A missing piece of the net-zero puzzle: Gaps in regulatory frameworks addressing the risks posed by alternative fuels

Introduction

Conventional bunker fuels used in the maritime sector like heavy fuel oil, marine diesel and gas oil, and light fuel oil, among others, are highly polluting and create significant environmental and social damage. The greenhouse gasses (GHG) created using these fuels in international shipping account for roughly 3% of global emissions yearly.¹ The regulatory body of the industry, the International Maritime Organization (IMO), set a new ambition in July 2023 for emissions from international shipping to reach net zero “by or around” 2050² in its 2023 IMO Strategy on Reduction of GHG Emissions from Ships (2023 IMO GHG Strategy), further emphasising the importance and duty of the sector to decarbonise.

Alternative fuels like biofuel, green and blue ammonia, green methanol, and green hydrogen, which produce zero or close to zero emissions, will need to play an important role in meeting the 2050 goal. The 2023 IMO GHG Strategy also includes the ambition for zero- or near-zero-emission fuels to make up 5%, striving for 10%, of the total energy used in international shipping by 2030, setting a clear imperative for the development of these types of fuels. Currently, progress on technology, supply, policy, and finance for these fuels is only partially on track to meet this goal,³ and there are many intermediate steps like updating port infrastructure and vessels to support the use of alternative fuels still needed.

Important aspects to consider alongside policy and technological developments are regulatory and risk limitation frameworks to make the uptake of these fuels feasible and practical. This comes with some unanswered questions from the insurance perspective, including how meeting and complying with new sustainability standards will impact coverage and the change in risk posed by new technology and alternative fuels.⁴

Understanding the risks of alternative fuels, robust regulation, and legislative support are imperative to close the current coverage gap. Letting these questions go unanswered could slow down the uptake of these fuels by the maritime sector and, in turn, the green transition as a whole.

Further research is needed into how to address these concerns and who is ultimately responsible, but it’s expected that building a solution will require multistakeholder engagement from both the public and private sectors. With complex sustainability issues like this, an important step is understanding the scope of the problem along with the current frameworks already in use.

Regulatory frameworks for conventional fuels

It’s no secret that accidents can happen at sea, including collisions and groundings, personnel injuries, fires and explosions, spills, machinery and technological failures, environmental incidents, and pollution. The risks that come with the use of conventional fuels are well known, and as such there are many regulatory frameworks to not only determine fault but also limit the liability when accidents occur. The regulatory frameworks explained in Table 1 make it clear who is responsible or liable when incidents occur and how much those who are found liable will pay. An important part of these policies is the creation of the International Oil Pollution Compensation (IOPC) Funds, which have been established to provide compensation for persistent oil pollution damage from a tanker if the cost of the damage is higher than the shipowner’s financial liability limit.

For instance, if a very large crude carrier (VLCC) were to be involved in an incident and part of its cargo were to be lost, the shipowner would be held strictly liable for the pollution damage under the Civil Liability Convention (CLC). The shipowner should have in place mandatory insurance, provided by a protection and indemnity (P&I) insurer, up to its financial limit based on its gross tonnage (GT). For a 150,000 GT VLCC, this would be approximately $118 million.⁵ For oil pollution occurring in the exclusive economic zone (EEZ) of CLC contracting states, the cost of pollution damage beyond this figure would be covered by the ‘second tier’ IOPC Fund up to a maximum of approximately $267 million.⁶ This second-tier fund is financed by the receivers of oil cargoes. There is also a 'third tier’ Supplementary IOPC Fund, established under the Supplementary Fund Protocol 2003, which provides additional compensation up to a maximum of approximately $1 billion.⁷

If the incident involved pollution caused by the bunker oil of a vessel other than a tanker, the shipowner would be held strictly liable for the pollution damage under the Bunkers Convention. This convention does not have a second-tier fund but requires mandatory insurance cover up to the vessel’s liability limit based on its gross tonnage.

Name	Purpose	Liability
1992 Civil Liability Convention (CLC)	An international convention that aims to ensure adequate compensation for damage caused by oil pollution resulting from maritime incidents involving oil-carrying ships. Mandatory insurance is required up to the shipowner's liability limit. The associated 1992 Fund Convention establishes a second-tier fund to provide compensation in excess of this primary limit. This second-tier fund is paid for by receivers of cargo. There is a third-tier fund for the largest of spills.	Places liability for such damage on the shipowner from which the oil pollution originated. It introduces strict liability for shipowners capped at varying amounts based on the size of the ship.1
2001 Bunkers Convention	An international convention that focuses on civil liability for pollution damage caused by spills of ships’ bunker fuel oil. This convention ensures prompt, sufficient, and effective compensation for pollution damage due to bunker oil spills from ships.	Shipowners are held liable for pollution damage resulting from vessel bunker oil spills. There are liability exceptions for acts of war, third-party intent, or negligence by authorities responsible for navigational aids.
2007 Wreck Removal Convention	An international convention that establishes a strict liability, compensation, and compulsory insurance regime for states affected by maritime casualties involving wreck removal. This includes the substances on board the ship that could cause pollution damage.	Places the responsibility on the registered owner of a ship to locate, mark, and remove a wreck deemed hazardous in a state's convention area.2
2010 Hazardous and Noxious Substances Convention (HNS) (not yet in force)	An international convention that establishes a comprehensive regime covering damage caused by cargoes of hazardous and noxious substances (HNS) carried by ships. This convention aims to ensure prompt and effective compensation for personal injury and death, damage to property, and costs of clean-up, as well as economic losses resulting from incidents involving the maritime transport of HNS cargoes.	The shipowner is strictly liable for damage, except in certain circumstances. Claims for loss of life and personal injury have priority in compensation distribution. The shipowner's liability is covered by insurance, and additional compensation is provided by a second-tier fund, which is funded by receivers of HNS cargoes.3
1986 Convention on Limitation of Liability for Maritime Claims (LLMC)	An international maritime convention that serves to limit a shipowner's liability for two main types of maritime claims: loss of life or personal injury; and property damage claims. This can include pollution damage, depending upon the national incorporation of the LLMC. The LLMC does not provide for strict liability against the shipowner or mandatory insurance cover.	Liability limits are set based on tonnage and determine the maximum financial liability of shipowners for all claims arising from maritime incidents. There is an exception to this limitation: a shipowner may lose the right to limit liability if it is proven that the incident resulted from the shipowner's personal act or omission committed with the intent to cause such damage, with knowledge that such damage would likely result.

