International shipping faces significant challenges as emissions trading schemes expand, potentially leading to overlapping greenhouse gas pricing mechanisms. Concerns are rising among shipping companies that double pricing could reduce their competitiveness and raise costs. This column identifies three potential scenarios in which emissions from international shipping could become subject to multiple GHG pricing instruments, and suggests that one way to avoid double pricing would be to implement a crediting mechanism whereby payments made under one instrument are credited under the other.
International shipping is the backbone of the global economy, accounting for about 80% of international trade (Vuillemey 2020). As the EU extends the application of its Emissions Trading System (EU ETS) to international shipping and the International Maritime Organization (IMO) works on the adoption of a greenhouse gas emissions (GHG) pricing mechanism for the same sector, the prospect of GHG emissions from international shipping being subject to multiple pricing instruments is becoming more likely. While it is common for pricing instruments to overlap in other sectors (Agnolucci et al. 2023), some shipping companies have expressed concerns about the double pricing of GHG emissions, as this may reduce their profits and competitiveness. Similarly, as higher shipping costs can result in higher prices of transported goods (Ostry et al. 2022), some countries are worried about its potential to reduce trade opportunities, and that it may result in negative impacts in terms of GDP and food security.
In a recent paper (Dominioni and Petit 2024), we identify three potential scenarios in which emissions from international shipping could become subject to multiple GHG pricing instruments:
- A first scenario is two or more jurisdictions implementing overlapping GHG pricing instruments for international shipping at the sub-global level, both targeting downstream emissions (i.e. emissions from vessels). Besides the extension of the EU ETS to international shipping, various jurisdictions are considering the implementation of a GHG pricing instrument for this sector, such as the US International Maritime Pollution Accountability Act of 2023.
- A second scenario is the IMO implementing a GHG pricing instrument which overlaps with another sub-global GHG pricing instrument targeting downstream emissions, such as the EU ETS or a pricing instrument from another jurisdiction.
- Lastly, a third scenario is the IMO or another jurisdiction implementing a GHG pricing mechanism that also covers upstream emissions, such as emissions released in the production of liquefied natural gas used as a bunker fuel.
Should double pricing be avoided at all costs?
GHG pricing and other GHG policies for shipping may impact the competitiveness of shipping companies and countries, even though research indicates that these impacts tend to be small on average (Cariou et al. 2023, Rojon et al. 2021). Double pricing could entail a further reduction in competitiveness for shipping companies, as a result of needing to comply with two or more GHG mechanisms simultaneously, and a further reduction in trade opportunities for some countries. However, the case for avoiding double pricing rests on a balancing of interests and on how these instruments are implemented in practice.
Higher carbon prices normally result in greater emissions abatements (Känzig and Konradt 2023). If the IMO implements weak GHG policies, additional climate policies – including GHG pricing – from the EU and other countries would be essential to ensure a fast decarbonisation of the shipping sector. Indeed, research suggests that marginal abatement costs to reach net-zero carbon emissions by 2050 are around $300 per tonne of carbon (Longva et al. 2024).
In addition, some potential negative effects of double pricing may be mitigated through instrument design. For instance, World Bank research indicates that using a share of carbon revenues from shipping to improve port efficiency or support the deployment of zero-carbon bunker fuels can reduce the potential negative impacts of GHG pricing on vulnerable countries and shipping companies (Dominioni and Englert 2022). The cost incurred by companies in complying with multiple GHG pricing instruments can also be reduced through the harmonization of those instruments (e.g. on verification and reporting).
Thus, overall, the case against double pricing rests on contingent factors, many of which are in the hands of policymakers working on these policies.
What could be done to avoid double pricing?
If policymakers decide to avoid the double pricing of GHG emissions from shipping, one way to do so would be to implement a crediting mechanism, whereby payments made under one instrument are credited (i.e. discounted) under the other. That is, a shipping company would pay a price on its GHG emissions under one instrument, and this payment would be subtracted from the payment of another instrument.
Implementing a crediting mechanism such as the one discussed above requires establishing some level of comparability of different GHG pricing instruments. This may be relatively easy for some GHG instruments, but more complicated for more complex ones (Dominioni and Esty 2023). Luckily, there is a growing body of research concerned with developing methodologies to compare different types of GHG pricing instruments (Agnolucci et al. 2023). This knowledge could be harnessed in the maritime transport sector to avoid double pricing.
This knowledge can also help the IMO to implement a GHG pricing instrument for international shipping that is considered at least as ‘equivalent’ to the EU ETS. Currently, the EU plans to review the extension of the EU ETS to international shipping in 2027, taking into account the GHG pricing mechanism adopted by the IMO in the meantime. An IMO GHG price equivalent to the EU ETS may prevent a further expansion of the latter (currently the EU ETS covers only a fraction of GHG emissions released in transporting goods from and to the EU) and, potentially, even its retraction from shipping. It is worth noting that, during an event in October 2024, the European Commission, represented by a senior official from the directorate-general for Mobility and Transport (DG Move), was reported as reassuring that the EU stands ready to take into account the forthcoming IMO global instrument and adapt the EU ETS in line with the ETS Directive review clause to “avoid any significant double burden”. (Lowry 2024).
Who can help shipping policymakers to avoid double pricing?
Much of the knowledge on establishing equivalence between GHG policies – including carbon pricing – has been created in the context of the implementation of border carbon adjustment mechanisms, i.e. charges on the GHG emissions embedded in internationally traded products.
In our paper, we identify different pathways through which regulatory cooperation can take place. Various countries that have or are planning to implement border carbon adjustment mechanisms, as well as institutions like the OECD, the IMF, the World Bank, and the WTO, are developing significant knowledge on comparing policies that put a price on carbon (e.g. Agnolucci et al. 2023, IMF 2019, OECD 2023). If double pricing in shipping is to be avoided, these is a case for this knowledge to be shared with IMO policymakers and other teams that work in jurisdictions which implemented or are implementing domestic GHG pricing mechanism for international shipping.
Border carbon adjustments mechanism can also include crediting mechanisms similar to those that may be implemented to avoid double pricing in international shipping. For instance, the EU Carbon Border Adjustment Mechanism (CBAM) credits for carbon pricing instruments implemented in countries that export to the EU (European Parliament and Council of the European Union 2023). Policymakers working on border carbon adjustment mechanism could also contribute their expertise on how to design crediting mechanisms to the IMO and within sub-global discussions on the implementation of GHG pricing for international shipping.
On this basis, we argued in favour of regulatory cooperation between the IMO, IMF, OECD, World Bank and the WTO, as well as policymakers working on shipping decarbonisation and border carbon adjustment mechanisms at the EU or national level.
Source : VOXeu
