Simulation study on regulatory compliance costs of alternative marine fuels under IMO GHG mid-term measures

2.1 Calculation of GHG Fuel Intensity

The IMO’s mid-term measures adopt a regulatory framework based on the GFI of the fuels used by ships. As shown in Equation (1), GFI is defined as the well-to-wake greenhouse gas emissions per unit of energy, measured in grams of CO₂-equivalent per megajoule (gCO₂eq/MJ).

𝐸𝐼_𝑗 represents the GFI of fuel type 𝑗 (gCO₂eq/MJ), 𝐸𝑛𝑒𝑟𝑔𝑦_𝑗 denotes the energy consumption of fuel type 𝑗 (MJ), and 𝐸𝑛𝑒𝑟𝑔𝑦_{𝑡𝑜𝑡𝑎𝑙} is the total energy consumption of the ship (MJ).

These values were calculated based on annual fuel consumption data reported by the IMO Data Collection System (DCS). The denominator, 𝐸𝑛𝑒𝑟𝑔𝑦_{𝑡𝑜𝑡𝑎𝑙}, includes not only the energy derived from fossil fuels but also zero- and low-carbon energy sources such as shore power, wind propulsion, and solar power. Thus, this GFI calculation approach evaluates the vessel’s overall energy mix, serving as a metric to drive actual decarbonization efforts beyond the simple assessment of direct GHG emissions.

The GFI calculation method differs fundamentally from the IMO Carbon Intensity Indicator (CII). While CII measures CO₂ emissions per ton-nautical mile based on tank-to-wake, GFI considers the full lifecycle (well-to-wake) emissions, including contributions from shore power, wind, and solar energy.

To quantitatively assess the GHG emissions performance of ships and apply differentiated penalties, the IMO introduced a two-tiered structure consisting of a Base Target and a Direct Compliance Target. The Base Target represents the minimum decarbonization requirement, whereas the Direct Compliance Target sets a strict compliance threshold. Each year's GFI target was determined based on a reduction factor (Z_T, %) applied to the 2008 reference GFI value of 93.3 gCO₂eq/MJ, as shown in Equation (2).

In this context, GFI_T​ represents the target GFI for year T (gCO₂eq/MJ), Z_T​ denotes the reduction factor (%) relative to the 2008 baseline year, and GFI₂₀₀₈​ is the reference GFI value, set at 93.3 gCO₂eq/MJ. The IMO specifies the annual Z_T for each target year, as summarized in Table 1 and Figure 1[7].

Table 1:

Annual GFI reduction factors (%) for the target annual GFI relative to the GFI reference value

Figure 1:

Annual GHG fuel intensity reduction two-tiers targets under IMO mid-term measures

2.2 RU Payment Mechanism

An RU is a nontransferable unit designed to financially compensate for excess emissions beyond the ship’s target GFI, with payments made to the IMO Net-Zero Fund. Figure 2[7] schematically illustrates the transaction mechanisms of RU and SU based on the GFI compliance framework.

Figure 2:

Compliance mechanism of remedial unit and surplus unit in the IMO GHG Regulation Framework

The IMO Net-Zero Fund will be established to collect RU from ships exceeding their GHG emission targets and allocate funds to promote decarbonization in maritime transport. Specifically, the Fund will support the use of zero- and near-zero-emission (ZNZ) fuels, assist developing countries, advance technology development and dissemination, and finance the necessary infrastructure.

The RU system categorizes compliance deficits into two tiers with differentiated pricing: USD 100/tCO₂eq for Tier 1 and USD 380/tCO₂eq for Tier 2. These rates apply during the initial phase, from 2028 to 2030, and may be revised thereafter.

The RU system functions as a regulatory variable that directly affects costs, depending on factors such as the choice of fuel type, speed, and routing of ship operations. Unlike a conventional carbon levy, an RU imposes a precise cost based on excess greenhouse gas (GHG) emissions, directly linking a ship’s annual environmental performance to its financial outcomes. Consequently, shipowners must strategically consider the impact of RU systems when planning energy transitions and making long-term investments.

2.3 SU Trading Mechanism

This measure introduces an SU mechanism to incentivize ships that exceed the regulatory requirements. This unit is recorded in the IMO GFI Registry and can serve as a market-based tool to reward higher environmental performance.

