Tier 2 Direct Compliance Threshold (DCT) well-to-wake

Background, why a two-tier structure

The Tier 2 Direct Compliance Threshold is one half of the two-tier compliance architecture chosen at MEPC 83 in April 2025. Reading the DCT in isolation from the wider architecture produces misunderstanding; the threshold is the lower of two fleet-uniform compliance bounds, and the relationship between the two bounds is what defines the economic incentive structure of the IMO Net-Zero Framework.

The original drafting proposals during the MEPC 80 to 82 cycle considered three structural options for the GHG Fuel Standard. The first was a single-threshold model: one Required GFI value per year, with a binary compliance test. Ships at or below the threshold pay nothing; ships above the threshold surrender Remediation Units in proportion to the excess. This design is administratively simple and transparent, but it produces no positive incentive for over-compliance. A ship operator who could feasibly run an Attained GFI ten percentage points below the Required GFI gains nothing from doing so under a single-threshold model.

The second structural option was a trading-with-cap model, analogous to the EU Emissions Trading System. Every ship is allocated a quota of allowances at the start of the year; ships that emit below their quota sell the excess; ships that emit above their quota buy the deficit. This design produces a strong positive incentive for over-compliance, but it requires a fully developed allowance market, a price-discovery mechanism, and the regulatory infrastructure to verify allowance ownership at year-end. The IMO Secretariat assessed in MEPC 82 that the maritime sector lacked the market depth to support a credible allowance price within the 2027 entry-into-force window.

The third structural option, ultimately adopted at MEPC 83, is the two-tier model with administered prices. Two thresholds are set each year: an outer Required GFI that triggers Tier 1 Remediation Unit liability above it, and an inner Direct Compliance Threshold that triggers Surplus Unit issuance below it. The IMO sets the RU price administratively rather than through market discovery, and SUs trade against the RU obligation at a derived price. This design preserves a positive incentive for over-compliance, avoids the market-depth problem of full allowance trading, and gives the IMO direct control over the cost of compliance through the administered RU price.

The two-tier model carries one further design feature that distinguishes it from both alternatives. The corridor between the DCT and the Required GFI is a neutral zone: ships in this band are compliant in the Tier 1 sense and incur no Tier 1 RU obligation, but they neither earn SUs nor surrender RUs to the same degree as direct compliers or non-compliers. In the operational version of regulation 29ter that emerged at MEPC 83, ships in this corridor surrender Tier 2 Remediation Units priced at a discount to the Tier 1 RU rate, in proportion to the gap between their Attained GFI and the DCT. The neutral-zone construction is designed to produce a graduated rather than binary incentive; even a ship that cannot reach direct compliance is rewarded for closing part of the gap.

The DCT, in this architecture, plays three distinct roles. It is the upper boundary of the SU-earning region: only ships at or below the DCT generate Surplus Units. It is the lower boundary of the Tier 2 RU-surrender region: ships between the DCT and the Required GFI surrender Tier 2 RUs in proportion to their distance from the DCT. And it is the policy anchor for the strive-for ambition of the 2023 Revised IMO GHG Strategy: the DCT trajectory is calibrated to the strive-for checkpoints rather than the indicative checkpoints, so that meeting the Strategy strive-for ambition translates directly into SU eligibility.

Definition of the Direct Compliance Threshold

The Tier 2 Direct Compliance Threshold for year $y$, written $\text{GFI}_{\text{DCT}}(y)$, is the year-specific value of the well-to-wake GHG fuel intensity, expressed in grams of carbon-dioxide-equivalent per megajoule on the lower-calorific-value energy basis of Resolution MEPC.391(82), at or below which a ship’s annually attained WtW GHG fuel intensity must lie to qualify for Surplus Unit issuance under regulation 30ter of MARPOL Annex VI Chapter 4 ter. The formal regulatory definition is:

where $\text{GFI}_{2008} = 93.3$ gCO2eq/MJ is the codified 2008 well-to-wake fleet-average baseline of regulation 28ter and $r_2(y)$ is the year-$y$ Tier 2 reduction factor set out in the table of regulation 28ter paragraph 5 with linear interpolation between checkpoints under regulation 28ter paragraph 6. The $r_2(y)$ values are defined exactly at the checkpoint years 2027, 2028, 2030, 2035, 2040 and 2050, and are linearly interpolated for non-checkpoint years.

Three features of this definition deserve careful reading.

First, the DCT shares its baseline with the Required GFI. Both curves are percentage-from-2008-baseline constructions anchored on the same $\text{GFI}_{2008} = 93.3$ gCO2eq/MJ. Any future revision of the baseline value, on the basis of an updated IMO GHG Study, propagates simultaneously through both curves. This is a deliberate drafting choice that preserves the geometric relationship between the two thresholds under any baseline revision; the gap between the Required GFI and the DCT is determined by the reduction factors alone, not by the baseline.

