These guidelines include a wide variety of metrics and indicators intended to promote sustainable land use, water management and waste handling, among other objectives[7].
The GFI score and sustainability features are to be documented on the so-called ‘Fuel Lifecycle Label’ (FLL), i.e. a technical tool which is intended to facilitate the appropriate certification of the fuels and which is described in the 2024 LCA Guidelines[8]. The certification is to be provided by Sustainable Fuels Certification Scheme (SFCS) to be recognised by the MEPC, having regard to guidelines yet to be developed.
From a more practical perspective, fuel suppliers and owners should be aware that the certification documentation is to be provided in connection with delivery of the fuels, accompanying the Bunker Delivery Notes (BDNs). The draft text thus provides that the requirements regarding BDNs under MARPOL, Annex VI, Reg. 18, are to be updated[9] (and thus to be taken into account in fuel supply contracts).
The IMO shall on a yearly basis report data and provide a report to ensure “transparency, traceability and environmental integrity in the certification process”. The MEPC is to announce a list of recognised SFCSs no later than on 1 March 2027. It is likely that e.g. ISCC and RSB will seek this recognition in due course.
In summary, the MEPC is clearly envisioning a certification system aligned with the certification procedure set up under EU Renewable Energy Directive (“RED”) which the FuelEU is relying upon. The manner in which the fuels are to be certified is though yet to be clarified. The draft text does, for instance, not stipulate whether the certification and tracing of the fuel pathway – and for instance the transfer of ‘Proofs of Sustainability’ (PoS) – are to be centralized in a global database similar to the Union Database for Biofuels (“UDB”) (under RED) or whether it will rely on a ‘Proofs of Compliance’ (which may possibly be used until the UDB is fully operational). The UDB currently embodies some unfortunate limitations on the tracing of fuel sources from outside the EU, e.g. fuels which are sourced from non-EU gas grids. The implementation regulations are still under review with the EU and further clarity is expected later this year[10].
In any event, it seems as a plain necessity that the IMO system is set up to allow for certification in a uniform manner irrespective of the country from which the fuels are sourced and that the UDB is fully aligned with the international framework under IMO – i.e. to facilitate a global market and to avoid that fuels are exempted from the EU market with negative effects for EU off-takers. This is needed to fulfil the Commission’s expressed intention to allow the bunkering of certified biofuels outside of the EU. The IMO, EU and other states and organisation have thus a common objective in making a global system.
On certification under FuelEU, we refer to our newsletter of 22 August 2024 (link).
The draft text focuses on the mechanism of the NZF, as described above, and the obligations of the “ship” – not the relevant responsible entities. For instance, the text provides that the “ship” shall report the annual GFI and that the “ship” shall determine and perform the compliance balance in the IMO GFI Registry. It is thus also the “ship” that is to make the monetary contributions to the IMO Net-Zero Fund.
The question then arises: Who is responsible for the ship? Noteworthy, the draft text contains the ISM definition for the “company” and certain obligations are only triggered if the “company” is changed[11]. Consequently, it seems clear that the compliance entity – and the monetary obligation to comply with the required contributions – will be the ISM company. This is often a bareboat charterer or technical manager who has assumed the duties and responsibilities imposed by the ISM Code from the registered owner.
As compliance is tied to the “ship”, the effects of non-compliance with the requirements will though be felt hard by all the vessel interests (irrespective of the regulatory responsibility).[12] It is obviously in the interest of a time charterer that the vessel is not detained and any buyer of the vessel will always want clarity on the exposure on unpaid contributions and accrued deficits relating to the period prior to delivery.
While the regulatory responsibility to achieve compliance with the GFI targets will be on the ISM Company, the draft text acknowledges – though with rather opaque wording – that this entity should not necessarily bear the costs (e.g. for contributions to the fund). The text provides that the responsibility is “without prejudice to the ship to recover any costs incurred in the application of this regulation that relate to the operational responsibility of the ship”. The “operational responsibility” is defined as “determining the fuel used, the cargo carried or the route or the speed of the ship”. This is the same language used in the FuelEU Maritime Regulation, Art. 23 (8), to denote the time charterer. It thus reveals the principle of “polluter pays” as enshrined in EU law, i.e. the intention that the entity responsible for fuel procurement bears the costs. Owners would, nonetheless, only be able to recover the costs from charterers if contractually agreed.
As a starting point, the responsibility to monitor that vessels comply with the NZF will be on the flag state as the flag is responsible for the issuance of the Statement of Compliance (SoC). The draft text provides that port states may verify the existence of the SoC, though the text does not stipulate the enforcement powers of the port state or the sanctions applicable to any failure to produce the SoC. This important issue is likely to be dealt with in connection with the implementation process at the MEPC 84 in October 2025.
The NZF does, as noted, use ‘units’ to measure – and settle – the Compliance Balance. The units form really a core of this new measure. Many stakeholders in the shipping industry may thus think that these units are similar to the (mandatory) allowances under the EU ETS or other, fungible, units used in (voluntary) carbon offsetting programs. Such units are generally freely transferrable among market players.