SU can be utilized in three ways: transferred to another ship to offset Tier 2 compliance deficits, banked for up to two years for future use, or voluntarily canceled as an environmental contribution. Unlike the RU, the SU functions as a tradable carbon credit, offering potential revenue opportunities for ship operators. However, each SU can only be used or transferred once and will expire after two years.

The introduction of the SU system serves not only to ensure regulatory compliance, but also to incentivize additional GHG reductions, enabling economic benefits through trading. By allowing ships to choose diverse compliance strategies rather than mandate specific technologies, the SU mechanism creates a flexible market-based framework that promotes a more practical and efficient transition to decarbonization.

3.1 Comparison of GHG Intensity by Fuel

This study utilizes the key physical properties of alternative marine fuels to quantitatively compare and analyze their GHG emission performance based on the IMO mid-term measures approved in April 2025. GHG emissions were calculated on a well-to-wake basis, considering both fuel consumption and associated energy use. The attained GFI for a ship is determined by the GHG intensity (gCO₂eq/MJ) and the amount of energy used for each fuel type, as shown in Figure 3. Therefore, fuel-specific properties such as GHG emission factors, lower calorific values (LCV), and typical usage rates are critical comparative indicators.

Figure 3:

GHG fuel intensity of key alternative marine fuels

Accordingly, Table 2 summarizes the GHG emission factors and physical properties of the major alternative marine fuels based on the EU Fuel Maritime regulation [8].

Table 2:

Key physical properties of conventional and alternative marine fuels

In this study, the Usage Rate was applied to account for the differences in the lower calorific value (LCV) of alternative marine fuels, enabling a fair comparison. The Usage Rate represents the relative amount of each fuel required to produce the same energy output, using heavy fuel oil (HFO) as a baseline (set to 1.0). For instance, the Diesel Cycle (LNG) required approximately 82% of HFO to generate an equivalent energy output corresponding to a Usage Rate of 0.82. Conversely, e-methanol, with its lower LCV, required approximately twice the amount of HFO, resulting in a Usage Rate of 2.04. Throughout the simulation, this Usage Rate was consistently applied to calculations of fuel costs and RU and SU rewards, thereby accurately reflecting the actual operational energy demand for each fuel type.

3.2 Calculation of RU and SU

This section outlines the methodology for calculating compliance costs by fuel type under the IMO Mid-term Measures. In this study, the "compliance cost" is defined as the total monetary value comprising fuel costs, RU penalties, and SU trading revenues. Calculations were performed using a MATLAB-based simulation model with five main steps.

3.2.4 Pricing of RU and SU

GHG emissions exceeding the target GFI are subject to differentiated pricing based on the two tiers. The total annual RU charge was calculated by multiplying the corresponding excess emissions by the applicable unit price. Table 3 presents the RU charges by fuel type normalized to the energy equivalent of one ton of HFO.

Table 3:

Annual expenditure for GHG Non-Compliance (RU-1 + RU-2) by Fuel Type [$]

Additionally, if a ship surpasses the Direct Compliance Target, it generates an SU. In this study, the trading price of SU is assumed to be 304 USD/tCO2eq, representing approximately 80% of the RU2 price. This assumption reflects the expectation that the SU will be traded at a discount compared to the RU2 price. Table 4 summarizes the annual SU values by fuel type

Table 4:

Annual revenue from Surplus Units by Fuel Type [$]

4.1 Annual RU Expenditure

Figure 4 presents the annual carbon charges (RU1 and RU2) calculated by fuel type. High-carbon fossil fuels such as HFO, LFO, and MDO/MGO exhibit a steady increase in RU2 charges over time as the GFI targets become more stringent, with a sharp escalation after 2030. This indicates that the continued use of high-carbon fuels will lead to a substantial increase in regulatory costs over the long term.

Figure 4:

Annual trends of GHG non-compliance charges (RU1 and RU2) by fuel type under IMO mid-term measures

In contrast, LNG and LPG fuels, with lower GHG intensities, initially experienced limited RU charges, but gradually faced increased RU2 charges as regulations tightened after 2032. Biofuels such as Bio100, Bio30, Bio24 (based on waste cooking oil), and e-methanol consistently outperformed the GFI targets in most years, resulting in minimal or negligible RU charges. This highlights their strong potential not only for GHG reduction but also for long-term economic competitiveness under the regulatory framework.

