Abolish fossil fuel tax exemptions for maritime transport
The maritime sector enjoys waivers from fuel taxation in the vast majority of markets. The IMF (2021) categorises energy taxes below efficient taxation levels as post-tax subsidies. An efficient taxation level would correspond with tax rates applicable to other consumer products or be high enough to internalise negative externalities from fuel use, including greenhouse gas emissions. Taxation rates for transport fuels undercut efficient levels in many markets. This can be, for example, low taxes on diesel justified with the policy objective of promoting economic activity. Transport fuel taxation also generally falls short of incorporating the costs of causing climate change. However, the international shipping sector and international aviation are the only transport sectors that commonly do not pay fuel excise duties (ITF, 2020).
For the maritime sector, exemptions from taxation generally apply to international shipping and many markets also waive domestic shipping from fuel taxes (OECD, 2019). ITF (2019) takes stock of maritime subsidies, which many governments offer to the maritime sector due to its importance for national economies and high exposure to international competition. The authors identify fuel tax exemptions as one of the most prominent subsidy types made available to shipping companies, along with tonnage taxation schemes that offer more attractive conditions than regular corporate taxes applicable to other sectors.
Energy subsidies can distort markets and lead to suboptimal environmental and social outcomes. In the maritime sector, low fuel prices reduce incentives for ship owners to invest in fuel saving technologies.
Phasing out post-tax subsidies for maritime fuels would incentivise the sector to invest in fuel-saving measures that reduce CO2 emissions. The effectiveness of these incentives depends on the chosen rate of maritime fuel taxation, the available measures to reduce fuel use, and their costs. The ITF (2020) provides an overview of available solutions. In the short term, solutions include using onshore renewable power at berth as well as retrofitting existing ships with energy-saving technologies with short payback times, for example, wind assistance technologies. In a longer timeframe, phasing out maritime fuel post-tax subsidies can improve the cost competitiveness of lower carbon emission fuels with taxation rates differentiated by the well-to-wake carbon intensity of fuels. Mundaca et al. (2021) evaluated impacts from a carbon price of USD 40 per ton CO2 on emissions from maritime transport of heavy products. They project that this would achieve a 7.65% emission reduction for this segment.
Post-tax energy subsidies for the maritime sector represent foregone tax revenues for governments. Phasing in excise duties would generate income for governments. The amount raised would depend on the taxation benchmark. For instance, regulators can apply the same rate as other freight transport sectors, such as for diesel use in the road freight segment. Alternatively, a higher level that better incorporates negative externalities from fuel use may be chosen. The ITF (2019) reports that there is no global assessment about the costs of existing fuel taxation waivers for the maritime sector. The authors cite EEA (2007), which estimated the annual value of tax exemptions in the EU-25 region at EUR 3-19 billion for both domestic and international shipping.
Phasing in fuel taxes for the maritime sector would not only generate government revenues but also create costs to the maritime sector through higher energy prices. Rojon et al. (2021) reviewed studies about potential impacts on trade from increased transport costs were the shipping sector to be subject to carbon pricing. They found that carbon pricing would have similar effects as a fuel taxation rate aimed at incorporating externalities from GHG emissions. Expected impacts are not uniform across different goods. The authors found that the trade of bulk goods such as agricultural produce or construction materials would suffer most. However, the price increase for most products would remain below 1% if fuel costs and thus transport costs increased. The authors stressed that impacts would not fall evenly across regions. Small developing island states (SDIS) and least developed countries (LDC) far from major shipping corridors already pay comparably high transport charges and would experience proportionally higher impacts from increased costs. Targeted support programs for vulnerable groups may alleviate potential impacts from increased fuel costs (Marten and van Dender, 2019).
Phasing out energy post-tax subsidies for maritime fuel use would incentivise the sector to reduce fuel consumption. This would not only reduce CO2 emissions but also some air pollutant emissions.
Phasing out fuel post-tax subsidies in the maritime sector can reduce negative impacts but faces challenges. The sector is highly globalised and increasing fuel taxes can prompt ship operators to bunker fuel at ports with lower taxes, undermining policy effectiveness. A global approach to maritime fuel taxation can prevent reforms resulting in fuel bunkering and carbon leakage, but there is no international consensus on a collective policy response. There are also legal challenges. For example, the Energy Tax Directive in the European Union explicitly forbids member states to tax fuel used in international shipping (this provision is under revision as of fall 2021 [EC, 2021]).
A first step towards efficient taxation of maritime fuels can be introducing fuel taxation for domestic or regional shipping in large regions with limited potential for fuel bunkering. Initiatives to phase in excise duties for domestic maritime fuel use have emerged in some markets. In the US state of California, for example, the state taxes maritime fuel purchased and used in the state until the first out-of-state destination (ITF, 2020).
Another reason regulators are cautious about phasing in maritime fuel taxation is the concern that doing so may affect trade. Fuel prices are one of several factors that determine shipping rates; potential increases in transport costs can affect international trade. Economies with a high dependency on imported goods would particularly suffer. Governments may spend revenues from fuel taxation to reduce such distributional impacts, or invest in programs that promote the scale-up and price reductions of low carbon fuels (Marten and van Dender, 2019).
Carbon pricing would have a similar effect on emission reductions as fuel taxation. The International Maritime Organization is currently discussing an international approach to fuel taxation. (S&P Global, 2021)
ITF (2021) Transport Climate Action Directory – Abolish fossil fuel tax exemptions for maritime transport
https://www.itf-oecd.org/policy/abolish-fossil-fuel-tax-exemptions-marit...
ITF (2020), “Navigating Towards Cleaner Maritime Shipping: Lessons from the Nordic Region”, International Transport Forum Policy Papers, No. 80, OECD Publishing, Paris.
ITF (2019), “Maritime Subsidies: Do They Provide Value for Money?”, International Transport Forum Policy Papers, No. 70, OECD Publishing, Paris.
EC (2011), “Revision of the Energy Taxation Directive”, European Commission, https://ec.europa.eu/taxation_customs/green-taxation-0/revision-energy-taxation-directive_en (accessed 26 October 2021).
EEA (2007), “Size, structure and distribution of transport subsidies in Europe”, EEA Technical Report No. 3/2007, European Environment Agency, https://www.eea.europa.eu/publications/technical_report_2007_3/download (assessed 02 September 2019).
IMF (2021), Fossil Fuel Subsidies, International Monetary Fund, https://www.imf.org/en/Topics/climate-change/energy-subsidies (accessed 13 September 2021).
Rojon, I. et al. (2021), “The impacts of carbon pricing on maritime transport costs and their implications for developing economies”, Marine Policy, Vol. 132, 104653, https://doi.org/10.1016/j.marpol.2021.104653.
Gabriela Mundaca, Jon Strand, Ian R. Young (2021), “Carbon pricing of international transport fuels: Impacts on carbon emissions and trade activity”, Journal of Environmental Economics and Management, 102517, https://doi.org/10.1016/j.jeem.2021.102517.
Marten, M. and K. van Dender (2019), "The use of revenues from carbon pricing", OECD Taxation Working Papers, No. 43, OECD Publishing, Paris, https://doi.org/10.1787/3cb265e4-en.
OECD (2019), Taxing Energy Use 2019: Using Taxes for Climate Action, OECD Publishing, Paris, https://doi.org/10.1787/058ca239-en.
S&P Global (2021), “SHIPPING: Carbon tax proposals ahead of IMO meeting make owners jittery”, www.spglobal.com/platts/en/market-insights/latest-news/shipping/060821-shipping-carbon-tax-proposals-ahead-of-imo-meeting-make-owners-jittery (accessed 26 October 2021).
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