World Shipping Council - Partners in Trade

Carbon Emissions FAQ

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Q: What are the issues that make reaching agreement challenging? Why is implementation difficult if everyone agrees on the need to reduce CO₂ emissions?

A: CO₂ regulatory regimes do not yet exist in most countries. It is both technically and politically difficult to create such systems for fixed emission sources (like power plants) in domestic economies. It is even more challenging to address mobile transportation sources, like automobiles, rail, aviation and shipping. The challenge of addressing these mobile sources becomes even more complex when those sources operate under the registries of different nations, call at ports in multiple nations, and generate emissions on the high seas outside any nation's jurisdiction.

The IMO has in fact made substantial progress on developing an energy efficiency design index for new ships to reduce carbon emissions. It is generally accepted, however, that such a design index, if only applied to new ships, is unlikely, by itself, to sufficiently address the issue. Accordingly, the IMO is considering several proposals characterized as "market based instruments" (MBIs) and other hybrid proposals to create a more comprehensive regime. These proposals are novel, and there is little precedent or experience to guide governments. While it appears probable that the IMO will develop a new convention in the foreseeable future, one should recognize that the issues being considered present unique challenges. The following provides a short description of some of those challenges.

Summary of the issues:

Macro-Political Questions in the Climate Debate

The IMO's regulatory regimes are based on the principle that all ships, regardless of who owns them or where they are registered, should comply with the same rules. The World Shipping Council and other industry organizations strongly support this principle. Furthermore, a carbon emission reduction regime would have little positive effect on climate change concerns if a ship operator could avoid it by changing the registration of its ship.

At the same time, however, there is a macro-political disagreement between developed and developing nations about appropriate restrictions on carbon emissions. The United Nations Framework Climate Change Convention (UNFCCC) and "Kyoto Protocol" distinguished between Annex I countries with one set of carbon emission reduction obligations and lesser-developed non-Annex I countries that did not have such obligations.

Additionally, only a little more than one-third of the world cargo fleet is registered in Annex I countries. Many non-Annex I countries under the existing Kyoto Protocols insist that a new global carbon regime must not impose burdens on their developing economies. Other governments insist that the carbon emissions from non-Annex I countries now and projected in the foreseeable future are so substantial that there can be no meaningful impact on CO₂ emissions or their effect on climate without the participation of these governments and their economies.

This set of political disagreements between governments is beyond the capacity of the shipping industry to resolve, but these issues will need to be addressed before the content of a new regime can be developed.

Market-Based Instrument Options Market-based instruments (MBI) include a variety of economic or market-oriented incentives and disincentives, such as taxes or tax credits, new fees, or tradable emissions limitations, often referred to as "Cap and Trade."

Marine Fuel Levy: One MBI concept being given consideration at the IMO is the establishment of an international "levy" on marine fuel, with the revenues being dedicated to a new United Nation's climate fund. Proponents advocate that the levy approach would be easier to implement and operate than other MBI approaches being considered. This proposal has been made by Denmark, and has been set forth in more detail and with more specifics than other MBI proposals. Issues surrounding it include the following:

1. Will governments be willing to adopt a UN-administered international levy on the sales of fuel?
2. What would be the mechanism for collection and enforcement?
   • What entity should be responsible and accountable for the collection of the revenues associated with the fund?
   • What is the enforcement scheme to ensure the payment of the levy? What is the role of port states in that enforcement scheme? What are the penalties and consequences to buyers and/or sellers who try to evade payment of the fee?
3. What would be the level of the levy to be applied? How would it be set, raised, lowered or suspended?
4. Assessing fees to a product will make it more expensive and will thus cause users to consume less of it, but predicting precise emission reduction results from a levy is problematic. For that reason, advocates of the concept argue that carbon emissions reductions would also be accomplished from this proposal via the use of the revenues generated from the levy for carbon mitigation projects. Questions about the control and management of such a fund are many, including:
   • Who would control the disbursement of the revenues collected?
   • Is the Clean Development Mechanism of the UNFCCC the most appropriate and efficient vehicle for ensuring the funds are productively used for CO₂ reduction?
   • Should the funds, or a portion of the funds, be devoted to research and development that is specific to improving fuel economy in the world's shipping fleet, alternative propulsion systems, and other measures to reduce CO₂ emissions - both in the short term and long term? If yes, what entity would be responsible for determining which research institutions and other stakeholders receive the funds and that the work is completed and disseminated?
   • If the funds are to be split between non-maritime CO₂ reduction projects and research and development projects specific to the maritime sector, what should be the relative split in funding?
   • What mechanism should be used to ensure that projects actually result in CO₂ emission reductions as opposed to theoretical or paper reductions?
5. Is the levy a flat, uniform assessment per ton of fuel, or does the amount of the tax vary depending on the efficiency of the vessel in order to create an additional economic incentive for the construction and operation of more efficient vessels? Japan, for example, has proposed that a vessel operator should get a rebate under the levy system if it improves vessel efficiency.
6. This concept has been proposed as an alternative market based instrument to emission "cap and trade" type concepts. If this course were pursued, industry would need assurance that other measures are not also adopted so that it faces both a fuel levy plus other market based instruments.