4.2 Total Annual Fuel Expenditure

Figure 5 depicts the total annual fuel expenditure for each fuel type obtained by adding the base fuel cost (USD/ton) to the carbon surcharges from RU1 and RU2. Although HFO initially had the lowest unit price, its high GHG intensity caused carbon charges to increase steadily over time, causing the total expenditure to nearly double the original fuel price by 2035. In contrast, bio-blended fuels, such as Bio30 and Bio24, experience moderate increases in total cost depending on the proportion of biofuel blended because their RU liabilities are partially mitigated.

Figure 5:

Annual fuel expenditure by fuel type including expenditure costs (Fuel Cost + RU1 + RU2)

This demonstrates the significant influence of biofuel content on both the total and compliance costs. Notably, bio-LNG shows a balanced profile between fuel cost and regulatory burden, suggesting its potential as a viable mid- to long-term alternative. Blended biofuels also offer strategic value by partially mitigating the RU charges during the fuel transition phase.

4.3 Annual SU Revenue

Figure 6 shows the simulated annual revenue from the SU for each fuel type. An SU is generated only when the GFI of the fuel surpasses the Direct Compliance Target. e-Methanol, Bio100, and Bio-LNG consistently produced significant SU revenue throughout the simulation period, with e-methanol showing particularly high generation levels, positioning it as both compliant and economically advantageous.

Figure 6:

Annual revenue from Surplus Units (SU) by fuel type under IMO mid-term measures

4.4 Comparison of Net Costs Relative to HFO

Figure 7 shows the calculated net compliance costs for each fuel type, considering the sum of the unit fuel costs and RU charges minus SU revenues. Figure 8 illustrates the annual trends of these costs relative to Heavy Fuel Oil (HFO), with the $0 baseline representing the HFO benchmark.

Figure 7:

Annual Total Regulatory Compliance Costs by fuel type including RU and SU Costs (Fuel Cost + RU1 + RU2 – SU)

Figure 8:

Annual Differential Compliance Costs of Alternative Fuels Relative to HFO (2028–2035)

High-carbon fossil fuels, such as HFO, LFO, and MDO/MGO, exhibit steadily rising compliance costs over time due to the strengthening of GFI targets and increasing RU charges. In contrast, low-carbon and ZNZ fuels, such as Bio100, Bio-LNG, and e-methanol, maintain relatively stable net costs owing to SU revenues that partially offset their higher initial fuel prices.

Notably, Bio24 and Bio30 exhibited a crossover point around 2032, where their net compliance costs fall below those of HFO.

This finding highlights the importance of ship operators to consider not only initial fuel prices, but also the long-term GHG intensity and the cumulative effects of RU and SU when developing fuel transition strategies. Although HFO remains cost-competitive until approximately 2031, its economic advantage will diminish rapidly thereafter, emphasizing the strategic benefit of transitioning to low-carbon fuels at an early stage.

Notably, Bio24 and Bio30 exhibited a crossover point around 2032, where their net compliance costs fall below those of HFO. This finding highlights the importance of ship operators to consider not only initial fuel prices, but also the long-term GHG intensity and the cumulative effects of RU and SU when developing fuel transition strategies. Although HFO remains cost-competitive until approximately 2031, its economic advantage will diminish rapidly thereafter, emphasizing the strategic benefit of transitioning to low-carbon fuels at an early stage.

Additional simulation results comparing Bio30 and Bio100 showed that the latter offers greater economic efficiency although it is more expensive. This advantage stems primarily from the significant revenue generated through Surplus Units (SUs), which effectively offset the higher upfront fuel costs. These findings suggest that, provided the SU market becomes sufficiently liquid and trading mechanisms are well established, ship operators may opt for fuels with higher bio-content to reduce net compliance costs. Additionally, LNG consistently outperforms HFO in terms of compliance costs across the entire simulation period, indicating its robustness as a mid-term, low-carbon compliance solution under the IMO regulatory framework. Although LNG is not a zero-emissions fuel, its lower GHG intensity and reduced exposure to RU penalties enhance its strategic value.