Second, the DCT is always at least as tight as the Required GFI. Regulation 28ter paragraph 5 imposes the constraint $r_2(y) \geq r_1(y)$ for every year $y$ in the trajectory. In the MEPC 83 calibration, this constraint is binding only at the 2050 endpoint, where both reduction factors equal 100 percent and both thresholds equal zero gCO2eq/MJ; at every other year, $r_2(y) > r_1(y)$ strictly, and the DCT is strictly tighter than the Required GFI. The strict inequality is what creates the SU-earning region.

Third, the DCT is fleet-uniform and annual, on the same basis as the Required GFI. Every ship of 5,000 GT and above engaged on international voyages is assessed against the same DCT for the same calendar year. The DCT does not vary with ship type, dwt, age, route, propulsion configuration or hull form. The verification cycle follows the IAPP renewal cadence, with the year-$y$ DCT applying to the calendar-year aggregate Attained GFI of every reporting ship for year $y$.

The verbal definition of the Tier 2 DCT is therefore: the inner compliance bound, fleet-uniform and annual, expressed in WtW gCO2eq/MJ on the MEPC.391(82) LCV-energy basis, derived from the same fixed 2008 baseline as the Required GFI by an MEPC-set Tier 2 reduction factor that is at least as large as the Tier 1 factor for every year, at or below which a ship qualifies for Surplus Unit issuance under regulation 30ter at the SU issuance rate set in the same regulation.

How the DCT is set each year, Required GFI minus a fixed buffer

The DCT trajectory is not literally set as the Required GFI minus a fixed percentage buffer. The actual MEPC 83 calibration uses two independent reduction factors, $r_1(y)$ for the Required GFI and $r_2(y)$ for the DCT, both anchored on the same 2008 baseline but each calibrated to a different Strategy checkpoint level. The shorthand description as “Required GFI minus a fixed buffer” is approximately correct in the entry years, where the gap between the two thresholds is roughly stable, but it becomes a poor description in the mid-2030s when the gap reaches its maximum and again in the late 2040s when both curves converge.

The correct operational description is that the DCT is calibrated to the strive-for level of the 2023 Revised IMO GHG Strategy checkpoints, while the Required GFI is calibrated to the indicative level of the same checkpoints with a small concession on the 2030 calibration to reflect realistic bunker-pool composition.

Concretely, the MEPC 83 compromise sets the Tier 2 reduction factors as follows. In 2027 the DCT reduction is 17 percent, equivalent to the existing CII intensity reduction by mid-decade and well above the 4 percent Tier 1 reduction for the same year. In 2028 the DCT reduction is 21 percent, against 6 percent for Tier 1. In 2030 the DCT reduction is 43 percent, an interpolation between the strive-for 30 percent of MEPC.377(80) for 2030 and the indicative 43 percent for 2035, pulled forward five years to maintain a meaningful gap between the two tiers; the Tier 1 reduction for 2030 is 17 percent. In 2035 the DCT reduction is 65 percent, against 30 percent for Tier 1, producing the largest absolute gap of the trajectory at 32.66 gCO2eq/MJ. In 2040 the DCT reduction is 80 percent, the strive-for level for 2040, against 65 percent for Tier 1. In 2050 both reduction factors converge on 100 percent and both thresholds converge on zero gCO2eq/MJ.

The interpolation rule for non-checkpoint years is identical for both curves. Given two adjacent checkpoint years $y_1$ and $y_2$ with reduction factors $r_2(y_1)$ and $r_2(y_2)$, the reduction factor for any year $y$ such that $y_1 \leq y \leq y_2$ is:

The interpolation is in reduction-factor space rather than in gCO2eq/MJ space, but because the baseline is a constant the two formulations produce identical numerical results. The regulation rounds the final $r_2(y)$ to two decimal places of percentage points before computing the DCT, and the resulting DCT is then rounded to two decimal places of gCO2eq/MJ.

The policy logic of this calibration is that a fleet operator who meets the Strategy strive-for ambition runs at the DCT and earns Surplus Units, while an operator who meets only the Strategy indicative ambition runs at the Required GFI with no SU revenue and a marginal Tier 2 RU exposure for the gap between the Required GFI and the DCT. The strive-for ambition is therefore not merely a political signal but a financial trigger: meeting it generates positive cash flow through SU sales, while missing it by even a small margin tips the operator into the neutral zone with no SU revenue.

Year-by-year DCT values 2027-2050

The table below sets out the year-by-year Tier 2 reduction factor $r_2(y)$, the corresponding DCT in gCO2eq/MJ, and the gap to the Tier 1 Required GFI for the same year. Checkpoint years 2027, 2028, 2030, 2035, 2040 and 2050 are emphasised; non-checkpoint years are populated by linear interpolation as described in the previous section.

Several structural patterns deserve attention.

The 2027 DCT of 77.44 gCO2eq/MJ is approximately the WtW intensity of a high-quality LNG dual-fuel pathway operated with low methane slip, or of a 30-percent biofuel blend on a residual fuel oil base. Direct compliance is therefore achievable in 2027 by a small fleet that has already invested in LNG dual-fuel propulsion or that has secured a supply contract for advanced biofuel. The 2027 DCT is not a stretch target; it is a recognition target for ships already in transition.

