Norway's IMO proposal: will more flexibility create a functioning surplus market?

Norway has proposed a substantial redesign of the IMO Net-Zero Framework, combining additional Surplus Units for zero- and near-zero fuels, five-year banking and broader use of surplus across both compliance tiers. The package offers a credible compromise, but its success depends on a difficult question: can the same surplus market deliver affordable compliance while providing a sufficiently high and predictable reward for investing in cleaner fuels?

Ahead of ISWG-GHG 23 and MEPC 85, Norway has submitted two closely related proposals, ISWG-GHG 23/2/5 and ISWG-GHG 23/2/6, seeking to address concerns with the IMO Net-Zero Framework (NZF). Rather than abandon the existing architecture, Norway proposes modifying its incentives and flexibility mechanisms while retaining the two-tier GHG Fuel Intensity (GFI) compliance system.

The proposal has several interesting features. It would reward the use of qualifying zero- and near-zero GHG fuels and technologies (ZNZs) through additional Surplus Units (SUs), rather than relying exclusively on monetary rewards from an IMO fund. It would extend SU validity from two to five years, allow SUs to balance both Tier 1 and Tier 2 deficits, and with that also replace Remedial Units with Voluntary Contribution Units (VCUs) as an alternative compliance route.

However, the package also places considerably more responsibility on the SU market. Surplus would no longer be merely an instrument for transferring excess compliance between ships. It would become a central determinant of the financial support delivered to ZNZ users.

Our assessment is that Norway has identified the right problems, but has not yet demonstrated that its proposed market design can solve them under both normal and exceptional fuel-market conditions.

What Norway's IMO proposal is about

Under Norway's suggested 2030 trajectory, the Base Target would require a 4.8% GFI reduction against the IMO reference value of 93.3 gCO₂e/MJ, while the Direct Compliance Target would require a 17.8% reduction. These correspond to absolute GFI thresholds of 88.8216 and 76.6926 gCO₂e/MJ respectively.

Similar to previous proposals, ships above the Base Target would face both Tier 1 and Tier 2 deficits. Ships meeting the Base Target but remaining above the Direct Compliance Target would face only Tier 1 deficits. Norway retains the contribution rates of USD 100/tCO₂e for Tier 1 and USD 380/tCO₂e for Tier 2. The significant change is that SUs could be used against either tier. Previously, the framework restricted transferred or banked SUs to Tier 2 compliance, leaving Tier 1 dependent on contribution (RU) payments.

Norway also proposes a technical multiplier for qualifying ZNZ use. Importantly, this is not the same design as China's proposed energy multiplier. Norway would leave the vessel's attained GFI unchanged and award additional SUs according to the verified emissions avoided by ZNZ fuels and technologies.

The multiplier would start at 1.25 in 2029, decline to 1.10 in 2030, reach 0.30 in 2033 and remain at that level until 2036, subject to review. Norway proposes strengthening Brazil's suggested Base Target trajectory by 20% to compensate for some of the additional compliance benefits.

The objective is understandable: give ZNZ users a more predictable quantity of compliance value while preserving incentives for actual fuel switching. However, as FuelEU Maritime shows, predictability in the number of units is not the same as predictability in their market value.

1. Can a ship generate SUs while failing direct compliance?

Starting with an interesting nuance, Norway intentionally allows for SU generation from ZNZ even if the respective ship is not compliant. Under proposed Regulation 36, ordinary SUs would continue to arise when a ship's actual compliance balance is positive. Additional ZNZ SUs, however, would be issued independently of whether that ship meets the Direct Compliance Target. Norway argues that a ZNZ incentive should not disappear simply because a ship cannot yet operate with a sufficiently high share of qualifying fuel.

To understand the effect, consider an illustrative ship consuming 1 PJ of energy in 2030. We use the fuel intensities in Norway's own analysis: conventional fuel at 95.48 gCO₂e/MJ and qualifying ZNZ fuel at 19 gCO₂e/MJ.

If the vessel uses ZNZ fuel for 15% of its annual energy consumption, its actual attained GFI would be 84.008 gCO₂e/MJ. This is below the Base Target, but still well above the Direct Compliance Target of 76.6926 gCO₂e/MJ.

