Carbon pricing for international shipping
A carbon price for shipping internalises negative externalities from carbon emissions and helps reduce the price gap between conventional and more sustainable fuels. Revenue from carbon pricing could fund further research and development in green shipping or ship retrofitting. It could also help mitigate the adverse impact of decarbonisation on trade in the least developed countries and small island developing states. In discussions at the International Maritime Organisation (IMO), carbon pricing is referred to as a "market-based measure" (MBM).
Conceptually, the main carbon pricing measures are carbon taxes and emission trading. A direct carbon tax acts by setting a fixed price per unit of CO2 in an effort to reduce CO2 emission levels, which are free to fluctuate. Under an emission trading system (ETS), however, the price per tonne of CO2 varies. The overall total of emissions is fixed and entities must have enough allowances for the amount of CO2 they emit. Common to these approaches is the incentive to firms to reduce their carbon emissions: it becomes their interest to decarbonise..
For the maritime sector, a carbon tax, bunker levy or fuel levy would correspond to a tax or a levy on shipping fuel in proportion to its carbon content. Carbon taxes can be revenue neutral or revenue generating, depending on their design. A specific form of a carbon levy is the “feebate” system, in which all ships emitting greenhouse gas emissions pay a levy that is used to subsidise zero-emission fuels and energy sources, via a rebate for ships operating with zero emissions to cover the price difference between conventional fuels and zero-emission fuels or energy sources.
Under an ETS, to keep their emissions within the allowed limits, emitters can either pay for the CO2 they emit in excess of their allowances (by trading for allowances with entities that emitted less than their allowance), or they can reduce their emissions. Management and enforcement of the system are needed to ensure its efficacy through monitoring, reporting and verification of emissions and tracking of allowances and trading.
Carbon pricing can be introduced at various levels. In some countries, domestic shipping is included in carbon pricing mechanisms. The 2018 IMO Initial Strategy on reduction of greenhouse gas (GHG) emissions from ships includes development of “new/innovative emission reduction mechanism(s), possibly including Market-based Measures (MBMs)” in its list of candidate mid-term measures. At the IMO level, five different proposals have been submitted since 2021 that are currently under debate. At the level of the European Union (EU) shipping will be included in the EU emission trading system (ETS) from 2024.
Various effects may be distinguished. First, higher maritime transport costs (due to carbon pricing) might reduce demand for maritime transport. Second, they could make reshoring more attractive, lead to shorter maritime transport distances (reduction in average tonne-kilometre per trip) and diversion to shorter maritime routes. Third, higher prices for high-carbon fuels (due to carbon pricing) could increase the attractiveness of low- and zero-carbon energy sources for shipping and more energy-efficient ship designs. Fourth, carbon pricing could lead to lower ship speeds and hence lead to lower emissions. Studies show that the first effect is fairly marginal, that the second effect could be significant on some trade routes, but that most CO2 emission reductions will likely come from the third effect and the fourth effect in case of high fuel prices and high carbon prices. An example from the study by Parry et al.: A carbon tax rising to USD 75 per tonne of CO2 by 2030 (USD 240 per ton of bunker fuel) and USD 150 per tonne by 2040 would reduce maritime CO2 emissions below business-as-usual levels by nearly 15% in 2030 and 25% in 2040. It would raise about USD 75 billion in revenue by2030 and USD 150 billion in 2040, while increasing shipping costs by 0.075% of global GDP by 2030.
Ship fuels are not currently taxed, in contrast, for example, to road transport fuels. Taxing ship fuels would be a way to internalise the externalities of carbon emissions. The burden of a carbon tax on the maritime sector would be bound to fall on shipping companies, retailers and importers, who would likely pass it on to consumers. The tax burden might translate into higher freight costs but also encourage the uptake of alternative fuels and methods of powering ships.
For carbon pricing to be effective, the enforcing authority needs the capacity to monitor and verify emission reporting (which itself must be done by the entities in the regulated sector). Establishing this capacity could entail upfront costs when setting up a carbon pricing system. The EU has had mandatory emission reporting since 2018 (monitoring, reporting and verification, or MRV) and the IMO data collection system has operated at the global level since 2019.
Implementation costs of carbon pricing depend on the chosen measure’s design and complexity. Emission trading systems are generally more complex to administer and thus generate higher implementation costs.
A carbon pricing mechanism for shipping could raise a substantial amount of revenue, some of which could be used for a range of purposes, including climate change adaptation and mitigation, R&D and technological co-operation and compensation.
Possible adverse effects on countries’ trade, particularly for the least developed countries and small island developing states, would need to be assessed and adequately addressed. In this regard, the IMO Initial Strategy on GHG reduction provides for measures’ impact on countries – including in the case of possible MBMs – to be assessed and taken into account as appropriate before a measure’s adoption. Applying regional carbon pricing schemes, such as EU-ETS, to the international shipping industry, is associated with the risk of evasion, hence carbon leakage.
Carbon pricing could also increase industry consolidation and concentration in shipping. This competition concern should be addressed.