Cap and Trade or Emissions Trading: The European Commission, some European governments, and some industry groups have expressed support for the idea of developing an alternative carbon emissions trading system as the most appropriate MBI. Unlike the Danish levy proposal, however, there has been no proposal made that specifically describes how such an emissions trading system would function at an operational level. The absence of a clear proposal has made discussion and assessment of the concept difficult. If this avenue were to be pursued, a significant number of questions would need to be addressed, as the design and operation of an emission trading proposal is likely to be more complicated than a levy on marine fuels. The unresolved issues include:

1. How is a "cap" on emissions from shipping established?
   • What is the level of the cap and how much is it lowered over what period of time?
   • What is the baseline year for establishing the cap?
   • Will allowances be allocated in a manner that gives credit to those vessel operators that have implemented fuel-efficiency efforts to date?
2. How are the allocations of the emission allowances within the cap distributed amongst the various sectors of the industry?
   • Are they auctioned? If so, by whom?
   • Are they sold at a fixed price, and if so, who sets that price?
   • If sold or auctioned, who receives the revenues?
   • What are the permissible uses of the revenues raised? (Additional questions similar to those that exist for the marine fuel levy proposal discussed above must also be addressed.)
   • Are the emission allowances allocated at no charge? If so, by whom? According to what criteria?
3. Who is covered by the cap? What vessels? Are there vessels that are not covered?
4. Who must hold the emission allowances? The ship owner? The ship operator?
5. What are the trading characteristics of the allowances? For example:
   • Once allocated, are the emission allowances freely tradable? Are the allowances issued and sold on an annual basis or a multi-year basis?
   • Is there a limit on how many allowances may be purchased or acquired by a particular vessel or company?
   • Is there a restriction on who may purchase allowances?
   • Is there any expiration or "use-by" date on an emission allowance or can they be "banked" indefinitely?
   • Does an emission allowance shrink in size over time at the same rate as the total emission cap is reduced over time?
6. May ship operators purchase and use carbon emission allowances from other industrial sectors?
   • Most stakeholders supporting development of a cap and trade system for maritime emissions have argued that such a system must be "open." An open system would allow trading of allowances across industrial sectors, but also requires, by definition, establishment of an economy-wide cap and trade system.
   • If the countries that have established such cap and trade systems are limited to certain developed countries, how does the system function in the shipping sector, which constantly crosses borders and operates on a global scale?
   • If governments do establish a cap for the economy as a whole, what criteria must govern the regimes establishing such allowances in other sectors to be acceptable for use by the maritime industry under its regime? Who establishes and enforces such criteria?
   • Can such an emission trading system exist in the absence of a comprehensive, international UN agreement and regime coming out of the Copenhagen UNFCCC meetings?
   • How could the IMO, as a specialized maritime regulatory entity, monitor and administer a cross-sectorial trading process?
   • If the emission trading system is not an open system allowing for cross-sectorial trading, but instead the cap and trade regime is a closed system governing only shipping, what would realistic carbon emission caps be and how would the system allow maritime shipping to service the expected increase in global commerce over time?
7. How is the system enforced? (Similar questions may exist for the fuel levy proposal.)
   • For example, must emission allowances be surrendered in order to purchase fuel? If so, the similarities to a levy system are significantly increased, although enforcement against fraudulent allowances and allowances generated by non-maritime sources may be more difficult than simply collecting a tax.
   • Does one require that all fuel oil suppliers, whether they are located in a State party to the Treaty or in a non-party State, be registered as proposed in the global levy system?
   • Is a reporting scheme from vessels and/or fuel suppliers necessary? What would that be?
   • Such allowances would need to be registered and monitored in some manner to protect against cheating and counterfeiting. How does the maritime sector administer such a system when allowances are generated from a multitude of sectors and countries where many of the countries are not party to or otherwise part of the system? What is the responsibility of the flag state with respect to enforcement?
   • How would an arriving ship to a given port state demonstrate compliance?
   • What are the consequences of non-compliance?
8. If a ship or ship operator does not possess enough allowances to cover its emissions, what happens? Does it pay a tax or penalty in order to continue to operate? If so, how is the level of the penalty established? If not, must it cease operation until it obtains sufficient emission allowances?
9. Do all transportation modes have a similar carbon regime applied to them so that maritime commerce is not disadvantaged vis-à-vis other transport modes?

Hybrid Proposals: Other governments at the IMO have made hybrid MBI proposals that offer a variation on the Danish levy concept or that are different from either the marine fuel levy or emission trading systems. More such proposals are likely to emanate from governments after the UNFCCC Copenhagen meeting in December 2009 and prior to the next IMO Marine Environment Protection Committee meeting in March of 2010.

As previously mentioned, Japan has proposed that the Danish levy concept be modified to provide a rebate of the levy if a vessel operator improves the efficiency of its vessel. Some have noted with favor that this idea seeks to incentivize improved vessel efficiency and thus reduced carbon emissions. Some have noted with disfavor that this idea would provide a greater reward to an operator of an existing, inefficient vessel for marginal improvement than a new, more efficient vessel that has built improved efficiency into it.

Additionally, the United States has proposed that all vessels, both existing and new-builds, be subjected to the new energy efficiency design index. In essence, this proposal would establish mandatory efficiency standards for all ships (new and existing) that increase in stringency over time. This system would also facilitate trading of efficiency credits so that ships that operate below the standards may trade credits with less-efficient ships in the existing fleet. This would constitute a type of "cap and trade" of ship energy efficiency rather than a cap and trade of carbon emissions. If a ship fell below the energy efficiency standards, it would need to purchase energy efficiency credits from other ship operators that perform above the standards or otherwise face punitive measures. Some stakeholders have noted favorably that such a system would effectively require the world's vessel fleet to significantly improve its energy efficiency, thereby reducing emissions yet avoid the political and practical complications associated with both an emissions cap and trade system and an international levy on marine fuels. Others have noted that the proposal does not yet provide sufficient detail, particularly with respect to existing ships that fall below the required efficiency standard and cannot find design index credits to purchase from those who operate more efficient ships.

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