The 2030 DCT of 53.18 gCO2eq/MJ corresponds to roughly 42 percent intensity reduction relative to a typical VLSFO baseline of 92.4 gCO2eq/MJ, the practical threshold at which dual-fuel methanol or LNG retrofit becomes the default abatement option. A 2030 direct complier has either a methanol or ammonia dual-fuel newbuild, an LNG dual-fuel ship operated on a high biomethane share, or an LNG ship retrofitted with carbon-capture and substantial onboard wind-assist.

The 2035 DCT of 32.66 gCO2eq/MJ is below the WtW intensity of even the cleanest LNG pathway. Direct compliance in 2035 requires a fuel mix dominated by green ammonia, e-methanol or biomethane, with VLSFO playing only a marginal role. The 2035 Tier 1 minus Tier 2 gap of 32.66 gCO2eq/MJ is the largest in the trajectory; this is the maximum-incentive year for early-mover capital deployment.

The 2040 DCT of 18.66 gCO2eq/MJ is below the WtW intensity of any current commercial pathway except green ammonia produced from renewable electricity, e-methanol from synthesis, or biomethane from advanced feedstocks with verified low upstream emissions. The 2040 DCT is achievable only by ships that have completed a full transition to ZNZ fuels.

The 2050 DCT of zero gCO2eq/MJ is the net-zero anchor. Direct compliance in 2050 requires a zero-emission fuel pathway across the full WtW boundary, including upstream production, transport, distribution and onboard combustion. Negative-emission credits within the GFS framework are not currently accepted; the 2050 endpoint is a hard zero rather than a net zero.

The non-checkpoint years between 2030 and 2035, and between 2035 and 2040, follow the linear interpolation rule strictly. The tightening rate accelerates between 2030 and 2035 (4.4 percentage points per year for $r_2$), holds at 3 percentage points per year between 2035 and 2040, and slows to 2 percentage points per year between 2040 and 2050. This non-uniform tightening rate reflects the MEPC 83 calibration of the Strategy checkpoints rather than any inherent technical schedule.

Surplus Unit issuance mechanics

A ship whose Attained GFI for year $y$ lies at or below the DCT for year $y$ generates Surplus Units in proportion to the over-compliance margin. The issuance formula of regulation 30ter paragraph 2 is:

where $\text{GFI}_{\text{att}}$ is the ship’s calendar-year Attained GFI in gCO2eq/MJ, $\text{GFI}_{\text{DCT}}(y)$ is the year-$y$ DCT in gCO2eq/MJ, $E_{\text{total}}$ is the ship’s calendar-year fuel-energy in megajoules on the LCV basis of Resolution MEPC.391(82), and the divisor $10^6$ converts the product from grams to tonnes. The SU is denominated in tonnes CO2eq, the same unit as the Tier 1 Remediation Unit, so that one SU offsets one Tier 1 RU on a one-for-one basis under the surrender accounting of regulation 32ter.

Three features of the issuance formula deserve careful reading.

First, the $\max(0, \cdot)$ operator ensures that no SUs are issued for ships above the DCT. A ship in the neutral zone between the DCT and the Required GFI receives zero SUs even if its Attained GFI is far below the Required GFI; only the gap below the DCT counts toward issuance.

Second, the issuance is proportional to the gCO2eq/MJ excess multiplied by the fuel-energy in MJ, not to the percentage over-compliance or to the absolute emissions. A ship that runs 10 gCO2eq/MJ below the DCT on 50 PJ of annual fuel-energy generates the same number of SUs as a ship that runs 10 gCO2eq/MJ below the DCT on 50 PJ of fuel-energy, regardless of ship type, dwt or trade. This construction couples SU issuance to the absolute fuel consumption of the ship rather than to any normalised intensity metric.

Third, the SU issuance is not capped. A ship that runs at zero gCO2eq/MJ in 2027 (a hypothetical pure-green-ammonia ship) generates SUs equal to $77.44 \cdot E_{\text{total}} / 10^6$ tonnes CO2eq, which on a 60 PJ Panamax bulker is approximately 4.6 million tonnes CO2eq. The absence of a cap is a deliberate choice to avoid blunting the early-mover incentive; the regulation accepts that very large SU issuances are possible in the early years and that the SU pool will compress as the trajectory tightens.

The IMO Net-Zero Fund maintains a central ledger of SU issuance under regulation 32ter, with each SU recorded against the ship’s IMO number and the calendar year of issuance. The ledger is the authoritative record of SU ownership and the basis for all subsequent banking, pooling and trading transactions.

Banking, pooling, and trading of Surplus Units

Surplus Units, once issued, are not ephemeral compliance credits. Regulation 32ter sets out three categories of permitted SU disposition: banking, pooling, and transfer. Each category has different rules and different time horizons.

Banking is the retention of SUs by the issuing ship’s owner for use in a future year’s compliance accounting. Banked SUs may be used to offset the Tier 1 RU surrender obligation of any ship in the same owner’s fleet for a future year, on a one-for-one basis in tonnes CO2eq. Banking is permitted for up to five calendar years beyond the year of issuance, with a one-year roll-over rule that allows a single year of additional retention if formally requested by the owner. SUs that are not used or transferred within the banking horizon expire and are cancelled from the IMO ledger. The five-year horizon is designed to balance two policy objectives: rewarding early-mover investment with a meaningful banking tail, and avoiding an indefinite accumulation of legacy SUs that would dilute the abatement signal of the trajectory.

