IMO Sulphur Cap and The Changing Dynamics of Global Shipping

Since its enforcement in January 2020 - cutting maximum sulfur in bunker fuel from 3.5% to 0.5% m/m under MARPOL Annex VI - the IMO global sulphur cap has brought significant, evolving impacts through 2025.

What originally began as a compliance pivot has now reshaped shipping economics, fuel markets, operations, and the broader decarbonisation transition.

Rising Fuel Costs & Industry Economics

Ships have shifted away from cheap high‑sulphur fuel oil (HSFO) toward very‑low‑sulphur fuel oil (VLSFO), marine gasoil (MGO) or LNG. As early estimates suggested, fuel bills rose annually by up to USD 60 billion under full compliance scenarios.

In 2025, the margin between VLSFO and HSFO remains compressed, especially across Asia, pressurizing bunker suppliers.

In Singapore, the global bunkering hub, the profit spread shrank from over US$140 to under US$100/tonne this year - prompting major fuel suppliers to reduce barge fleets as demand softens.

Further inflationary pressure emerged from the EU’s FuelEU Maritime regulation effective January 1, 2025. It demands biofuel or LNG use on ships over 5,000 GT calling EU ports. Shipbrokers reported freight rates rising as compliant fuels remain in tight supply.

Shipowners have responded via fuel surcharges - bunker adjustment factors (BAF) or environmental fuel fees - to pass increased fuel costs onto shippers.

Operational Adjustments and Technical Risks

To comply, many carriers equipped vessels with scrubbers to continue burning cheaper HSFO. But scrubber installation reduces cargo capacity, and open‑loop systems have drawn bans in sensitive outlets due to marine pollution concerns.

Meanwhile, quality issues in low‑sulphur fuel persist. Elevated levels of catalytic fines in VLSFO/MGO - tiny abrasive particles - are continuing to cause engine failures, damage to cylinders and injection systems. Reports now indicate that, even five years in, fuel compatibility and high cat‑fines remain a serious challenge in regions like western European ports.

Underwriters say these operational complications may increase machinery‑damage claims, delays, groundings, and insurance losses—including recourse actions between ship operators and charterers over fuel disputes.

Trade Patterns and Modal Shifts

In some regions, the cap has induced modal shifts - cargo rerouted from short‑sea or feeder shipping to road or rail, particularly where compliant fuel is scarce or cost‑prohibitive. While broad estimates suggest modal shift risk remains limited globally, in traffic‑dense maritime corridors the effect is emerging.

Baltic shipping shows early signs—operators investing in LNG or methanol, ports upgrading infrastructure, and short‑sea operators absorbing 5–15% higher fuel costs.

Environmental & Regulatory Transition

Crucially, sulphur cuts deliver major air quality benefits. Between 2020 and 2025, SO₂ emissions from international shipping declined by about 8.5–9 million tonnes - a 77% reduction.

However, reductions in sulphate aerosols remove a radiative cooling effect. Some literature warns the shift may accelerate net warming or contribute to increased CO₂ equivalent from climate forcing trade‑offs, estimating up to 30% offset via lost cooling, and doubling of warming timelines.

Toward the Next Phase: Net‑Zero & Pricing

Looking ahead, fossil‑fuel compliance is increasingly intertwined with broader decarbonisation. The IMO’s Net‑Zero Framework, drafted in April 2025, will introduce global carbon pricing starting in 2028 - ranging US$100 to 380 per tonne of CO₂ with a cap‑and‑trade structure.

This signals a further shift away from low‑sulphur fossil fuels toward LNG, methanol, ammonia and biofuels, accelerated by emissions pricing and fuel definitions in the new regime. Ships still using VLSFO will likely face mounting regulatory and financial pressure in the second half of the decade.

While compliance was mandatory in 2020, its real influence continues to evolve. That legacy cap paved the way for the future for a new era of regulated, carbon‑priced shipping.

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