Introduction
Once adopted, the International Maritime Organisation’s (IMO) policy measures will give the shipping industry long-term certainty on its shift away from fossil fuels. In the short term, the transition to full decarbonisation allows for a range of fuel options, which will narrow as emissions reduction targets tighten. The Net-Zero Framework (NZF) requirements can be met, in part, using drop-in biofuels or liquefied natural gas (LNG) during the early years of the transition. Over time, however, hydrogen-derived fuels produced with renewable energy, such as e-ammonia, e-methanol, and e-methane, are considered the most promising options for getting to zero at scale.
These fuels, however, are not commercially available at competitive prices during the first years of the NZF. Scaling up fuel production, building compatible vessels, and establishing the right bunkering infrastructure globally will take many years. The history of industrial change shows that technological transitions rarely follow a linear path and instead typically progress along an S-curve, with slow initial adoption followed by a rapid acceleration. For the maritime sector to remain on track for its transition, at least 5% of its energy demand should come from scalable alternatives such as e-fuels by 2030 to prepare for the rapid scale-up, in line with the IMO’s 2023 greenhouse gas strategy.
As the IMO prepares for the adoption of the NZF in October 2025 and its measures to enter into force in 2027, it still needs to develop supporting guidelines for their implementation. This includes more precise definitions of zero- and near-zero emission fuels and mechanisms for rewarding their use, emissions accounting and certification for different fuels and production pathways, and the governance and design of a central fund to support the transition. Penalties are expected to generate $11-12 billion in annual revenue by 2030, funds that can both reward e-fuel adoption and enable a just and equitable transition that leaves no country behind.
Achieving the 5% target is critical, but the success of this funding hinges on strict accounting of full life cycle environmental impacts, addressing the scalability constraints of fuels, and targeting rewards and funding to options that will be needed to deliver zero-emission shipping at scale. Successfully managed, the rewards can unlock early offtake and ensure a level playing field for the fuels of the future, ensuring e-fuels can compete with transitional fuels such as biofuels and LNG and become a growing portion of the global fuel mix.
The fuel challenge: aligning shipowners, fuel producers, and investors
Unlocking the shipping sector’s fuel transition hinges on alignment between fuel producers and shipowners, with investors playing a critical role. Offtake of e-fuels is currently facing the well-known “chicken-and-egg” dilemma, with often clashing interests between the three actors:
E-fuel producers face steep up-front capital requirements with uncertain long-term returns. Technology pathways and fuel cost trajectories remain in flux, while the regulatory framework is still evolving and making multi-decade investment commitments inherently risky. They cannot reach a final investment decision and get the required financing at a manageable cost of capital without a multi-year offtake commitment.
Fuel offtakers must decarbonise while maintaining cost competitiveness. They aim for the lowest possible compliance costs, prefer short-term commitments to preserve flexibility, and need regulatory certainty to plan investments. They are wary of committing to multi-year fuel offtake due to concerns about availability and price trajectories.
(Equity) investors often seek high returns within relatively short time horizons and likely require a portion of the offtake to be pre-sold via secure agreements. Risk tolerance is low, with a preference for counterparties with strong balance sheets.
Bridging these different priorities is critical to breaking the investment deadlock and enabling scalable fuel production. The market alone cannot solve this. Policy intervention is needed to kickstart market development. Without such action to share risk across the value chain, neither capital nor supply will mobilise at the pace required.
Figure 1: Conflicting priorities between fuel producers, fuel offtakers, and investors can stall progress
Regulators can play a critical role by de-risking investments. Such support can come in the form of both supply-side and demand-side support.
Supply-side support policies target the fuel producers. Within the context of the IMO, Regulation 41(2) highlights “researching, developing and making globally available and deploying zero and near-zero GHG [greenhouse gas] emission technologies, fuels and/or energy sources” in relation to the revenues’ objective to achieve a just and equitable transition. Supply-side support is therefore likely to be limited to fuel production and infrastructure in the Global South.
Demand-side support policies target the fuel offtakers. The rewards are outlined in Regulation 39(2) of the NZF, which addresses the uptake of zero or near-zero GHG emission technologies, fuels and/or energy sources (ZNZs): “Ships may receive rewards from the IMO Net-Zero Fund for the ZNZs used, taking into account guidelines to be developed by the Organization”.
This Insight Brief will focus exclusively on demand-side support, particularly the rewards for ZNZ fuels.
Considerations for analysing the reward mechanism
The Net-Zero Framework is made up of different elements, each with its own objectives and impacts. As shown by total cost of ownership modelling under the current framework, the greenhouse gas fuel intensity (GFI) reduction targets and surplus units for overperformance alone can drive an incremental energy transition but are insufficient to support an early uptake of e-fuels.