Pooling is the aggregation of SUs across multiple ships in the same owner’s fleet for the purpose of meeting the surrender obligation of any single ship in the pool. Under regulation 32ter paragraph 4, an owner with a fleet of N ships may pool the SU issuances of all direct-complier ships and apply them to the Tier 1 RU surrender obligation of any non-complier ship in the same fleet, subject to the constraint that the pooled offset cannot exceed the total Tier 1 RU obligation of the receiving ship. Pooling is administratively similar to the FuelEU Maritime pooling mechanism described in FuelEU Maritime explained, but the GFS pooling rules are stricter: pooling is permitted only within the same Document of Compliance (DoC) holder, not across different commercial operators. This restriction is designed to prevent pure financial pooling between unrelated operators, which the MEPC 83 negotiators viewed as inconsistent with the operational character of the Tier 1 surrender obligation.

Transfer is the sale or assignment of SUs from one owner to a different owner, executed through the IMO Net-Zero Fund’s central ledger. Transfer is permitted from 2028 onward, with a one-year delay relative to the entry-into-force date of Chapter 4 ter to allow the ledger infrastructure to stabilise. Transfers are recorded on the central ledger with a transaction fee of 1 percent of the transaction value, paid into the IMO Net-Zero Fund. The transaction fee is the principal mechanism by which the SU market generates revenue for the Fund’s developing-country mitigation programmes, alongside the RU surrender revenue.

A subordinate category, sometimes treated as a fourth disposition, is retirement. An owner may voluntarily retire SUs without using them for compliance, banking them, or transferring them. Retired SUs are cancelled from the central ledger and are not counted toward any compliance obligation. Retirement is permitted at any time and is the principal mechanism by which voluntary corporate climate commitments can be expressed within the GFS framework. A shipping company that wishes to claim climate leadership beyond the regulatory floor may purchase SUs on the secondary market and retire them, demonstrating an over-and-above contribution to the trajectory.

The combined effect of banking, pooling, transfer and retirement is that the SU market behaves as a liquid secondary instrument with a five-year shelf life. The market depth is determined by the number of direct compliers, the absolute over-compliance margin in gCO2eq/MJ, the total fuel-energy of the direct-complier fleet, and the rate at which non-compliers and tiered compliers seek to offset their Tier 1 RU obligation through SU purchases. The IMO has indicated that it will publish quarterly market statistics from 2028 onward, including the total SU pool, the average transaction price, the geographic distribution of SU sellers and buyers, and the fraction of SUs that are banked, pooled, transferred, or retired in each calendar quarter.

Market interaction, RU and SU price relationship

The Tier 1 Remediation Unit price is set administratively by the MEPC under regulation 33ter and reviewed at least every five years. The MEPC 83 compromise set the indicative RU price for the 2027 to 2030 period at approximately 100 USD per tonne CO2eq, with formal confirmation deferred to MEPC 84 in October 2025. Subsequent reviews are scheduled for 2030, 2035, 2040 and 2045, with the indicative trajectory rising to approximately 250 USD per tonne CO2eq by 2050.

The Surplus Unit price is not administered. SUs trade on the secondary market through the IMO ledger transfer mechanism, with the market price determined by the supply-demand balance of SU issuances relative to Tier 1 RU obligations. The relationship between the SU price and the RU price is bounded by an arbitrage argument that runs as follows.

The upper bound on the SU price is the Tier 1 RU price itself. A non-complier ship has the choice between surrendering a Tier 1 RU at the administered price and purchasing an SU at the market price to offset the same one-tonne CO2eq obligation. If the SU price exceeds the RU price, the non-complier prefers to surrender RUs and the SU demand collapses, pushing the SU price down. If the SU price equals the RU price, the non-complier is indifferent and the SU market clears at parity.

The lower bound on the SU price is the Tier 2 RU price, which regulation 33ter sets at a fixed discount to the Tier 1 RU price (initially 50 percent in the 2027 to 2030 period, reviewable). A tiered-complier ship has the choice between surrendering a Tier 2 RU at the discounted administered price and purchasing an SU at the market price to offset the same one-tonne CO2eq Tier 2 obligation. If the SU price falls below the Tier 2 RU price, tiered compliers buy SUs en masse and the SU demand pushes the price back up to the Tier 2 floor. If the SU price equals the Tier 2 RU price, tiered compliers are indifferent.

The combined effect of the upper and lower bounds is that the SU price trades in a corridor between the Tier 2 RU price and the Tier 1 RU price, with the exact equilibrium determined by the relative size of the SU pool and the combined Tier 1 plus Tier 2 RU obligation. In years when direct compliers are few and non-compliers are many, the SU price approaches the Tier 1 RU price; in years when direct compliers are many and tiered compliers dominate the demand side, the SU price approaches the Tier 2 RU price.

