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Is shipping ready for carbon pricing?


Predictability and scalability need to be taken into account 

Of the 68 carbon pricing schemes currently operational worldwide, very few cover shipping. Yet there is scope for carbon pricing to be successfully applied to the shipping sector, if predictability, scalability and the technical readiness of zero-emission greenhouse gas technologies are taken into account in their design, said the OECD’s International Transport Forum (ITF).

A policy paper by Olaf Merk, administrator for ports and shipping at the ITF, considered the pros and cons of carbon pricing schemes, asking whether they are applicable to shipping, or whether the characteristics of shipping make that difficult or even impossible.

“One of the obvious characteristics of shipping is its global reach. Even if some shipping activity is foremost local or regional, the largest part of shipping activity takes place at a global level. So, how could regulators design an effective carbon pricing scheme that does not result in massive evasion? The answer to this question depends on the carbon pricing scheme’s geographical scope, who pays the carbon price and who receives the carbon price revenues,” Merk said.

When different carbon pricing schemes are applied regionally rather than globally, the risk of evasion increases. But attempts at evasion are “less likely if the costs of evasion for shipping companies outweigh the benefits of evasion”. He described a supra-national scheme, for example, at the EU level, as “an alternative but less desirable option”.

On the question of who pays the carbon price, Merk said the overarching principle of ‘polluter pays’ applies. “In the case of shipping, this would mean that the more polluting ship would pay more,” he said. In terms of who receives the revenues, he suggests that the establishment of an international institution or mechanism charged with allocating and distributing carbon pricing revenues may be necessary. “This could be a mechanism under the auspices of the IMO or another UN organisation (such as the Green Climate Fund under the auspices of the UNFCCC) or a distribution mechanism to allocate carbon revenues to countries.”

When different carbon pricing schemes are applied regionally rather than globally, the risk of evasion increases

Hurdles ahead

However, there are challenges to overcome. For one, the shipping sector is made up of many parts. For example, a ship can be owned, operated, managed and crewed by four different companies, each tasked with a different responsibility and having different commercial interests. “This makes it difficult to establish who has the most leverage to reduce shipping emissions. It also makes it hard to define which actor should pay the carbon price and what part of it.”

Also, there must be equal treatment of ships. “Respecting this principle limits the possibilities for regional carbon pricing schemes, as it discourages regional authorities from introducing a carbon pricing scheme that only applies to ships registered under certain flags,” Merk said.

There will also be opposers to carbon pricing for shipping. These include the shipping industry itself, who may link high carbon prices with a reduction in global trade; governments from countries on the edges of global trade routes who may concerned about increases in trade costs; and fossil fuel companies.

The Paper makes five recommendations to encourage the acceptance and take-up of carbon pricing in shipping. First, the ITF suggests introducing carbon pricing in shipping as part of a broader set of decarbonisation measures. “A global carbon pricing scheme for shipping would accelerate the decarbonisation of maritime transport,” noted Merk.

Second, consider designing a carbon pricing mechanism for maritime shipping as a “feebate” system. This type of system would require all ships emitting greenhouse gas emissions to pay a levy that is then used to subsidise zero-emission fuels and energy sources. Ships operating with zero emissions receive a rebate that covers the price difference between conventional fuels and zero-emission fuels or energy sources. The rebate would be funded by increased levies for vessels that still burn fossil fuels. “In this way, the ‘feebate’ system incentivises operators to adopt emissions-free energy sources early while burdening late movers with higher costs and increasing pressure to convert.” The ITF urges that the “feebate” system is introduced as soon as possible.

The well-to-wake life-cycle view of greenhouse gas emissions in shipping will maximise emission reductions

Design standard

Third, complement carbon pricing with a technical design requirement and a low-emission fuel standard. To this end, the ITF calls on governments to agree a technical design requirement for “zero-emission readiness” for new vessels. “This standard would require all new vessels to be capable of running on zero-emission fuels or other zero-emission energy sources,” said Merk.

Fourth, use carbon pricing revenues from maritime shipping to facilitate an equitable transition to zero emissions. This recommendation suggests that a “substantial share” of revenues from any carbon pricing mechanism be reserved for general climate mitigation and adaptation projects in Small Island Developing States (SIDS) and least developed countries (LDCs), including projects related to decarbonising maritime transport. “Using carbon-pricing revenues in this way helps balance potentially increased transport costs and negative impacts on trade,” said Merk.

The last recommendation is to make sure that pricing schemes and standards cover well-to-wake emissions. This needs to cover the entire process of fuel production, delivery and onboard use. “The well-to-wake life-cycle view of greenhouse gas emissions in shipping will maximise emission reductions,” Merk concluded.

Overall, the ITF concludes that circumstances are “favourable” for a productive global discussion on carbon pricing for shipping, but careful thought needs to be put into a system’s design so that it is equitable, transparent, and maximises effectiveness.

Source: Baltic Exchange by Carly Fields

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