As indicated above, this is, however, not quite the case in respect of SUs and RUs under the IMO framework. SUs can thus only be transferred once and only to other vessels, whereas RUs cannot be transferred at all (as RUs can only be used to remedy the deficit for the specific vessel for which the RUs are acquired by contribution to the IMO Net-Zero Fund). The units are thus fundamentally different from EUAs which are not only fungible and fully transferable but also deemed as financial instruments under EU law.
The restriction on the transfer on SUs is apparently made to avoid speculation. Of note, the value of the SUs – or rather the right to obtain SUs pending the data verification – may fluctuate (depending on the demand for RUs and biofuel pricing) during a year. The question is thus whether this restriction will work as intended. It will likely limit the liquidity of the market if non-shipping companies are not able to trade the SUs directly and it may incentivise the market to set up derivative products as a way to indirectly trade the asset.
In practice, the restrictions relating to the transfer of the SUs and the fact that the SUs cannot be issued before the data is verified during the verification period will likely have contractual consequences. It would mean that owners, charterers and technical managers (the ISM Company) will need tight contractual provisions – or even security arrangements such as deposits – to safeguard the rights to (later) obtain SUs during the verification process so that the transactions with the SUs can be executed as intended.
As the ISM Company will presumably be the responsible entity, the NZF is likely – depending on the penalties to be set at the next MEPC session – to create significant financial liabilities and risks for ship managers if they do not agree on contractual protections (such as the ETS and FuelEU clauses for SHIPMAN).
It will also be prudent for owners and charterers to consider this new IMO measure in (very) long-term charter parties, both time and bareboat charters, which will be in effect in 2028 or later. Under time charters, charterers’ strategy may simply be to ignore this new measure, hoping the owners will not request reimbursement (as intended under the polluter pays principle). This may be a dangerous approach as the owners may be able to recover the costs under existing charter party clauses, namely general catch-all clauses providing that all voyage-related taxes or costs should be borne by charterers or change-of-law clauses which, depending on the wording, may place the costs on the time charterers. Naturally, charterers wishing to use biofuels and obtain the rewards relating to SUs would only be able to do so on a contractual basis.
The consequences of the NZF will not be limited to the management contracts and charter parties but will involve any contract concerning fuel procurement or the underlying costs relating to the voyages. It is therefore also a certainty that BIMCO will start the work on these NZF clauses in due course.
On BIMCOs FuelEU clauses for SHIPMAN and time charterers, we refer to our newsletter of 2 September 2024 (link) and 2 December 2024 (link).
From a legal perspective, the NZF is clearly complex. It does though have some intriguing features which are clear improvements from FuelEU. It incorporates many of the sensible incentives provided under FuelEU while it avoids some, but not all, of the impracticalities of the pooling mechanism (which is causing contractual pains) by operating with units. Nonetheless, the mismatch between the entities holding the regulatory responsibility (ISM Company) and the commercial control (e.g. time charterer) necessitates strong contract provisions throughout the contract chain. Stakeholders should thus take great care when dealing with this new IMO measure in their contracts – to avoid problems up and down the stream.
The measure is still to be finally adopt and much will depend on the implementation and the guidelines to be issued on, for instance, the certification procedures. From the EUs perspective, the Commission has already welcomed the MEPC outcome and informed it will assess its current “EU maritime related regulations” with the intention to also avoid “significant double burden”[13]. We will in Gorrissen Federspiel closely follow the developments in the IMO and EU up to the next expected climax at the MEPC session in October 2025.
Gorrissen Federspiel is a knowledge partner of the Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping and provides advice to owners, charterers, fuel suppliers and other industry stakeholders on the implementation of IMO measures, EU regulations, voluntary carbon reduction schemes and other decarbonisation initiatives in the shipping, offshore and energy sectors.
[1] There will be no phase in period in respect of, for instance, methane (as with the EU ETS) which is currently entailing particular benefits to LNG as fuel (until 2026).
[2] This would thus seemingly be a form of voluntary emission reduction aligned with the non-additionality principle of the GHG Protocol.
[3] The market price of SUs will thus be effectively capped at USD 380 though the costs would, logically, more be aligned with the net extra costs of bio and other renewable fuels (save compliance savings on EUAs etc.).
[4] The NZF does, however, not contain any provisions for penalty multiplier which is another complicating feature of FuelEU.
[5] I.e. entities authorised under the RO Code.
[6] It is thus different from the ‘tank-to-wake’ approach taken under the EU ETS and CII.
[7] 2024 LCA Guidelines, Section 7.
[8] 2024 LCA Guidelines, section 8.
[9] Additional requirements in respect of biofuels are already provided under FuelEU, Annex II.
[10] See ESSF, Report on Marine Fuels Certification Procedures to support implementation of FuelEU Maritime, March 2025, p 50.
[11] Certain obligations are also triggered if the vessel is reflagged or if the vessel is withdrawn from service.
[12] This is contrary to the position under the EU ETS which does not allow for enforcement actions in the vessel itself if it is no longer owned by the responsible entity. See our newsletter of 24 November 2023 (link).
[13] Press release of the EU Commission of 11 April 2025 (link).