A second-order effect introduces the banking option value. An owner who banks SUs for future use values them not only at the current-year clearing price but also at the expected discounted future price. If the trajectory tightens faster than the RU price rises, banked SUs gain real value over time, and the equilibrium SU price in the issuance year incorporates a positive option premium. The MEPC 83 calibration with a 4.4-percentage-point-per-year tightening rate between 2030 and 2035 is precisely the regime in which the banking option premium is largest, and the secondary-market SU prices in 2027 to 2030 are likely to incorporate a 5 to 15 percent premium relative to the unconditional RU corridor floor.

A third-order effect introduces the regional price correlations with FuelEU Maritime compliance balances and EU ETS for shipping allowance prices. A European-trading direct complier earns SUs under the GFS, FuelEU surplus balance under the EU regulation, and reduced EU ETS allowance demand. These three credits are not formally fungible, but they are correlated through the same underlying fuel-mix decisions, and the secondary markets for each tend to move together. Sophisticated fleet operators model the three markets jointly when planning fuel procurement and capital deployment.

Well-to-wake methodology, consistency between Tier 1 and Tier 2

A central design principle of the GFS is that the Attained GFI is computed once per ship-year, on a single methodology, and compared independently against both the Tier 1 Required GFI and the Tier 2 DCT. The methodology is the well-to-wake lifecycle accounting of Resolution MEPC.391(82), and it is applied identically for the Tier 1 surrender computation and the Tier 2 SU issuance computation.

The well-to-wake boundary covers four lifecycle phases. The upstream phase includes feedstock extraction, conversion, processing and refining; for fossil fuels this captures crude extraction, refinery operations and product distribution; for biofuels it captures feedstock cultivation, transport and conversion; for synthetic fuels it captures the electricity input, the carbon source and the synthesis energy. The transport phase includes the marine and inland transport of the fuel from the production facility to the bunker port. The bunkering phase includes the storage, blending and transfer operations at the bunker port. The onboard phase includes the combustion or conversion of the fuel into mechanical or electrical energy, including any unburned fuel slip such as methane slip from LNG dual-fuel engines.

The lifecycle GHG intensity is expressed in gCO2eq/MJ on the lower-calorific-value energy basis of the fuel, using AR5 GWP100 weighting for non-CO2 GHGs (methane at 28, nitrous oxide at 265). The MEPC.391(82) Default Values Table provides default WtW intensities for every commercially relevant marine fuel pathway, with optional certified-pathway values for fuels supported by a Sustainability Certification Scheme certificate. A ship may use the certified value if available; otherwise the default applies.

The methodological consistency between Tier 1 and Tier 2 has three practical consequences.

First, a ship’s Attained GFI is a single number per calendar year, and the Tier 1 surrender computation and the Tier 2 SU issuance computation use the same number. There is no scenario in which a ship is assessed at one Attained GFI for Tier 1 purposes and a different Attained GFI for Tier 2 purposes. This rules out methodological arbitrage.

Second, any certification benefit of a Sustainability Certification Scheme certificate accrues equally to both compliance computations. A certified low-carbon biomethane pathway with a WtW intensity 8 gCO2eq/MJ below the default value reduces the Attained GFI by 8 gCO2eq/MJ for both the Tier 1 surrender and the Tier 2 SU issuance. This produces a coherent incentive for fuel suppliers to seek certification: certification reduces the Tier 1 RU obligation and increases the Tier 2 SU issuance simultaneously, with no methodological dilution.

Third, any methodological revision at a future MEPC review affects both compliance computations symmetrically. If a 2030 review of the LCA Guidelines tightens the methane-slip default for LNG dual-fuel engines, the Attained GFI of every LNG dual-fuel ship rises by the same amount for both Tier 1 and Tier 2 purposes. The methodological-risk exposure of an LNG investment is therefore equal for the upper and lower compliance bounds, and the investment thesis can be evaluated on a single Attained GFI scenario rather than on two parallel scenarios.

The methodological consistency is not a trivial design feature. The EU’s parallel construction in the FuelEU Maritime Regulation and the EU ETS uses two slightly different lifecycle methodologies (the Renewable Energy Directive II for FuelEU and the Maritime ETS Methodology for EU ETS), producing small but persistent differences in the assessed intensity of the same fuel pathway. The IMO has explicitly avoided this fragmentation in the GFS architecture by collapsing all Chapter 4 ter computations onto the single MEPC.391(82) methodology.

Formula, assumptions, and limits

Formula

The Tier 2 Direct Compliance Threshold for year $y$ is given by:

The Surplus Unit issuance for a ship with Attained GFI at or below the DCT is given by:

The Tier 2 reduction factor $r_2(y)$ is defined exactly at the MEPC 83 checkpoint years 2027, 2028, 2030, 2035, 2040 and 2050, and is linearly interpolated for non-checkpoint years using:

where $y_1$ and $y_2$ are the two adjacent checkpoint years bracketing $y$.

