Decarbonizing international shipping — which accounts for roughly 3% of global greenhouse gas emissions — will ultimately require a transition to low- and zero-emissions fuels such as green methanol, ammonia, and hydrogen derivatives. These alternatives, however, remain significantly more expensive than the fossil fuels they are intended to replace — in part because the market price of conventional fossil fuels does not account for the climate damage they cause. Targeted financial support can help bridge this cost gap, but the design of such support is critical: it determines whether subsidies merely secure inexpensive near-term emissions reductions or lay the groundwork for a durable low-emissions fuel system.

To ground the discussion of subsidy programming for low-emissions fuels, the analysis centers on an active policy debate — how to incentivize "zero or near-zero" (ZNZ) fuel use within the International Maritime Organization's (IMO) Net-Zero Framework (NZF). The NZF is being developed under the IMO's 2023 Revised GHG Strategy, which set a goal of reaching net-zero emissions from international shipping by or around 2050. If implemented, the NZF — currently under negotiation among member states at successive sessions of the IMO's Marine Environment Protection Committee (MEPC) — would establish a globally binding climate regulation for the shipping industry.

At the core of any ZNZ reward scheme lies a fundamental choice: should subsidies be directed toward lowering the cost of abatement using fuels that are already close to commercial competitiveness, or toward accelerating the deployment of higher-cost but more scalable next-generation fuel pathways? Attempting to pursue both objectives through a single, undifferentiated instrument risks achieving neither effectively.

Using this trade-off as a starting point, the paper distills the design of a ZNZ reward program into five interlocking variables: eligibility, abatement benchmark, multipliers, differentiation, and reward instruments. For each variable, the paper sets out the available options and examines the trade-offs across three dimensions — incentive strength, fiscal durability, and environmental integrity — recommending an approach where the analysis supports a clear preference.

The paper is structured in four parts:

• Section 1 explains the need for incentives.
• Section 2 introduces the NZF and the methodology for calculating ZNZ rewards.
• Section 3 presents the main analysis of each of the five variables, while the conclusion consolidates the findings in a decision table.
• Two appendices cover the multiplier mechanism and further differentiation criteria.

Source: Maersk Mc-Kinney Møller Center for Zero Carbon Shipping (MMMCZCS)