IMO Net-Zero Framework

Business implications of the IMO Net-Zero Framework

The expected implementation of the IMO Net-Zero Framework (NZF) will significantly impact shipping costs in several ways:

• Compliance costs: Shipping companies will need to increase their expenditure to meet stricter GHG intensity targets, either by adopting expensive low-GHG emission fuels and/or by purchasing Remedial Units (RUs) to offset emissions.
• Operational adjustments: Companies may need to modify their operations to support increased compliance, such as by optimizing sailing operations or by investing capital in new technologies.
• Administrative expenses: Complying with the NZF Framework will require continuous data verification, and transactions with the IMO GFI Registry and Net-Zero Fund will increase administrative overheads.
• Financial liabilities: The risk of accumulating financial liabilities due to non-compliance will necessitate the establishment of guarantees and securities, adding to overall costs.
• Fleet upgrading costs: Compliance costs will have an impact on the commercial attractiveness of different vessels, which may require shipowners to re-evaluate their ownership strategies, fleet upgrade strategies, and newbuilding strategies.

Overall, while the NZF aims to reduce greenhouse gas (GHG) emissions, it will result in both higher short-term and long-term costs for the shipping industry. However, these investments could lead to long-term benefits through improved efficiency and sustainability.

Commercial arrangements between ISM company and owner

The ISM company is responsible for compliance with the NZF requirements. This may be the shipowner managing their own vessels, or an external manager. 

The ISM company will manage all transactions with the IMO GFI Registry and Net-Zero Fund for the procurement of RUs and the formal compliance process.

The compliance balance will be the key reference for business management and financial settlements between the ISM company and the vessel owner.

Key areas to be addressed:

• Transfer responsibilities and financial liabilities to the owner, similar to the FuelEU Maritime regulation.
• Updating the ship management agreement to reflect the NZF is crucial to transferring responsibilities and liabilities to the vessel owner and should be initiated once the regulation has been adopted and guidance is available, and before the requirements come into force from 2028.
• Mitigate the risk of non-compensation from the owner through prepaid or pay-as-you-go models, financial guarantees, or other methods.
• Perform transactions in US dollars to compensate for non-compliance or surplus units (SUs).

Commercial arrangements between the owner and charterer

Terms will vary based on contract formats and the regulation guidelines that will be made available by the IMO in due course. As of now, the FuelEU Maritime terms will suffice as a starting point.

Key areas to be addressed:

• Time charter terms: Define settlement logic for surplus or deficit compliance balance.
• Voyage charter terms: Include compliance costs in the charter rate.
• COA terms: Include compliance costs in freight tariffs, with potential surcharges for different regulations.
• Settlements during the charter period for longer time charters, e.g. monthly.
• Financial compensation terms for Tier 1 and Tier 2 compliance balance deficits.
• Use of third-party verified statements as reference for financial transactions.
• High-quality data required for clear responsibilities and SLAs between shipowner and charterer.

Reliable and verified data is key   

To address the data-centric challenges associated with the commercial aspects of the NZF, consider the following strategic approaches:

• Secure high-quality, third-party verified data to build trust between contractual parties.
• Perform continuous data verification, beyond annual checks, to meet business needs.
• Develop a robust and flexible data architecture for sharing and receiving data across the value chain.

Be prepared with DNV

To find out how DNV can support you in your strategic, operational and commercial preparation for NZF, simply contact our experts via the web form.