Derivation

The DCT is derived from the 2008 baseline and the year’s Tier 2 reduction factor by direct multiplication of $\text{GFI}_{2008} = 93.3$ gCO2eq/MJ by $(1 - r_2(y))$. The reduction factor $r_2(y)$ is derived from the MEPC 83 calibration of the Strategy strive-for checkpoints for non-checkpoint years using the linear-interpolation rule. The derivation involves no fitted constants, no statistical estimation, and no fleet-specific calibration: the trajectory is identical for every ship subject to Chapter 4 ter regardless of size, type or trading pattern.

The SU issuance is derived from the Attained GFI shortfall below the DCT by direct multiplication by the ship’s annual fuel-energy in megajoules. The conversion to tonnes CO2eq is by division by $10^6$, since the Attained GFI and DCT are in grams per megajoule and the issuance is in tonnes per ship-year.

Assumptions

The DCT and SU issuance formulas rest on five explicit assumptions of MARPOL Annex VI Chapter 4 ter.

First, the 2008 baseline assumption: a single fleet-average WtW intensity of 93.3 gCO2eq/MJ characterises the international fleet in 2008. This baseline is reconstructed from the Fourth IMO GHG Study and is treated as immutable by the regulation.

Second, the AR5 GWP100 weighting assumption: methane is weighted at 28 and nitrous oxide at 265 over a 100-year horizon. Future amendments to IPCC AR6 or AR7 weightings would require an MEPC amendment to take effect.

Third, the LCV-energy basis assumption: fuel energy is computed on the lower-calorific-value basis rather than higher-calorific-value or net-calorific-value alternatives. The choice of LCV is consistent with the existing CII regulation and the EU FuelEU Maritime methodology.

Fourth, the default-pathway assumption: in the absence of a certified Sustainability Certification Scheme certificate, the default WtW intensity from the MEPC.391(82) Default Values Table applies. The default values are conservative relative to typical certified pathways.

Fifth, the annual-aggregation assumption: the Attained GFI is computed on calendar-year aggregate fuel consumption, not on voyage-specific or season-specific fuel consumption. Within-year variations in fuel mix average out over the calendar year.

Worked example

Consider a Panamax bulker with annual fuel-energy of $E_{\text{total}} = 60$ PJ = $6 \times 10^{16}$ J = $6 \times 10^{10}$ MJ in calendar year 2030, operated on a fuel mix yielding an Attained GFI of 48.0 gCO2eq/MJ.

The 2030 DCT is:

The over-compliance margin is:

The SU issuance is:

That is 310,800 SUs for the calendar year 2030. At a notional SU price of 80 USD per tonne CO2eq (a midpoint between the Tier 2 RU floor and Tier 1 RU ceiling), the implied annual SU revenue is approximately 24.9 million USD. This revenue stream is the principal financial reward for early-mover investment in the dual-fuel methanol or biomethane retrofit that delivered the 48.0 gCO2eq/MJ Attained GFI.

For the same ship in 2035, with the DCT at 32.66 gCO2eq/MJ, the same Attained GFI of 48.0 gCO2eq/MJ would be in the neutral zone (above the 2035 DCT but below the 2035 Required GFI of 65.31 gCO2eq/MJ). No SUs are issued; a Tier 2 RU obligation of $48.0 - 32.66 = 15.34$ gCO2eq/MJ multiplied by 60 PJ and divided by $10^6$ equals 920,400 tCO2eq applies, at the Tier 2 RU price (50 percent of the Tier 1 RU price under the MEPC 83 indicative calibration).

The contrast between the 2030 SU revenue of 24.9 million USD and the 2035 RU obligation of approximately 36.8 million USD (at a Tier 2 RU price of 40 USD per tonne CO2eq, half of the 80 USD Tier 1 indicative) illustrates the maximum-incentive-year dynamic: the same ship that earns SUs in 2030 must continue to invest in Attained GFI reduction or face a substantial Tier 2 RU obligation by 2035.

Edge cases and limits

Six edge cases of the DCT and SU issuance formulas deserve attention.

First, a ship with zero fuel consumption in a calendar year (a laid-up ship or a ship in long drydock) generates zero SUs regardless of any notional Attained GFI. The issuance formula multiplies the gCO2eq/MJ shortfall by the fuel-energy, so $E_{\text{total}} = 0$ produces zero issuance.

Second, a ship with an Attained GFI exactly equal to the DCT (to the rounding precision of two decimal places of gCO2eq/MJ) generates zero SUs. The formula uses a non-strict inequality ($\text{GFI}_{\text{att}} \leq \text{GFI}_{\text{DCT}}$) for direct-compliance qualification but a strict positive shortfall for SU issuance. A ship at exactly the DCT is direct-compliant and earns zero SUs.

Third, a ship that achieves a negative Attained GFI through verified onboard CO2 capture and storage to permanent geological sequestration, where the upstream and onboard capture exceeds the downstream emissions, is treated under MEPC 83 as having an Attained GFI of zero rather than a negative number. The MEPC has deferred the question of negative-GFI accounting to a future review.

Fourth, the first-year transition from no Chapter 4 ter to active Chapter 4 ter on 1 January 2027 is a hard-edge transition with no phase-in. A ship that delivered an Attained GFI of 50 gCO2eq/MJ in 2026 (when the GFS was not in force) and the same 50 gCO2eq/MJ in 2027 receives 1.65 million tCO2eq in SUs in 2027 (on a 60 PJ fleet) but received zero SUs in 2026 because the regulation was not in force.