The ship would consequently have a Tier 1 deficit of approximately 7,308 tonnes CO₂e. Using the avoided-emissions reference implied by Norway's fleet calculations, its ZNZ consumption would simultaneously produce approximately 12,260 additional SUs at the proposed 2030 multiplier of 1.10. After using sufficient units to balance its own deficit, the ship could retain or transfer approximately 4,952 SUs, despite not having achieved direct compliance through its actual fuel mix. Under the same assumptions, a ship using only ZNZ and conventional fuel reaches a net positive unit position at approximately 11.9% ZNZ energy use, well before it physically meets the Direct Compliance Target.

That is important as the IMO would be permitting ships to become net suppliers of compliance units without outperforming the Direct Compliance Target in their actual GFI.

One may argue that refusing ZNZ incentives to every ship with a physical deficit could discourage early adoption, especially where qualifying fuel is unavailable in sufficient quantities. However, the IMO must at least distinguish between SUs created through actual outperformance and SUs created as an additional policy incentive. Both may be legitimate, but they are not economically or environmentally identical. If agreed, this distinction should be visible in the GFI Registry, including separate reporting of issuance, internal use, transfers, banking and cancellation as it will be crucial to assess the 'real' progress towards achieving the environmental targets.

2. How much additional surplus could enter the market?

Norway's analysis assumes annual energy consumption of approximately 10 EJ for the relevant fleet, consistent with its cited range of 9.1–10.6 EJ from the IMO comprehensive impact assessment.

Using Norway's assumed fuel intensities, and applying its actual 2030 targets and multiplier, we calculated three illustrative fleet scenarios:

Uniform fleet fuel mix	Actual fleet GFI [gCO₂e/MJ]	Tier 1 deficit [Mt gCO₂e]	Tier 2 deficit [Mt gCO₂e]	Add. ZNZ SUs [Mt gCO₂e]
100% conventional fuel	95.480	121.29	66.58	0.00
5% ZNZ, 95% conventional	91.656	121.29	28.34	40.87
5% ZNZ, 5% non-ZNZ low-GHG fuel, 90% conventional	88.132	114.39	0.00	40.87

Illustrative calculations using 10 EJ annual fleet energy, conventional fuel at 95.48 gCO₂e/MJ, ZNZ fuel at 19 gCO₂e/MJ, non-ZNZ low-GHG fuel at 25 gCO₂e/MJ and a 2030 ZNZ multiplier of 1.10. Mt = million tonnes CO₂e. The scenarios assume every ship has the same fuel mix and exclude previously banked units.

The second scenario is particularly interesting. At a 5% ZNZ energy share, the fleet would generate 40.87 million additional SUs, compared with 28.34 million tonnes of remaining Tier 2 deficits. If those units were available and allocated first to the more expensive Tier 2 obligations, approximately 12.52 million units would remain to address less expansive (below USD 100) Tier 1 deficits or be banked.

The third scenario illustrates how competition from other low-GHG fuels changes the balance further. With the same 5% ZNZ share and an additional 5% of energy supplied by a non-ZNZ pathway at 25 gCO₂e/MJ, the hypothetical fleet would have no Tier 2 deficit at all. Its remaining demand would be Tier 1, while the multiplier would still generate 40.87 million SUs priced at below USD 100 in the SU market.

Please note that the assumption that every ship uses the same fuel mix is deliberately simplified, and the distribution of fuel use matters greatly.

In this context, it is important to recognise that a single fleet-average ZNZ uptake assumption cannot establish that Norway's proposal will produce a stable SU market. The market structure can be very different if not only considering the aggregated fuel mix but a more detailed distribution of fuel usage across different market participants. The relevant modelling must distinguish between early adopters generating large volumes of SUs, partial adopters using bonus units internally, and conventional-fuel ships creating demand. It must also account for other low-GHG fuels that improve actual GFI without qualifying for the multiplier.

Norway's own analysis recognises that additional SUs may substitute for physical emissions reductions and therefore proposes strengthening the targets. But its 20% adjustment is based on high-level assumptions. It is not yet evidence that the additional issuance would remain environmentally neutral across materially different patterns of ZNZ uptake.

3. Two targets, two contribution prices, but only one SU market

Norway wants to preserve two GFI targets while allowing the same SU to balance deficits under either tier. The idea is largely politically motivated as it allows the framing of voluntary units rather than the less accepted Tier 1 RU payment.

