International Maritime Organization Approves Carbon Credit Scheme for Shipping

From April 7–11, 2025, the MEPC of the IMO convened in London for its highly anticipated 83rd session (“MEPC 83”). The IMO, a specialized agency of the United Nations (“UN”) consisting of 176 member states, is responsible for developing safety, security, and pollution standards for international shipping. MEPC 83 was particularly significant as it aligned with the IMO’s 2023 Strategy on Reduction of GHG Emissions from Ships (the “2023 Strategy”), which set goals to reduce the carbon intensity of international shipping by 40 percent by 2030 and to reach net zero “close to” 2050.

MEPC 83 resulted in the adoption or approval of various environmental protection measures, including the designation of the North-East Atlantic Ocean as an Emissions Control Area for sulfur oxide emissions, particulate matter and nitrogen oxide emissions and a draft work plan for developing a regulatory framework for onboard carbon capture storage systems. The most noteworthy development of the meeting was the IMO’s approval of the “IMO Net-Zero Framework.”

The IMO Net-Zero Framework

The IMO Net-Zero Framework, which, upon formal adoption, will be added to Annex VI to the International Convention for the Prevention of Pollution of Ships (“MARPOL”), will focus on large ocean-going ships with over 5,000 gross tonnage — a category responsible for 85 percent of the total carbon dioxide emissions from the international shipping industry, according to IMO. These vessels will be required to reduce their annual GFI over time in accordance with certain global fuel standards or achieve compliance through offsetting mechanisms, such as using banked credits, purchasing credits from other ships, or acquiring credits by contributing to the IMO Net-Zero Fund. The annual GFI of a ship will be calculated using a comprehensive “well-to-wake” approach that accounts for the GHG emissions of all fuels used on board a ship in a given calendar year — from production, transportation, and delivery to final combustion on the vessel.

The IMO proposed annual GFI reduction targets for 2028 through 2035, set forth below, are based on a percent reduction of the 2008 average GFI of international shipping (93.3 gCO₂eq/MJ). The Net-Zero Framework sets forth two “tiers” of GFI reduction targets — the Base Target and the Direct Compliance Target.

Annual GFI Reduction Factors for the Target Annual GFI

Beginning in 2029 (for reporting year 2028), any ship that meets the tonnage threshold must calculate its annual GFI for the preceding calendar year and offset any excess emissions to achieve both “Tier 1” and “Tier 2” compliance. A ship must achieve compliance with both tiers, and the available methods and costs for achieving compliance with the two tiers are different. A ship with an annual GFI that is below the Base Target but exceeds the Direct Compliance Target must offset their Tier 1 compliance deficit by acquiring remedial units via contributions to the IMO Net-Zero Fund. Remedial units for Tier 1 compliance will be priced at US$100 per tonne of CO₂eq for the 2028–2030 reporting period. Ships with an annual GFI in excess of both the Base Target and the Direct Compliance Target must offset both their Tier 1 compliance deficit, as stated above, and Tier 2 compliance deficit. Tier 2 compliance can be achieved by (i) purchasing surplus units from other ships; (ii) using banked surplus units; or (iii) using remedial units acquired through contributions to the IMO Net-Zero Fund. Remedial units for Tier 2 compliance will be priced at US$380 per tonne of CO₂eq for the 2028–2030 reporting period. Ships with an annual GFI below the Direct Compliance Target, the more stringent of the two targets, will be eligible to earn surplus units, which can be banked or sold to other ships.

Net-Zero Framework Levels of Compliance

The IMO Net-Zero Fund

The revenues of the IMO Net-Zero Fund, which will be established to collect compliance contributions from ships that require remedial units, will be distributed to:

• Reward the use of zero or near-zero GHG emission technologies and low-emission ships;
• Support innovation, research, infrastructure and a “just and equitable transition” in developing countries;
• Fund training, technology transfer and capacity building to support the IMO GHG Strategy; and
• Facilitate environmental and climate protection, adaptation and resilience building with respect to shipping, particularly in vulnerable countries, such as Small Island Developing States and Least Developed Countries.¹

Reaching International Consensus

According to the UN, the negotiation of the Net-Zero Framework was “particularly challenging,” and approximately one dozen countries were opposed to the proposal. As reported by many news outlets, the United States delegates exited the talks early and did not participate in the vote on the new measures. President Trump has made his stance on global climate-related agreements clear; he has twice withdrawn the United States from the Paris Agreement, and reportedly has already threatened retaliatory fees if the Net-Zero Framework is applied to U.S. shipping. Even so, the United States is currently one of 108 countries that are parties to MARPOL Annex VI, and the U.S. Environmental Protection Agency and the U.S. Coast Guard jointly oversee its implementation in the United States. It is not clear, however, what actions the Trump Administration may take in the coming months regarding the newly approved measures and what impact any such actions may have on the shipping industry.

The Net-Zero Framework was hailed by the IMO Secretary General, Mr. Arsenio Dominguez, as “another step in our collective efforts to combat climate change.”² Yet the approved measures came as a disappointment to some, as there were previously talks of more stringent alternatives — such as a flat carbon levy on all emissions from shipping. Credit trading schemes, or “cap-and-trade” programs, are often criticized for purportedly allowing those who can afford it to continue their operations without much change in their emissions. In the case of the Net-Zero Framework, compliance is achieved by purchasing remedial units from the IMO or, in the case of Tier 2 compliance, purchasing surplus units from other ships. Others have raised concerns that the GFI targets through 2030 are not sufficiently ambitious to achieve the IMO’s carbon intensity reduction goal of 40 percent by 2030. Nevertheless, the Net-Zero Framework is likely to have a significant impact on the global shipping industry.

The MEPC will meet for an extraordinary session in October 2025 for the formal adoption of the proposed amendments. The IMO is expected to approve detailed implementation guidelines at the 84th session of the MEPC in Spring 2026, and the measures are expected to become effective in 2027.

We will continue monitoring developments related to the proposed framework. Please reach out to your Vinson & Elkins team to discuss these matters and their implications for your business.

¹ “Small Island Developing States” are a group of 39 States and 18 Associate Members of the UN that face “unique social, economic and environmental vulnerabilities,” including, for example, Belize, Cuba, Samoa, and St. Lucia. “Least Developed Countries” (“LDCs”) are recognized by the UN as the “poorest and weakest segment of the international community.” Currently there are 44 LDCs, including, for example, Cambodia, Ethiopia, Nepal, Haiti, and Uganda.

² Marine Environment Protection Committee (MEPC 83) – Closing Remarks (Apr. 11, 2025), available at https://www.imo.org/en/MediaCentre/SecretaryGeneral/Pages/MEPC-83-Closing-remarks.aspx.