Fifth, the 2050 endpoint of zero gCO2eq/MJ produces a degenerate SU issuance computation. With the DCT at zero, the only ships that generate SUs are those with negative Attained GFI, which under the current treatment are floored to zero. The 2050 SU pool is therefore zero; the MEPC has indicated that the post-2050 review cycle will revisit this question.

Sixth, a ship that switches flag mid-year (a single-flag ship that changes Administration in July, for example) is assessed under the calendar-year aggregate fuel consumption attributable to the IMO number, not under any flag-specific allocation. The Attained GFI is computed once per IMO number per calendar year. This rule prevents flag-of-convenience timing optimisations.

Regulatory basis

The regulatory basis for the Tier 2 DCT and Surplus Unit issuance is MARPOL Annex VI Chapter 4 ter, specifically:

• Regulation 28ter paragraphs 5 and 6: define the Tier 2 reduction factor table and the linear-interpolation rule.
• Regulation 29ter paragraph 4: defines direct compliance as Attained GFI at or below the DCT.
• Regulation 30ter: defines the Surplus Unit issuance formula and the SU denomination in tonnes CO2eq.
• Regulation 32ter: defines banking, pooling, transfer, and retirement of Surplus Units.
• Regulation 33ter: defines the Tier 1 and Tier 2 RU prices and the SU corridor pricing.
• Resolution MEPC.391(82): defines the LCA methodology and default WtW intensities.

The regulatory basis is consistent with the 2023 Revised IMO GHG Strategy (Resolution MEPC.377(80)) at the level of Strategy checkpoints and with the broader MARPOL Annex VI framework at the level of verification and IAPP renewal.

Common errors

Five common errors recur in fleet-planning applications of the DCT and SU issuance.

First, applying the strive-for level to the Required GFI rather than the DCT treats the Tier 1 floor as if it were the Tier 2 DCT, overstating the Tier 1 surrender obligation in 2030 by 23 percentage points (43 percent rather than 17 percent reduction). The reverse error, applying the indicative level to the DCT, understates the SU issuance by the same margin.

Second, using the Tier 1 reduction factor for SU calculation rather than the Tier 2 factor produces an SU issuance that is too small by the Tier-1-minus-Tier-2 gap, which is largest in 2035 at 32.66 gCO2eq/MJ.

Third, computing the SU issuance from a TtW Attained GFI rather than the WtW Attained GFI ignores the upstream emissions and produces an SU issuance that is too large for fossil pathways and too small for biofuel pathways. The Attained GFI for the SU issuance must be the same WtW number as for the Tier 1 surrender.

Fourth, failing to apply the $\max(0, \cdot)$ operator to the gap below the DCT produces negative SU issuances for ships in the neutral zone or above the Required GFI. The regulation does not permit negative SUs; the gap floor is zero.

Fifth, double-counting SUs across the IMO ledger and a national or regional ledger (such as the EU FuelEU Maritime surplus balance ledger) violates the Single Verification Principle of regulation 31ter. SUs and FuelEU surplus balances are independent credits computed under different methodologies; a ship that earns both retains both, but the units are not fungible across regimes.

Strategic implications, when to invest in over-compliance

The DCT and SU issuance mechanism creates a positive economic incentive for early-mover investment in alternative fuels and onboard efficiency, but the strength and timing of that incentive vary substantially across the trajectory. Fleet operators face a strategic question: when in the 2027 to 2050 trajectory does the investment thesis for direct compliance dominate the alternative thesis of tiered compliance with Tier 2 RU surrender?

The answer depends on four parameters: the SU equilibrium price relative to the Tier 1 and Tier 2 RU corridor, the marginal abatement cost of the next gCO2eq/MJ of intensity reduction, the banking option premium for SUs issued in tightening years, and the residual asset value of any abatement capital at the next five-yearly review.

For 2027 to 2029, the SU price is constrained by a thin secondary market with few direct compliers and few non-compliers. Most of the 5,000 GT-and-above fleet is a tiered complier in this period, and the SU demand from non-compliers is small. The SU equilibrium price is likely to sit close to the Tier 2 RU floor, which limits the SU revenue per tonne CO2eq. The investment thesis for direct compliance in 2027 to 2029 is therefore weak unless the abatement capital has independent value in later years.

For 2030 to 2034, the SU price strengthens as the trajectory tightens. The 2030 DCT of 53.18 gCO2eq/MJ pushes a substantial fraction of the LNG dual-fuel fleet out of direct compliance, and the SU pool contracts; simultaneously, the 2030 Required GFI of 77.44 gCO2eq/MJ pushes a fraction of the VLSFO fleet into Tier 1 non-compliance, and the RU plus SU demand expands. The SU equilibrium price in this period is likely to migrate toward the Tier 1 RU ceiling, with a substantial banking option premium for SUs that can be carried into 2035.