While this expands the potential market for surplus, it must be noted that Tier 1 and Tier 2 buyers won't have the same willingness to pay. A ship facing a Tier 2 deficit compares SU purchases with the USD 380/tCO₂e contribution alternative. A Tier 1 buyer compares them with an alternative costing USD 100/tCO₂e. Therefore, a company with only Tier 1 exposure would have little reason to pay USD 150 or USD 200 for an SU that could be replaced by a USD 100 contribution unit. A company with Tier 2 exposure, by contrast, might still find an SU attractive at those prices. Consequently, opening Tier 1 to surplus does not automatically create additional demand at the same prices as Tier 2.

This means the market could behave very differently depending on the relative quantities of outstanding Tier 2 deficits and available SUs. Where Tier 2 demand is abundant, SU prices could remain materially above USD 100. Where higher-value demand has largely been satisfied, further supply would increasingly compete against the lower Tier 1 contribution alternative. At the same time, the USD 100 rate should not be mistaken for a guaranteed floor. On the contrary, if surplus availability exceeds demand and the anticipated value of banking, prices could fall below it.

Norway's design therefore increases the usability of SUs, but cannot guarantee their value. However, the two-tier structure may still be desirable. It provides a potentially more acceptable alternative to direct compliance and helps contain extreme compliance costs by outbalancing oversupply with additional but lower priced demand.

4. Norway's own fuel economics reveal a potential incentive mismatch

The central commercial concern becomes clearer when we examine the fuel prices Norway uses to justify the multiplier. In ISWG-GHG 23/2/5, Norway compares conventional fuel costing USD 11/GJ and emitting 95.48 gCO₂e/MJ with a non-ZNZ low-GHG fuel costing USD 25/GJ at 25 gCO₂e/MJ. It then considers two ZNZ fuels, both at 19 gCO₂e/MJ, but priced at USD 45/GJ and USD 65/GJ respectively. Under those assumptions, switching from conventional fuel to the non-ZNZ pathway costs approximately USD 199 per tonne of physical emissions avoided. Switching to the cheaper ZNZ fuel costs approximately USD 445 per tonne avoided before accounting for the additional SUs.

The ZNZ fuel therefore needs a substantial additional incentive to compete. Norway illustrates the solution using an assumed SU price of USD 200/tCO₂e. At a multiplier of 1.25, its cheaper ZNZ pathway becomes approximately competitive with the non-ZNZ alternative. Under the corresponding avoided-emissions accounting, the resulting abatement cost falls to roughly USD 200/tCO₂e.

But what happens if the SU price is USD 100 rather than USD 200? A considerable scenario if oversupply of SUs results in unlocking lower priced Tier 1 demand.

The effective abatement cost of the same ZNZ fuel rises to approximately USD 323/tCO₂e avoided, while the non-ZNZ alternative remains around USD 199 under the assumed fixed fuel prices. The multiplier has not changed. The number of units awarded has not changed. Yet their financial value is no longer sufficient to close the illustrated cost gap. This exposes a weakness in relying on SUs as the principal ZNZ incentive. Norway's own example needs an SU price close to USD 200 to make its lower-cost ZNZ fuel competitive. But the additional Tier 1 demand created by its proposed flexibility mechanism is anchored to a USD 100 contribution alternative.

For high-cost fuels, the distinction between a fixed multiplier and a fixed monetary reward is material. The former determines the quantity of units received but leaves the market to determine the value realised, creating uncertainty that is suboptimal for financing new fuel production or propulsion technology. More certainty in higher SU prices can, for example, be created by either increasing the costs of the voluntary contributions or establishing more ambitious targets.

An interesting additional point has been raised by an IMarEST submission. The proposal warns that using SU prices as a measure of incentive requirements creates a feedback risk: the incentive itself changes SU supply and therefore influences the price being used to value it. For example, if Norway's multiplier succeeds in increasing qualifying ZNZ use, more additional SUs enter the market. If that extra issuance depresses SU prices, the incentive delivered to future ZNZ users weakens. Of course, demand and banking also change, but it is a pricing mechanism that should be modelled.

5. Five-year banking: what FuelEU and the Strait of Hormuz teach us

Norway proposes extending SU validity to five calendar years after the year of issuance, compared with two years under the original framework and there is a good economic argument for doing so. Short expiry periods can force surplus holders to sell at unfavourable prices even where their units could have value against future tightening targets. Longer banking gives companies greater flexibility and can connect current compliance values with expected future scarcity.

However, banking can also carry the consequences of an unusually favourable generation period into subsequent years. FuelEU Maritime offers a relevant market example.

