In this paper we explore three different options for a market-based measure to address the climate impact of international shipping: an offsetting scheme, a maritime emissions trading scheme, and a climate levy. We propose four criteria to evaluate the choice of a market-based measure in the sector, apply these criteria to the three options, and make recommendations as an input into discussions on carbon pricing for the International Maritime Organization. We conclude that a climate levy would be the most appropriate measure to help decarbonize the sector in keeping with the goals outlined in the Paris Agreement.
Key findings
A carbon price can play an important role in steering the international maritime sector towards decarbonisation – a task that is both feasible and necessary to reach global objectives to limit climate change to 1.5°C. When considering how to implement a carbon price on shipping, a number of important questions need to be considered including the design of an MRV system, what should be the compliance entity, and how to enforce the measure. Further, any potential carbon pricing approach in the shipping sector needs to be measured based on four criteria: (1) its effectiveness; (2) its ability to comply with the International Maritime Organization’s (IMO) principles of non-discrimination and no more favourable treatment; (3) its ability to take impact on states and common but differentiated responsibilities and respective capabilities into consideration; and (4) its ability to minimise associated transaction costs and administrative burden. A carbon levy in the maritime sector is likely to be the most suitable instrument to address these challenges. Because ships built now will be in use for decades to come, the IMO should move quickly to consider and adopt a robust, well-designed carbon price in the next sessions of the IMO’s Marine Environmental Protection Committee (MEPC).
Assessment of different market-based measures: an offsetting scheme, an emissions trading scheme, and a climate levy
| Offsetting scheme | Emissions trading scheme | Climate levy | |
|---|---|---|---|
| Effectiveness | Some potential in-sector GHG emission reduction incentive, depending on offset credit price levels. However, price levels are highly uncertain as they depend on a number of additional external factors. Consequently, offsetting could allow emissions to continue to increase within the sector. | A cap gives high certainty regarding overall emissions. However, an ETS is unsuited to deliver on targets such as “at least” 50% since price incentives diminish the more emissions are reduced. Further, an ETS is unlikely to provide ship owners / investors certainty for investment in more efficient technology. This uncertainty of future price levels would lead to unpredictable responses from shipping companies in terms of operational measures and is unlikely to incentivise shipping companies to invest in technological changes. | A clear climate levy provides investors with more certainty and is therefore, depending on prices and future trajectories, most likely to incentivise the decrease of GHG emissions in the maritime sector. Though also a function of fuel prices and freight rates, a climate levy is the most likely to incentivise both ship operators to take operational measures to reduce emissions such as reducing speed; and ship owners / investors to invest in technical measures. The lack of price volatility and uncertainty mean that lower price levels are necessary than under an ETS for the same incentive towards more efficient technology. |
| NMFT | Possible | Possible | Possible |
| CBDR-RC | Significant challenges, because the scheme does not raise revenues that can be redistributed. Neither exemption, nor nationally determined contributions represent an option for CBDR-RC in an environmentally effective scheme. | Possible if allowances are sold or auctioned and revenues are used to compensate states along the lines of impact of the scheme and CBDR-RC. Neither exemption, nor nationally determined contributions represent an option for CBDR-RC in an environmentally effective scheme. | Possible if climate levy revenues are used to compensate states along the lines of impact of the scheme and CBDR-RC. Neither exemption, nor nationally determined contributions represent an option for CBDR-RC in an environmentally effective scheme. |
| Transaction costs and administrative burden | High. All ships must be monitored to determine individual GHG emissions and ship owners must purchase offset credits. Also, small ship owners with relatively low GHG emissions incur relatively high transaction costs. | High. All ships must be monitored to determine individual ships’ GHG emissions. Further, shipping companies must participate on the carbon market. Also, small shipping companies that emit relatively little GHG emissions incur relatively high transaction costs. | Medium. All ships must be monitored. Unlike under the offsetting scheme and ETS, shipping companies do not have to trade allowances or buy offset credits. With the same carbon price as under those schemes, transaction costs are lower for a levy than for an offsetting or emissions trading scheme. |