Table 1: Overview of current regulatory frameworks for liability in international shipping.

Risks posed by alternative fuels

Alternative fuels are not without their own risks. These include various potential human safety and environmental impacts that are important to understand from the perspective of regulation and prevention frameworks.

Biofuels pose similar but lesser pollution risks than persistent oil bunkers but do not fall within the scope of the CLC or Bunkers Convention. Electric or hybrid power from lithium-ion batteries can be explosive and result in thermal runaway, resulting in human and environmental harm due to challenges in firefighting, disposal, and potential toxic gas pollution. Ammonia is toxic, combustible, and can be challenging to store safely. Methanol is corrosive and has significant crew safety concerns, with negative GHG effects from methane escape. Liquified natural gas (LNG) and liquified petroleum gas (LPG) can cause greater emissions than conventional fuels through methane slippage. Finally, hydrogen fuel has explosive risks and associated risks to life or damage to property concerns.

In general, the risk and liability considerations with alternative fuels include increased explosivity, flammability, and corrosivity, which raise safety concerns for the environment, people, ports, and infrastructure. However, there is currently no international regulation in force specifically addressing the issues arising in relation to the carriage and utilisation of alternative fuels.

Example: Ammonia

Let’s take ammonia for example. An ammonia leak or spill could lead to pollution claims and personal injury claims. These claims would not fall under the scope of the CLC (if the ammonia was being carried as a cargo)¹ or the Bunkers Convention if being used as fuel.² The absence of any applicable convention could lead to a non-uniform approach on jurisdiction and liability, depending upon the national law of the location of the incident. The scope of the Wreck Removal Convention is unclear, and while it could potentially define ammonia as a hazard, this would be limited to wreck situations only. While a shipowner might be able to limit liability generally under the LLMC for loss of life, personal injury, property claims and possibly pollution arising from an incident involving ammonia,³ there would be uncertainty about compensation for victims because the LLMC does not provide for strict liability or mandate shipowners to carry insurance up to the set limitation amounts. The HNS Convention could resolve some of the issues for incidents when ammonia is carried as cargo, but there will be no international uniformity to liability and limitation unless it comes into force. At least twelve states are needed to ratify the HNS Convention, and currently only eight states have done so⁴.

Addressing the gaps

The lack of an international liability and compensation framework leaves victims of incidents at risk of inadequate or no compensation. It makes shipowners and insurers vulnerable to local actions, potentially leading to increased criminalisation of seafarers when liability is not clearly stated and disincentives the uptake of alternative fuels. On top of this, the use of and experience with alternative fuels is limited at this stage, leading to uncertainty regarding their compatibility with existing on-board systems and machinery. This uncertainty amplifies the risk, increasing the potential for breakdowns and fuel loss, subsequently leading to pollution. Despite guidance issued by classification societies, the lack of universal standards and international regulations limits the efficacy of these measures.

As the pressure and desire for the adoption of alternative fuels increases, it’s important to understand all the pieces of the net-zero puzzle. This includes addressing safety challenges and regulatory gaps associated with alternative fuels, which will require comprehensive trials, international cooperation, and robust frameworks to mitigate risks to crew, vessels, and the environment. Efforts must also be made to raise awareness of the potential missing legislative pieces and their implications for the protection available to victims and society. This involves undertaking work to map and consider potential methods of filling existing gaps to ensure comprehensive regulatory coverage and updating existing legislation to resolve shortcomings. Additionally, it is imperative to consider accident scenarios through worked examples, focusing on real-life outcomes for individuals, the environment, and property, as well as potential liabilities and limits.

To begin, the ratification of the HNS Convention should be a priority. If in full force, the HNS Convention could partially resolve the issue, as it would provide strict liability, mandatory insurance, and a second-tier fund structure for incidents involving cargoes of alternative fuels. There are several alternative solutions for an appropriate liability and compensation regime for alternative fuels: an ‘alternative fuels convention’ modelled on existing conventions, or a protocol to one of those existing conventions. This could be a way to reduce uncertainty around the liability and costs of incidents involving alternative fuels. It would seem necessary for whichever solution to include a second-tier fund to provide compensation to victims of larger incidents. Without such a fund for alternative fuels, accidents involving conventional fossil fuels might receive better financial protection than accidents involving alternative fuels, which could create a serious headwind to the net-zero transition.

The risks associated with the carriage and utilisation of alternative fuels, both those currently known and those being identified, create new dangers for vessels, their crew, and the environment. Marine insurers play an important role in understanding and mitigating these risks and, as such, have a unique role to play in the decarbonisation of the international shipping industry, as highlighted in the Poseidon Principles for Marine Insurance 2023 report.⁵ Additionally, insights offered by insurers who are already supporting the trials of new fuels and related pilot projects should be requested and recognised. Collaboration with stakeholders from across the industry, from insurers to policymakers, is essential to ensure a harmonious approach in creating or modifying existing regulations to reach IMO climate goals and support the net-zero transition. While previous conventions have developed as reactions, the green transition should focus on being proactive going forward.