ITF (2021) Transport Climate Action Directory – Carbon Pricing for International Shipping
https://www.itf-oecd.org/policy/carbon-pricing-for-international-shipping
ITF (2022), Carbon Pricing in Shipping, https://www.itf-oecd.org/sites/default/files/docs/carbon-pricing-shipping.pdf
ITF (2018) Decarbonising Maritime Transport Pathways to zero-carbon shipping by 2035. https://www.itf-oecd.org/decarbonising-maritime-transport
Cariou, P. and Cheaitou, A. (2012) The effectiveness of a European speed limit versus an international bunker-levy to reduce CO2 emissions from container shipping. Transportation Research Part D: Transport and Environment, Volume 17, Issue 2, March 2012, Pages 116-123. https://doi.org/10.1016/j.trd.2011.10.003
Corbett, J.J., Wang, H., and Winebrake, J.J. (2009) The effectiveness and costs of speed reductions on emissions from international shipping. Transportation Research Part D: Transport and Environment, Volume 14, Issue 8, December 2009, Pages 593-598. https://doi.org/10.1016/j.trd.2009.08.005
European Commission (n.d.) EU Emissions Trading Scheme (EU ETS). https://ec.europa.eu/clima/policies/ets_en
European Parliamentary Research Service (2019) ICAO Agreement on CO2 emissions from aviation. https://www.europarl.europa.eu/RegData/etudes/ATAG/2019/640169/EPRS_ATA(2019)640169_EN.pdf
Hermeling, C. (2015) Sailing into a dilemma: An economic and legal analysis of an EU trading scheme for maritime emissions. Transportation Research Part A: Policy and Practice, Volume: 78, page(s): 34-53. https://www.sciencedirect.com/science/article/pii/S096585641500107X
IMO (2010) Reduction of GHG Emissions From Ships Full report of the work undertaken by the Expert Group on Feasibility Study and Impact Assessment of possible Market-based Measures. IMO doc. http://www.imo.org/en/OurWork/Environment/PollutionPrevention/AirPollution/Documents/Feasibility%20Study%20and%20Impact%20Assessment/1%20-%20Report%20of%20MBM%20EG.pdf
Koesler, S., Achtnicht, M., and Köhler, J. (2015) Course set for a cap? A case study among ship operators on a maritime ETS. Transport Policy. https://www.sciencedirect.com/science/article/pii/S0967070X1400208X?via%3Dihub
Lagouvardou, S., Psaraftis, H. N. and Zis, T. (2020) A Literature Survey on Market-Based Measures for the Decarbonization of Shipping. Department of Technology, Management, and Economics, Technical University of Denmark. https://doi.org/10.3390/su12103953
Lee, T., Chang, Y.T. and Lee, P. (2013) Economy-wide impact analysis of a carbon tax on international container shipping. Transportation Research Part A: Policy and Practice, Volume 58, December 2013, Pages 87-102. https://doi.org/10.1016/j.tra.2013.10.002
Parry, I. et al. (2018) Carbon Taxation for International Maritime Fuels: Assessing the Options. IMF Working Paper https://www.imf.org/~/media/Files/Publications/WP/2018/wp18203.ashx
Partnership for Market Readiness; International Carbon Action Partnership. (2016) Emissions Trading in Practice: A Handbook on Design and Implementation. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/23874
Psaraftis, H.N. (2012) Market Based Measures for Green House Gas Emissions from Ships: A Review. WMU Journal of Maritime Affairs 11, 211-232. https://link.springer.com/content/pdf/10.1007%2Fs13437-012-0030-5.pdf
Psaraftis, H.N. and Lagouvardou, S. (2019) Market Based Measures for the reduction of greenhouse gas emissions from ships: a possible way forward. Samfundsøkonomen 4/19, 60-70. https://www.djoefforlag.dk/openaccess/samf/samfdocs/2019/2019_4/Samf_7_4_2019.pdf
Psaraftis, H.N. and Woodall, P. (2019) Reducing GHGs: the MBM and MRV agendas. Chapter in "Sustainable shipping: a cross-disciplinary view" H.N. Psaraftis (ed.), Springer. https://www.springer.com/gp/book/9783030043292
The World Bank (n.d.) Carbon Pricing Dashboard. https://carbonpricingdashboard.worldbank.org/what-carbon-pricing
United Nations Framework Convention on Climate Change (UNFCCC) (2020) Emissions Trading. https://unfccc.int/process/the-kyoto-protocol/mechanisms/emissions-trading
Wang, K., Fu, X., Luo, M. (2013) Investigating the impacts of introducing emission trading scheme to shipping industry. Working Paper ITLS-WP-13-10. Institute of Transport and Logistics Studies, The Australian Key Centre in Transport and Logistics Management, The University of Sydney. https://ses.library.usyd.edu.au/bitstream/handle/2123/19184/ITLS-WP13-10.pdf?sequence=1&isAllowed=y
Zhu, M. et al. (2018) Impact of maritime emissions trading system on fleet deployment and mitigation of CO2 emission. Transportation Research Part D: Transport and Environment, Volume: 62, page(s): 474-488. https://www.sciencedirect.com/science/article/pii/S1361920917310143
Printer-friendly version