The uncertainty and instability created by a credit-trading policy architecture favours states with strong industrial policy
2 days ago
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Analysis shows that cheapest, and most equitable energy transition is brought about by a high levy price (of 100-150 USD/tCO2e), combined with a Global Fuel Standard
London, 26th March 2025 – A new report from UCL's Energy Institute Shipping and Oceans Research Group shows that biggest implication of the three policy scenarios currently being debated is the level, stability and predictability of revenue they would likely generate. Stable and predictable revenue generation, crucial for enabling a just and equitable energy transition, is only possible in scenarios which have a levy component.
The report titled ‘Implications of potential IMO policy outcomes on enabling shipping’s energy transition’ outlines some of the potential implications of the now three main candidate policy options following the last IMO ISWG-GHG meeting in February 2025 (ISWG-GHG 18) in stimulating such an energy transition. Whilst much of the details of the policy scenarios remain up for debate, UCL analysis shows that IMO member states are coalescing around three main policy scenarios; i. an attempted bridging option put forward by the chair at ISWG 18, often referred to as ‘J9’ or IMSF&F (International Maritime Sustainable Fuels and Fund) with multiple Global Fuel Standard/Residual Units bands (henceforth, IMSF&F with banded RUs) that does not have a levy component, ii. a weak or low levy with GFS, iii, a strong or high levy with GFS. The majority of political support appeared to be behind the two levy with GFS options (see previous readouts from UCL).
Dr Domagoj Baresic, Senior Research Fellow at the UCL Energy Institute, said: “Without ensuring a streamlined and well-prepared policy environment the shipping industry risks a costlier, less effective and longer energy transition.”
The report finds that in the IMSF&F with banded RUs scenario, revenues would only be about 5-25% of what would be generated in a weak levy + GFS scenario. The IMSF&F with banded RUs scenario could also accelerate LNG dual-fuel uptake and create heavier dependence on bio or bio-based blends well into the later years—the quantities required of which could become impossible to source, leaving the sector with no option but to pay to pollute. The energy transition overall is therefore more likely to be prolonged in the IMSF&F with banded RUs scenario because of a significant period of market uncertainty in the early years.
A more uncertain and unstable policy driver such as ‘J9’, will lead to competitive advantage for regions with strong industrial policy and state intervention. Examples to understand what might happen without a strong IMO policy driver are taken from how Chinese state intervention on photovoltaics, electric vehicles and other transition technologies, has led to large market share by China, with the western business model, less able to manage the timing risks for these markets, less competitive.
Dr Tristan Smith, Professor of Energy and Transport at the UCL Energy Institute said: “This transition could happen in a number of different ways. Strong IMO policy and a levy can ensure a globally inclusive transition including in a range of IMO-empowered low-income countries, whereas track-record shows a much less inclusive transition, including a disadvantage to the western business model, of a weaker IMO policy outcome centred on credit-trading. Most models/analysis have not looked at geography of transition and are missing this important detail.”
The work is underpinned by UCL’s quantitative modelling of the scenarios coupled with a deep understanding of the nature of shipping’s energy transition and informed by a decade of work on this subject which informed the GMF Transition Strategy for Shipping and UN High Level Climate Champion’s work on tracking progress towards the 5% goal. Previous work by UCL and UMAS also shows that only targeted subsidy for e-fuels, coupled with a GHG levy, would ensure e-fuel early adoption. In another report, UCL and UMAS showed that without targeted financial support mechanisms, which can be supported from revenues generated from a levy, future e-fuel production could risk leaving developing nations behind in the energy transition opportunity, despite their favourable renewable resources, because of the poor access to funding and higher costs of capital faced by them.