This modelling showed that the GFI targets push the industry towards lower-emission fuels. Since cleaner fuels tend to cost more, shipowners will move from the cheapest compliant option to the next one as targets become stricter. For example, a vessel might start with LNG, later add carbon capture, and eventually switch to ammonia. Although these technologies are more expensive than today’s oil, penalties on conventional fuels will make them the most cost-effective way to comply with the GFI. Surplus units make compliance more flexible and affordable. They reward early movers and give late adopters more time but don’t drive extra demand for zero-carbon fuels beyond what the GFI already requires. Because they are technology-neutral, they do not close the cost gap between transitional fuels and future options like e-fuels.
This creates a challenge: e-fuels are unlikely to be competitive until the mid-2040s, but they need years of investment and scale-up to be ready in time. Early uptake is critical to building supply chains, cutting costs, and ensuring a smoother transition.
This is where rewards come in. While the GFI drives gradual decarbonisation, rewards can specifically support the early adoption of e-fuels that would otherwise be delayed.
Criteria for determining the feasibility and efficiency of reward mechanisms
The rewards mechanism can take many different forms and shapes. Different potential elements and combinations should be considered in light of their ability to contribute to the early uptake of scalable zero-emission fuels.
In its Fourth Assessment Report, the Intergovernmental Panel on Climate Change outlined four criteria for evaluating environmental policy instruments: environmental effectiveness, cost-effectiveness, distributional considerations, and institutional feasibility. These general considerations can be translated to better reflect the maritime context by including aspects such as investment certainty, price discovery, accessibility, fund liability, political feasibility, and administrative burden (see Table 1).
Figure 2: Framework to evaluate the reward mechanism, adapted from IPCC (2018)
The impact of reward design elements on the four considerations
The NZF’s reward mechanism has two main design components: fuel eligibility and reward level-setting. These two hierarchical but interrelated components directly impact the achievement of the reward’s objectives. Many options and configurations within these two components are possible and should be tested against their impact across the four criteria outlined above.
Figure 3: The two elements of the reward mechanism, fuel eligibility and price-setting mechanisms, should be tested against four criteria
Fuel eligibility: Technology-centric vs emissions-centric
Eligibility criteria for the rewards are the most critical safeguard to ensure they support the early commercialisation of scalable zero-emission fuels, rather than divert resources to fuels and technologies that will become competitiveas compliance options.
The IMO has already limited the disbursement of rewards to ZNZ fuels and set an initial threshold of 19 grams of carbon dioxide equivalent per megajoule (gr CO2e/MJ) until 2035, and 15 gr CO2e/MJ after. A further definition of ZNZ fuels and how they are treated in terms of reward eligibility is still to be discussed. Approaches to handling eligibility for rewards can be:
Technology-centric based on the fuels’ production pathway and feedstock;
Emissions-centric based on fuels’ emissions intensity; or
A hybrid umbrella approach for all fuels based on emissions intensity, with earmarked funds according to production pathways and feedstock.
Table 1: Summary of the impact of various fuel scope considerations on the four considerations
Technology-centric approach
Fuels that are likely to meet the ZNZ threshold can be broadly categorised into biofuels, e-fuels, and renewable energy, such as electricity and wind. One technology-centric approach based on production pathways would be to allow both e-fuels and biofuels such as advanced biofuels to access the rewards, potentially with differentiated rewards per category. This is a relatively straightforward approach, but it may lead to the rewards being used up by biofuels and e-fuels being left without sufficient support. This limits the investment case for e-fuels significantly. If shipowners receive rewards for fuels that are currently more widely available and cost-competitive, there will be little incentive to choose more e-fuels, and their uptake will be stunted.
A second option would be to limit the eligible fuels to e-fuels only. This choice should have a positive impact on investment certainty for e-fuel producers that would not have to compete with biofuels that have a head start in the compliance market and on commercial maturity.
Among e-fuels, there is likely to be a range of costs (both absolute costs and marginal costs of abatement). A design that gives the same reward to all e-fuels may only stimulate the lowest-cost option, which in turn may risk the industry putting all of its e-fuelled eggs in one technology basket. If the goal is to stimulate a range of scalable alternatives, then differentiating the reward levels between various e-fuel pathways, including e-hydrogen, e-ammonia, e-methanol, and e-methane, could be an option. This may increase investment certainty across the different e-fuels but might have a negative impact on the fund’s sustainability. As some e-fuels may have a larger cost gap, more money would be required to support the same energy demand. This risk could be mitigated over time. For example, such an approach could start with differentiated support for individual production pathways early on but move to undifferentiated support over a clear timescale. This way, market innovators receive initial support while a level of competition between the different options is slowly introduced over time.
An e-fuel-specific approach would be relatively simple for the IMO to administer and is more likely to limit the fund's liability in the initial years. However, it may lack political support as it can be perceived as going against the IMO’s fuel agnosticism. Regardless, political feasibility should not be the main barrier to considering all options at this stage.
