Global carbon pricing mechanism for shipping back on course

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US and Saudi diplomats were widely blamed for scuttling the Net-Zero Framework (NZF), the global carbon pricing mechanism being developed by the International Maritime Organisation (IMO). At a meeting of IMO member states in October 2025, their strongarm tactics persuaded many in the room to adjourn adoption for one year. The threat of retribution by Trump's mafiosi proved too much for some officials.

The impact of policy uncertainty on shipping's transition towards scalable zero emissions fuels (SZEF) has been huge. The fifth annual Climate action in shipping report states that the failure to adopt the carbon price mechanism has been the "single most transition-regressive event in the five years the report has been running."

To be on track with emission targets outlined in the IMO's 2023 GHG Strategy, 5-10% of maritime shipping fuels need to be SZEF by 2030. Reaching this target equates to 0.6-1.2 exajoules (EJ) of energy, equivalent to 15-30 Mt per year of heavy fuel oil equivalent (HFOe). Production of clean fuels is likely to fall well short of the targets, only reaching the lower bound of 0.6 EJ at some point between 2032-35.

On the other side of the ledger, fossil-fuelled vessels continue to dominate the orderbook. The good news is that the share of the active fleet capable of utilising clean fuels increased from 0.41% to 0.77% between 2024 and 2025 following the delivery of 56 newbuild ships. But this could be as good as it gets, at least in the short-term. SZEF-capable orders amounted to 5.7% of the orderbook in 2025, down from 9.5% in 2024.

Of course policy uncertainty didn't just come out of nowhere. The signs were there much earlier in 2025 as several important elements of the framework that had previously been agreed on in principle (including a dual-target global fuel intensity, a two-tier carbon price, and a trading mechanism) were now up for debate (see Gunboat climate diplomacy ratchets up a notch: Trump administration seeks to torpedo carbon price on shipping, once and for all).

Although there is now broad support (even from the US and Saudi's) for the more technical aspects of the framework (such as the need for GHG emission intensity thresholds), its mainly the fossil-fuel aligned governments that remain opposed to the financial aspects (namely the carbon price). But as a recent landmark study by the UCL Energy Institute and RMI makes clear, carbon pricing's inclusion is critical if the shipping industry is to achieve a cost-effective transition.

Regional maritime carbon pricing mechanisms such as those in Europe (and those proposed by the UK and others) will not be sufficient to drive the transition of the global maritime fleet. The majority of vessels have limited exposure to EU regulations, and in any case, neither the EU ETS or FuelEU are sufficiently stringent to incentivise global fleet investments (see Putting a cap on European shipping emissions: The maritime sector is beginning to price in EU carbon prices).

Encouraging early adopters is going to be crucial if SZEF is to move up the S-curve of adoption. Most shipowners will wait until there is a critical mass, but getting to that tipping point will require price mechanisms that reward pioneering shipowners. That's something which a carbon credit trading mechanism, coupled with a levy-financed fund that direct investments would help achieve.

As participants in the EU ETS and other carbon pricing mechanisms have found to their cost, carbon price stability is just as important as the overall price level. If the design of the framework results in too much volatility, or leaves the carbon price languishing too low, it may reduce the incentive to invest in clean marine fuels (see Carbon price uncertainty is a drag on industrial 'green' investment).

Finally, once critical mass is reached, SZEF uptake is likely to accelerate rapidly, but that leaves its own challenges as bottlenecks could emerge if demand outpaces supply. The risk then is that the pace of adoption slows if supply disruptions emerge as potential threat. The report argues that strong revenue support for early investment in the production of clean fuels is critical.

The upshot from the modelling conducted by UCL Energy and RMI is that the technical-only framework supported by American and Saudi officials "delivers none of the above", while also carrying "the highest transition risk and cost of any architecture considered."

Uncertainty over the future of the global carbon pricing mechanism isn't the only variable on shipowners minds this past year: the war in the Middle East is clearly the overriding factor, especially for shipowners involved with transporting crude, product, and LNG. The spike in freight rates - due to disruption in the Strait of Hormuz and the Red Sea - means that tankers are being worked well past the usual point at which they would normally be scrapped or retrofitted – in turn delaying the shipping industry's transition to cleaner fuels.

There's an opportunity cost. Every day off the high seas costs significantly more now in terms of lost freight rate earnings than it did twelve months ago. Shipyards that might have retrofitted a tanker or LNG vessel to improve its fuel efficiency, or enabled it to use SZEF's such as methanol, are now almost fully-booked until 2030. In the longer-term, once space in the shipyards allows, the additional earnings from the past year will help shipowners fund investment in SZEF-compliant vessels.

At the same time, the cost of shipping - predominantly a function of the price of HFO - has also soared, adversely affecting all shippers, whether that includes dry bulk, containers, and crude oil and other forms of energy. The narrowing in the cost differential between conventional marine fuel and SZEF has increased the incentive to switch. Aside from the costs, the geopolitical risks involved with being reliant on fossil fuels has become clearer ever since the Russian invasion of Ukraine, and particularly so following the start of US/Israeli hostilities with Iran.

The "turning a tanker" analogy is an apt metaphor to describe the inertia involved with maritime decarbonisation.

Shipowners need to consider the likely time a vessel will take to enter service and its potential lifespan. Although it typically takes around 4 years between order and delivery of a new vessel, bottlenecks at the shipyards might add several months to the delivery date. Vessels are then typically in service for 20-25 years.

Much of the investment needs to go into infrastructure that individual shipping companies have little or no control over. A 2023 report by the think tank Global Maritime Forum estimates that almost 90% of the $1.4-1.9 trillion required to decarbonise needs to be directed at land based infrastructure. This includes hydrogen production, ammonia synthesis, storage and distribution.

The shift to SZEFs will be take decades, not months. However, the sooner that shipowners have a durable decarbonisation signal; one that remains, irrespective of the price of oil, the sooner that shipowners and port operators can begin investing.

As the events at the IMO meeting last October demonstrate, an actor with the ability to shape expectations by force can be incredibly damaging, especially given that a collective majority of states were in favour of a strong, carbon price focused framework. The question now is whether the Republican's drubbing in the midterm elections and the prospect of a Democrat president in two years time will change expectations sufficiently to correct course.

Trump maybe a lame duck president, but a caged and wounded animal can often be at its most dangerous. Even if there is a resolution to hostilities in the Middle East, its difficult to imagine a scenario that the powers that be will allow shipping to return to the "free movement" that existed prior to the conflict. A week is a long time in politics, but after the damage that has been done, expectations may take a little while longer to improve.

As attendees gather at the next IMO meeting in early December, those member states that were bullied into changing their position should feel emboldened to change their minds and support a comprehensive carbon price mechanism. Meanwhile, those governments and sections of industry that tied their long-term fortunes to Trump should now be more circumspect.

The shipping industry really needs a global carbon pricing mechanism that is anti-fragile in any geopolitical scenario - Trump, or no Trump. It's in the IMO's hands to ensure that its members are back on course.

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Carbon RiskPeter Sainsbury