BetterSea's volume-weighted monthly surplus index declined from EUR 106.52/tCO₂e in July 2026 to EUR 84.09 in October. The volume-weighted end-of-month price reached EUR 73.72/tCO₂e on 30 October. This decline occurred despite continued trading activity and the ability to bank surplus compliance balances. It does not prove that banking failed: without knowing what prices would have been in its absence, that conclusion would be unjustified, but it demonstrates is that banking does not override the economics of generating new compliance.

The market has been heavily influenced by the elevated conventional bunker-price environment associated with disruption around the Strait of Hormuz. Where conventional fuels become more expensive relative to certain biofuels, the incremental cost of generating compliance can fall sharply. For example, at the current moment (November 2026), the FuelEU compliance-generation cost is approximately EUR -19/tCO₂e for Bio100 in the Netherlands against MGO, compared with EUR 176/tCO₂e against VLSFO. The differences demonstrate an important economic point: the same alternative pathway can face very different generation costs depending on the fuel being displaced. When low-cost sources can satisfy sufficient demand, more expensive generators (SU sellers) cannot assume that the market will compensate their higher production costs.

For Norway's proposal, the implication is straightforward. Imagine that an external fuel-price shock makes certain compliance-generation pathways unusually inexpensive for two or three consecutive years. Companies may generate additional units, retain some for future use and sell others into the market. Once fuel prices normalise, the accumulated inventory does not disappear. Under a five-year validity regime, those units could continue meeting obligations during later reporting periods. This may support early generators, but it could also reduce the need for fresh alternative-fuel use in subsequent years. A risk currently omnipresent under FuelEU Maritime.

The risk becomes more significant if the same period also sees substantial issuance of multiplier-generated SUs.

Norway recognises the danger of excessive accumulated stocks and argues that a finite five-year period offers a compromise between short-term price pressure and unlimited banking. What is missing is evidence that five years is the appropriate period under realistic oversupply and market-shock scenarios. A robust assessment should compare two-, three- and five-year validity under different fuel-price trajectories, including a prolonged period of low-cost surplus generation followed by normalisation. It should examine outstanding unit stocks by issuance year, their use against subsequent deficits and their impact on demand for newly generated compliance. It should also consider whether ordinary SUs and additional multiplier-generated SUs necessarily require identical banking treatment.

Our assessment: Norway's direction is sensible, but the market design needs a stronger test

Norway's proposal deserves support as a serious attempt to reconcile several competing requirements. It preserves the two-tier compliance structure, replaces remedial units with voluntary contributions by allowing SUs for Tier 1 compliance, and rewards qualifying ZNZ use through additional SUs.

However, the success of the SU market is of utmost importance for achieving the ultimate GHG reduction targets particularly in Norway's proposal, which is why we request a more rigorous assessment of the interaction between these mechanisms to fully understand their impact on the SU market. Three questions should be answered before the rules are finalised:

First, how many ordinary and multiplier-generated SUs would be issued under plausible fuel-uptake scenarios, and how would that issuance affect actual fleet emissions? The IMO should model both concentrated and dispersed ZNZ adoption, competing non-ZNZ pathways and different levels of fuel availability. The proposed strengthening of the GFI targets should be validated against those outcomes.

Second, what is the likely relationship between SU supply and the remaining Tier 1 and Tier 2 deficits? Norway's broader eligibility can improve market flexibility, but Tier 1 demand is anchored to a USD 100 contribution alternative. It cannot automatically sustain the approximately USD 200 SU value used in Norway's own illustration of ZNZ competitiveness.

Third, how resilient would the market be to prolonged external fuel-price shocks? A five-year bank may protect sellers against temporary weak prices, but it can also carry a large inventory of inexpensive compliance into later years. The IMO needs stress tests and transparent inventory data, not only assumptions about future target tightening.

The wider lesson from FuelEU Maritime is that the regulatory value assigned to compliance is not necessarily the price realised in the market. That price emerges from the economics of the available generation pathways, the demand still requiring compliance, the willingness of generators to offer units and the value of retaining them for future years.

Norway's proposal improves the ways in which surplus can be created and used. The remaining task is to demonstrate that those improvements produce a market capable of supporting the fuel investments the IMO wants to encourage. After all, a successful compliance market should be judged by whether the price signals it generates support actual emissions reductions and the development of the fuels required for deeper decarbonisation.