For 2035 to 2039, the SU price is maximally tight in the 2035 maximum-incentive year (Tier 1 minus Tier 2 gap of 32.66 gCO2eq/MJ) and softens in the years immediately following. A direct complier in 2035 generates very large SU issuances per ship-year, and the equilibrium price approaches the Tier 1 RU ceiling. This is the peak SU revenue year of the trajectory and the year in which the early-mover investment thesis is strongest.

For 2040 to 2049, the SU price compresses as both the gap and the SU pool shrink. A direct complier in 2045 generates a much smaller SU issuance per ship-year (DCT at 9.33 gCO2eq/MJ, gap to Required GFI at 7.0 gCO2eq/MJ), and the equilibrium price softens accordingly. The investment thesis in this period is dominated by the avoidance of Tier 1 RU surrender at progressively higher RU prices rather than by SU revenue.

For 2050 and beyond, both the DCT and the Required GFI converge on zero gCO2eq/MJ, and the trajectory mechanism collapses into a single point. The SU and RU markets become degenerate, and a successor regime is required.

The strategic conclusion is that the window of maximum SU revenue per ship-year is approximately 2030 to 2038, with the absolute peak in 2035. Capital deployment that delivers a low Attained GFI in this window earns disproportionate SU revenue relative to capital deployment that targets the same Attained GFI in 2027 to 2029 (low SU price) or in 2040 onward (low gap). A ten-year investment horizon that targets full operation by 2030 captures the entire 2030 to 2038 SU revenue window plus the 2027 to 2029 banking-option tail; this is the financial logic that motivates early-mover newbuilds and retrofits in the 2026 to 2029 capital cycle.

A second strategic dimension is the portfolio composition of an owner with a mixed fleet. Pooling rules permit SUs from direct-complier ships in the fleet to offset Tier 1 RU obligations of non-complier ships in the same fleet. This produces a positive incentive for hybrid fleet strategies: invest aggressively in a small subset of ships that operate at the DCT, and use their SU pool to offset the more modest non-compliance of the remaining VLSFO-fuelled fleet. The economics of this hybrid strategy depend on the relative size of the direct-complier and non-complier subsets, the SU equilibrium price, and the administrative overhead of pooling.

A third strategic dimension is the regulatory-correlation hedge with FuelEU Maritime and EU ETS for shipping. A ship operating in European trade earns SUs under the GFS, FuelEU surplus balance under the EU regulation, and reduced EU ETS allowance demand. The three credits are not formally fungible, but the underlying fuel-mix decisions are identical, and the secondary markets are correlated. A European-trading early mover captures three correlated revenue streams from a single capital deployment, substantially improving the investment IRR relative to a non-European-trading early mover.

A fourth strategic dimension is the review-cycle exposure of capital deployment. A 2027 capital deployment with a fifteen-year payback is exposed to two five-yearly reviews (2030 and 2035), each of which can tighten the trajectory. A tightened trajectory increases the Attained GFI relative to the DCT and reduces SU issuance for the same fuel-mix; a loosened trajectory has the opposite effect. The review-cycle exposure is asymmetric: the political momentum of the 2023 Revised IMO GHG Strategy is toward tightening rather than loosening, and a prudent investment thesis assumes a 5 to 15 percentage-point tightening at each five-yearly review. Capital deployments with shorter paybacks have lower review-cycle exposure and are more attractive on a risk-adjusted basis.

The combined strategic picture is that the DCT and SU issuance mechanism rewards a specific profile of investment: early in the entry years, targeted at the 2030 to 2038 SU revenue window, biased toward European-trading routes for the FuelEU and EU ETS correlation, with a payback horizon shorter than ten years to limit review-cycle exposure. This profile is consistent with the dual-fuel methanol newbuild thesis that has dominated the 2024 to 2026 newbuild orderbook and with the LNG-with-biomethane retrofit thesis that has dominated the 2025 to 2026 retrofit market.

See also

• Tier 1 Required GFI standard
• IMO Net-Zero Framework
• Marine GFS methodology
• GFI reduction trajectory 2027 to 2050
• 2023 Revised IMO GHG Strategy
• MARPOL Annex VI
• FuelEU Maritime explained
• EU ETS for shipping

ShipCalculators.com calculators relevant to this article:

• GFI compliance calculator for end-to-end Tier 1 RU and Tier 2 SU computations.
• GFI attained calculator for the upstream WtW Attained GFI from any fuel-mix.
• FuelEU compliance balance calculator for the parallel European compliance computation.

Related calculators

• NOx Tier Compliance Check
• Slamming Relative Velocity Threshold
• NOₓ Tier I / II / III Limits
• IMSBC - Direct Reduced Iron (A)
• Boiler Efficiency - Direct Method
• Boiler - Direct-Method Efficiency
• PMS Completion Rate
• VLSFO - Well-to-Wake

Related formulas

• NOx Tier Compliance Check
• GFI Compliance - IMO Net-Zero Framework
• Slamming Relative Velocity Threshold
• NOₓ Tier I / II / III Limits
• IMSBC - Direct Reduced Iron (A)
• FuelEU Compliance Balance
• Boiler Efficiency - Direct Method
• Boiler - Direct-Method Efficiency
• PMS Completion Rate
• ODME - 30 L/nm Compliance Check