Figure 4: Three different approaches to a technology-centric fuel scope
Emissions-centric approach
An alternative option to fuel eligibility is to take an emissions-centric approach that links fuel eligibility to emissions intensity, expressed in gr CO2e/MJ. Rewarding all eligible ZNZ fuels that meet the pre-determined emission threshold runs similar risks as outlined above in terms of investment certainty and fund efficiency.
An alternative approach would be categorising fuels on their emissions intensity, which could be linked to a differentiated price (of which the options are outlined in the section on the reward-setting mechanism). Fuels with higher emission reduction potential receive a higher reward, regardless of the fuel type. However, pending the Life Cycle Assessment guidelines, bio-LNG can reach very low emission intensity levels, with some producers even reporting negative emissions. That means that differentiation would not ensure that funds get directed to e-fuels.
Figure 5: An emissions-centric approach based on thresholds
Figure 6: An emissions-centric approach with fuel specificity
Hybrid approach
A potential mitigating solution combines an emissions-centric approach with technological specificity. For example, a portion of the fund could be earmarked for specific technological pathways, such as e-fuels as a group or differentiated e-fuels. A sub-fund for e-fuels could increase investor certainty but would still minimise the total volume of rewards available and is, therefore, still unlikely to generate enough of a business case. The broad scope would also still negatively impact the sustainability of the fund.
Another hybrid solution could be to introduce a framework of sustainability criteria, which can be applied to fuels either meeting the technology-centric or the emissions-centric approach. Such sustainability criteria could include, for example, impact on land use change, water use, or biodiversity impacts.
Reward-setting mechanism: Static vs dynamic pricing
The second element of the rewards is the reward-setting mechanism itself, which primarily involves the level and time of the reward. The level of the rewards can be either set administratively, through auction, or a hybrid linked to an exogenous variable:
Administratively set level: reward where the level is set by the IMO, depending on the scope of the fuel.
Auction-based level: reward where the level is set through bids, in which generally the lowest bid wins.
Hybrid with an exogenous variable: Reward where level is set through a combination of one or two and an external variable - i.e. contracts for difference
These can be combined with different time horizons, each with different impacts on the considerations.
Table 2: Summary of the impact of various price-setting mechanisms on the four considerations
Administratively set rewards
A reward set administratively by the IMO for the defined ZNZ fuel is likely to be a fixed price, either for a group of fuels or for individual fuel types (see section on fuel scope). A fixed price ($/tCO2e abated) for the defined fuel may be a fast and relatively simple way to reward ZNZ fuels. It can be easily administered based on total consumption and paid out to the shipowner, making it in theory a predictable mechanism. However, it comes with significant drawbacks. Firstly, a simple flat-rate reward can put the fund at risk of unlimited liability. Without knowing how much money the fund draws in and how many vessels will be eligible for reward, there is a significant risk that the required payouts are larger than the total revenue. This, in turn, defeats any investor certainty, as shipowners would be wary to invest if they cannot be assured that the IMO can pay out their rewards.
Figure 7: Administratively-set rewards
This could be mitigated by restricting the total volumes of fixed rewards to be paid out, requiring shipowners to apply for the reward beforehand and the IMO to determine who receives the rewards each year. While this solves the fund liability issue, it creates another risk. Yearly fixed rate rewards would not guarantee shipowners that they would also be eligible for the reward the following year. Without multi-year guarantees, shipowners are unlikely to commit to a long-term offtake.
This leaves a third option for administratively-set fixed rewards: allocating a limited volume of rewards to the chosen shipowners for multiple years. This would need to be at least three years to provide some level of certainty for multi-year offtake, although the longer the period, the higher the investment certainty. A fixed price also allows for better planning. However, this mechanism would still likely hurt cost-effectiveness. Without price discovery, the cost effectiveness relies on the IMO’s ability to set the right reward level. Anything too high may lead to excess demand; anything too low may simply have no effect at all. As for institutional feasibility, this option leaves it to the IMO to decide which reward applicants get at the fixed price, which may put a high burden on the organisation.
Figure 8: Single-year administratively set rewards
Figure 9: Multi-year administratively set rewards
Reward levels could be set through auctions in whichshipowners bid for a certain reward level. In such a system, a shipowner would submit a bid for a required reward to operate their vessel on the eligible fuel, including the number of years. Based on the collected revenue, the fund would allocate rewards according to the bids. This can either be based on blind bidding or a transparent system. The advantage of an auction is that it can increase investor certainty, as the shipowner will know their reward and receive it for multiple years. At the same time, the fund’s sustainability is ensured. Furthermore, an auction-based system should theoretically maximise price discovery and cost-effectiveness, but this would depend on the market’s ability to calculate accurate prices.
