Carbon pricing in shipping

Mar 14 | 2023

A report from the International Transport Forum.

Carbon pricing in shippingBetween June 2021 and November 2022 the International Transport Forum interview stakeholders and experts who participated in the its Common Interest Group on Decarbonising Shipping. The subsequent report reviews the effectiveness of carbon pricing, how it might be applied to the shipping sector and with what effects. It also evaluates recent proposals by countries to introduce a price on shipping’s carbon emissions and examines related policy issues.

The report showed that a lack of commercial viability of zero-emission ships is a significant challenge for decarbonising maritime transport. A price gap between conventional and zero-emission ship fuels hinders the adoption of known and sometimes available technological solutions. The result is a bottleneck for the uptake of zero-emission energy sources for ships. A price on shipping carbon could help bridge the gap and accelerate deployment by making conventional ship fuels more expensive and zero-emission fuels and energy sources competitive.

Worldwide, 68 generic carbon pricing schemes exist on supra-national, national and sub-national levels. They cover around 23% of global greenhouse gas emissions, according to the World Bank. Only one scheme, Norway's national carbon tax, encompasses emissions from maritime shipping. Studies indicate that carbon pricing on its own is often insufficient because prices are too low to trigger full decarbonisation. They are most effectively applied with other instruments, such as regulations and standards. Carbon pricing schemes can generate significant revenues and provide funds for investing in zero-emission technologies and infrastructure. These could have a long-lasting impact by lowering the costs of zero-emission shipping.

The ITF said that circumstances are favourable for a productive global discussion on carbon pricing for shipping. At a regional level, the European Union (EU) is advancing its proposal to include shipping in the EU emission trading system (ETS). At the global level, a growing number of countries and shipping industry stakeholders consider carbon pricing a promising measure to decarbonise the sector.

These developments make it more likely to reach a global agreement on carbon pricing in shipping at the International Maritime Organisation (IMO). Five proposals for global carbon pricing schemes for shipping have been submitted to the IMO: levies, a ‘feebate’ system, an emission trading system for shipping and a reward/penalty system. In addition, there has been a proposal for a maritime fuel standard. Despite differences in approach, there are also considerable overlaps and possible complementarities among the proposals.

Full decarbonisation of maritime shipping by mid-century will require building a substantial number of vessels capable of operating on zero-emission energy sources in the coming years. To stay on a clear decarbonisation pathway, an immediate transition to zero-emission ship fuels is preferable to including an intermediary phase in which vessels run on low-emission fuels before switching to zero-emission propulsion systems. Carbon pricing mechanisms could encourage such leapfrogging through adequate support for emission-free fuels or other clean energy sources.

Mitigating the negative impacts of carbon pricing and facilitating an equitable transition is the key to securing an agreement at the global level. Directing some of the revenues from a shipping carbon pricing scheme towards broader climate change mitigation and adaptation appears to be a way forward. The ITF made the following general recommendations:

Introduce 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. Such a scheme should combine elements of the five different carbon pricing proposals put forward to the IMO. Regulatory instruments such as technical design requirements for ships and a low-emission fuel standard should accompany it.

Consider a ‘feebate’ system

Under a ‘feebate’ system, all ships emitting greenhouse gas emissions pay a levy that is 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. This rebate is funded by increased levies for vessels that still burn fossil fuels. In this way, the ‘feebate’ system incentivises operators to adopt emission-free energy sources early while burdening late movers with higher costs and increasing pressure to convert. The ‘feebate’ system should be introduced as soon as possible.

Include a technical design requirement and a low-emission fuel standard

Governments should agree on 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. Governments should also consider introducing a low-emission fuel standard that would become progressively stricter and so help to phase out fossil fuels in shipping.

Use carbon pricing revenues to facilitate an equitable transition to zero emissions

A substantial share of revenues from the carbon pricing mechanism would need to 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. Retrofitting ships to make them zero-emission ready or adapting port infrastructure to accelerate the uptake of zero-emission energy sources are other potential uses.

Make sure pricing schemes and standards cover well-to-wake emissions

Well-to-wake covers emissions from 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. Moving to a well-to-wake basis requires reliable data on emissions from the entire energy production process of alternative ship fuels.

The decarbonisation imperative

The report explained that the planet is in a state of climate emergency. In 2022 alone, climate change resulted in a range of catastrophic weather events. Extreme weather is expected to worsen as global temperatures rise. In 2022, the average temperature rise above pre-industrial levels was around 1.2°C. At the current rate of greenhouse gas (GHG) emission increases, the world will likely reach a 1.5°C temperature rise by the early 2030s, possibly before.

Maritime transport is a significant emitter of greenhouse gases. Shipping’s annual GHG emissions increased by 9.6% in 2018 compared with 2012. In 2018, the shipping sector emitted 1 056 million tonnes of CO2. This represented 2.89% of the total global anthropogenic CO2 emissions in 2018.

Decarbonising maritime transport is necessary to mitigate the global climate emergency. However, there are no indications that maritime shipping’s emissions have peaked. According to the International Maritime Organization’s (IMO) Fourth IMO Greenhouse Gas Study, shipping’s CO2 emissions are expected to grow by up to 50% by 2050, depending on assumptions of future maritime trade growth.