Brazil's submission to ISWG-GHG 22 (document 22/2/12) would keep the IMO Net-Zero Framework's core compliance architecture intact while delaying and softening its first years — and the first FuelEU Maritime compliance cycle shows exactly why the softening matters. With FuelEU surplus prices collapsing to €83.13/tCO₂e at end-August 2026, according to BetterSea transaction data, down from €190-200/tCO₂e during the first cycle, the European experience demonstrates how quickly a compliance market finds the cheapest generator and what that does to everyone else's economics.

The proposal, tabled ahead of the September 2026 intersessional working group, follows the October 2025 decision not to adopt the draft MARPOL Annex VI amendments. Rather than reopen the MEPC 83 package, Brazil presents compromise options that preserve the GHG Fuel Intensity standard, ship-level compliance balances, Surplus Units, Remedial Units and financial support for zero- and near-zero (ZNZ) fuels. Changes target three areas: initial target stringency, the presentation of the economic element, and the institutional structure for collecting and redistributing compliance contributions.

The architecture stays, the wording changes

Ships would still be measured against an annual well-to-wake GHG intensity in gCO₂eq/MJ, benchmarked against the 93.3 gCO₂eq/MJ reference value representing shipping's average 2008 intensity. Two thresholds remain: the less stringent Base Target and the deeper Direct Compliance Target. A vessel's position relative to both determines whether it generates surplus, a Tier 1 deficit, or both Tier 1 and Tier 2 deficits.

Brazil's proposed Regulation 32 wording would make explicit that a ship can comply directly through fuels, technologies or energy sources — or by cancelling banked or traded surplus units and Remedial Units (RUs). Draft Regulation 36 would similarly confirm each ship may voluntarily choose its route. The political purpose is clear: Brazil proposes removing references to "GHG emissions pricing," arguing the system is not a general levy on every tonne of emissions but an alternative compliance route where direct physical compliance is unavailable or commercially unattractive.

A softer start, then a sharper trajectory

Brazil shifts implementation dates by one year and defers several reduction levels, citing concerns about compliant fuel availability, supply chain maturity and economic impact. The distinctive feature is 2029 and 2030, when the Base Target and Direct Compliance Target would be identical — 3% in 2029 and 4% in 2030 — effectively eliminating the Tier 1 band. Brazil's stated aim is to reduce early revenue collection and give IMO time to build collection and redistribution systems. From 2031 the targets separate sharply: the Direct Compliance Target at a 19% reduction versus 6% for the Base Target. At the far end, Brazil would replace the envisaged 65% Base Target reduction in 2040 with 70% in 2041.

Surplus units as a tradable asset — with limits

A ship beating the Direct Compliance Target generates surplus units measured in tonnes of CO₂-equivalent, transferable to other ships, bankable, or voluntarily cancelled as mitigation. This mirrors FuelEU's pooling logic: reductions happen where they are cheapest, and vessels with high physical decarbonisation costs stay compliant through the market.

But not every marginal improvement creates tradable supply. A vessel between the two 2031 thresholds — say at a 10% reduction — meets the Base Target yet generates no surplus. And Tier 1 deficits must be covered by Tier 1 RUs, not traded surplus; surplus units can only address Tier 2 deficits alongside Tier 2 RUs. That prevents cheap surplus from satisfying the full compliance requirement of every higher-emitting vessel and preserves RU demand even in a well-supplied surplus market.

The 2029-2030 introductory period temporarily removes that safeguard. With a single threshold, vessels — potentially including some LNG configurations, depending on final well-to-wake GHG factors — could generate large volumes of low-cost surplus before the two-tier structure takes effect.

What FuelEU's first year shows

European Commission data shows more than 90% of ships used pooling for the 2025 compliance year, fewer than 2% used borrowing, and roughly 7% made no flexibility request — about half of those complying directly, the rest paying the penalty. The market worked. The fuel outcome is more nuanced: biofuel supplied more than two-thirds of renewable and low-carbon compliance energy, and Commission modelling suggests existing LNG delivered roughly one-third of the required 2025 emissions reduction. E-fuels, onshore power and wind-assisted propulsion remained marginal.

The 2026 price collapse sharpens the structural point. The Strait of Hormuz shock raised conventional bunker prices faster than some biofuel prices, compressing the fossil-renewable premium; industry sources reported FuelEU abatement costs for biofuel-MGO switches falling below zero. Companies that previously bought surplus became low-cost generators themselves, and new supply entered the market at near-zero marginal cost. The surplus market does not distinguish between generation costs — the cheapest marginal supplier increasingly sets the value received by every generator, including those using capital-intensive e-methanol, e-ammonia or renewable hydrogen.

The IMO draft responds in two ways FuelEU does not. Surplus units expire after two calendar years, preventing an indefinitely growing stock of legacy compliance (FuelEU banking has no expiry date, and the size of the accumulated banked stock is invisible to market participants). And the separate ZNZ reward mechanism — retained by Brazil, with a dedicated ZNZ Rewards Window tied to evidence of actual qualifying fuel use, and a threshold of no more than 19 gCO₂eq/MJ — targets support at the deep-decarbonisation pathways that generic compliance value cannot bridge.

A Facility instead of a Fund

Institutionally, Brazil replaces the IMO Net-Zero Fund with an IMO Facility: IMO sets governing rules, eligibility and policy, while accredited international, regional or national financial institutions handle implementation and report back. The Facility could be temporary, with a sunset clause. One channel finances ZNZ rewards; a separate Just & Equitable Transition Window finances eligible projects. The design addresses member-state objections to IMO becoming a large-scale asset manager and project evaluator.

One unresolved interaction deserves attention: when Tier 2 deficits can be balanced either with traded surplus or Tier 2 RUs at the draft prices of USD 100/tCO₂eq (Tier 1) and USD 380/tCO₂eq (Tier 2), companies will choose the cheaper route. Cheap surplus means fewer RU purchases and less revenue reaching the Facility. From 2031 the Tier 1 band stabilises contributions, and Brazil permits voluntary donations, but the relationship between RU demand and the ZNZ reward pool will need careful calibration in the guidelines — Brazil itself flags GFI and ZNZ reward calculation, Facility governance and auditing, and sustainable-fuel certification as priority workstreams.

What happens next

ISWG-GHG 22 did not adopt Brazil's proposal. The Chair observed delegations' willingness to work toward text for MEPC 85; interested states were invited to consult further and submit convergent proposals, while several implementation guidelines were deferred for time. ISWG-GHG 23 runs 23-27 November 2026, immediately ahead of MEPC 85 from 30 November to 3 December, with the adjourned extraordinary MEPC session resuming 4 December, subject to confirmation. Brazil argues mid-term measures should be adopted no later than MEPC 85, notes the amendments are already circulated via Circular Letter No. 5214, and proposes the 2023 IMO GHG Strategy review begin only 16 months after entry into force of the measures.

The open question, as FuelEU's first cycle shows, is not whether ships can comply but whether the interaction of fuel choices, surplus units, RUs and ZNZ rewards produces the investment signal needed as targets tighten — and whether the 2029-2030 single-threshold years, in an already delayed framework, will soften the market more than IMO intends.