On the downside, an auction-based mechanism requires a sensitive balance of stringency. If the terms are too strict, no shipowner may apply. Less drastically, the rewards may only support the few fuel supply options with investment already secured, limiting the broader impact. For example, a German auction focusing on wind power attracted no bids, largely attributed to strict terms and an inability to cover risks for investors. If terms are too loose, shipowners may be encouraged to bid low to win but withdraw if they are unable to secure fuel for less than the price of the bid. A supply-side example of this can be found in the EU Hydrogen Bank. Fuel producers bid as low as €0.60/kg for hydrogen but ended up withdrawing. Consultations with companies across the value chain indicated a limited appetite for an auction-based system due to the administrative and technical burden it places on the companies involved and their lack of faith that terms and conditions would fit the sector's needs.
Another option within this category would be a double auction. In this system, a third party acts as an intermediary with no direct contractual relation between the fuel producer and the shipowner. An example is the H2Global mechanism, in which an intermediary signs longer-term offtake agreements with fuel producers with winning bids, and then sells these fuels in shorter offtake lengths to buyers who, similarly, place bids. The difference between the more expensive price the fuel producers bid for and the lower price that the fuel offtaker is willing to pay is covered by external funding. This way, funding is used to overcome both the lack of willingness to pay and the difference in desired offtake lengths. However, this option may be restricted in the context of the IMO due to the legal text of the Net-Zero Framework (see reference to Regulation 39(2) above), which limits reward payouts to shipowners.
Figure 10: single auctions
Figure 11: double auctions
Hybrid with exogenous variable
A third category is a combination of the administrative and auction-based mechanisms linked to an exogenous variable, often referred to as a reference price. One option is a demand-side contract for difference (CfD), in which the IMO would bridge the gap between a reference fuel (for example, the lowest-cost compliant fuel) and the so-called strike price of an eligible fuel. Under such a scheme, the shipowner pays the market price for the eligible fuel and receives a payment from the CfD administrator equal to the difference between that market price and an agreed strike price. The strike price can be set administratively or via competitive auctions, where bidders state the minimum premium they require. Hybrid approaches are also possible, combining a fixed strike price with adjustment clauses for input cost volatility (e.g., feedstock or electricity prices) to avoid over- or under-compensation and keep incentives aligned with actual market conditions.
A CfD can positively impact investment certainty by ensuring the shipowner’s effective fuel cost is covered to a level that makes it competitive with conventional fuels, reducing demand risk for early suppliers. However, this hinges on the shipowners passing the CfD through to the fuel producer, which can be difficult to control. As the price of the alternative fuel will never exceed the strike price, risks for the shipowner are relatively limited. A strike price can be set for multiple years, reducing exposure to future risks. Nevertheless, a CfD still generates a potentially significant fund liability. While the total volume of fuel supported can be restricted, since the total payout depends on the fluctuations of the reference price and market price, there is no way to ensure there is enough revenue to cover the rewards. It is also a significantly complex mechanism to administer, impacting both the distributional considerations for smaller shipowners and the IMO’s administrative burden.
Figure 12: Contracts for difference (CfDs)
Recommendations for the reward mechanism
Define the objective clearly: Position rewards as a tool to accelerate the early uptake of scalable zero-emission fuels, particularly e-fuels, rather than as a general compliance subsidy. Emphasise their role in bridging today’s commercial viability gap between the long-run scalable solutions that will be needed in 2040, and the least-cost compliance options.
Limit to e-fuels in eligibility: Limit the reward scope to e-fuels by potentially using a combination of GHG emissions and technology-specific criteria (such as production pathway, feedback, sustainability criteria) to define its eligibility. Avoid overly broad eligibility (e.g., all ZNZ fuels), which risks diverting funds to transitional fuels whose adoption is driven anyway under GFI pressure.
Adopt dynamic, multi-year reward structures: Move beyond one-off, fixed-rate rewards and instead ensure multi-year certainty to enable long-term offtake commitments. Prioritise mechanisms that combine predictability for shipowners with cost-effectiveness for the fund and limits on liability.
Explore auctions and CfD-style mechanisms: While competitive auctions are difficult to design and require a delicate balance of terms and conditions, they can enable price discovery and reduce the risk of over-subsidisation.
Consider the timing of the rewards: Regardless of the different reward designs that could be used, earliest adoption also requires consideration of what can be done in the period before 2029 to reach offtake and vessels running on e-fuels prior to 2030. This requires national policy action but may also include interim steps within the IMO Framework to derisk such investments as soon as possible.
Support the fuel side, especially in the Global South: A key industry concern remains the availability of e-fuels. While offtake is currently the most critical piece of the puzzle, complementing demand-side rewards with targeted supply-side support can unlock e-fuel production potential in emerging economies. Invest in production capacity, infrastructure, and technology deployment to ensure a just and equitable transition that brings new opportunities to developing countries.