Seatrade-Maritime: IMO Net-Zero Framework penalties could face FMC threat in US

Published by Seatrade-Maritime

Container lines preparing for the International Maritime Organization’s (IMO) Net-Zero Framework (NZF) could face an operational and legal conundrum in the US depending on how the framework shakes out, according to a regulatory briefing by law firm Holland & Knight.

While the IMO is proposing to enforce tiered penalties – ranging from $100 to $380 per tonne of carbon dioxide equivalent – to drive fleet decarbonization, attorneys at the firm warn that carriers that attempt to pass those compliance costs along to their customers could trigger aggressive regulatory action at the Federal Maritime Commission (FMC).

“The [FMC] plays an important role in protecting US importers and exporters from unjust practices, and international environmental mandates that impact shipping costs and service availability may warrant the Commission’s oversight,” Holland & Knight stated in the briefing, authored by partners Sean Pribyl, Lucille Marvin, and associate Allison Skopec.

OSRA’s surcharge problem

At the center of the dispute is how carriers will recover the financial costs required by the IMO’s penalty structure. Under the Shipping Act of 1984, as amended by the Ocean Shipping Reform Act (OSRA) of 2022, common carriers are barred from practices that lead to unreasonable increases in transportation costs or to unreasonable decreases in service.

US importers and exporters would be allowed to challenge those practices before the FMC if ocean carriers attempt to offset IMO penalties by introducing broad environmental surcharges, or by embedding compliance costs into their service contracts.

“Additionally, proposals that would mandate adoption of fuels before they reach demonstrated commercial viability raise questions about realistic availability, affordability and scalability,” the law firm points out. “Stakeholders continue to debate whether implementation timelines should be tied to verifiable fuel readiness metrics or whether firm deadlines are necessary to accelerate investment and adoption.”

DiBella’s hard line

Of particular cause for concern for carriers, the law firm stresses, are statements from FMC Chair Laura DiBella. In addition to insisting that a decarbonization framework be linked to the viability and availability of alternative fuels, DiBella has also stated that the NZF could become the subject of a FMC investigation.

“Though she has not said the FMC has plans to open proceedings against any specific country, she has placed the FMC’s seldom-used Section 19 authority squarely within the international climate policy discussion,” according to the authors.

Under Section 19 of the Shipping Act, they note, the agency can open an investigation on its own or in response to a petition when a foreign government’s laws, regulations or practices – or a foreign vessel operators’ competitive methods or pricing practices – create unfavorable conditions in U.S. foreign-trade shipping. “Thus, implementation of the framework by flag states or carrier practices used to recover its costs could attract FMC scrutiny if the resulting charges or restrictions produce such conditions.”

They warn that the remedies available to FMC regulators are severe:

• Equalizing fees on foreign-flag vessels calling at US ports.
• Tariff and service contract suspensions.
• Limits on sailings or cargo.
• Financial penalties reaching up to $1 million per voyage.
• Denying vessel entry at US ports.

Recommendations for industry

With delegates under increasing pressure in the coming months to negotiate an NZF agreement, Holland & Knight offered “key considerations” for shippers, carriers, and other maritime industry participants, including:

• Monitor the evolving US regulatory posture and any retaliatory trade measures the US may pursue against flag states supporting the framework.
• Assess potential exposure to increased transportation costs resulting from fuel mandates and develop strategies for cost management and allocation in service contracts.
• Engage with policymakers and industry associations to advocate for NZF provisions that recognize commercially viable alternative fuels.
• Prepare for regulatory fragmentation – continued delay in NZF adoption may result in an expanding patchwork of regional carbon pricing systems with varying compliance obligations.
• Evaluate service contracts and tariff provisions in light of potential environmental surcharges and compliance cost pass-throughs.
• Leverage FMC’s protections to address carrier practices that may raise concerns under the US Shipping Act.