EU carbon tax puts a price on shipping emissions

The European Union is trying to clean up one of the world’s dirtiest industries by taxing ships’ carbon emissions.

Maersk shipping
If it were a country, shipping would be the sixth-largest polluter in the world, according to the World Economic Forum. Image: lotsemann, Flickr

Ships emit around one billion tonnes of greenhouse gases every year, or 3 per cent of global emissions. If it were a country, shipping would be the sixth-largest polluter in the world, according to the World Economic Forum. Without further action, shipping emissions are expected to reach 90-130 per cent of their 2008 levels by 2050.

The International Maritime Organization (IMO), the UN body responsible for shipping, has long been criticised for failing to address the urgency of the climate crisis and dragging its feet on introducing regulations to curb emissions. 

One of the most contentious issues that keeps coming up at IMO meetings is whether the industry should set a carbon tax. Pacific Island nations, which are particularly vulnerable to rising seas, have called for a carbon price of US$100 per tonne on bunker fuels. But emerging economies, including China and South Africa, oppose the measure. 

The EU is taking matters into its own hands. To achieve its 2030 goal of reducing emissions by at least 55 per cent, the bloc is revising its climate, energy and transport legislation under the “Fit for 55” package. The proposed reforms include several shipping measures, ranging from a sustainable fuel mandate within the EU to the inclusion of maritime emissions in the bloc’s emissions trading scheme (ETS). 

The EU plan will include shipping emissions in the bloc’s ETS from 2023. When the measure comes into force, shipowners, regardless of the flag they fly, will have to buy carbon allowances to cover all emissions during voyages in the EU and half of those generated by international voyages that start or finish at an EU port. 

In 2023, companies chartering large vessels will be required to purchase allowances for 20 per cent of their emissions from ships that call at EU ports, ratcheting up to 100 per cent by 2026. 

Shifting to clean fuel 

Shipping experts say the measure alone won’t lead to a drastic reduction in global maritime emissions. Still, it sends an important signal that could trigger decarbonisation efforts worldwide. The inclusion of maritime emissions in the ETS will also raise a large pool of funds that the EU can use to accelerate innovation and develop low-carbon fuels and renewables infrastructure. 

The EU ETS will cover 10-15 per cent of international shipping emissions, according to Faig Abbasov, shipping programme director at Transport & Environment, a Brussels-based thinktank. “This is not a measure designed to decarbonise global shipping,” said Abbasov. “The EU is starting with its own backyard and leading the way [in the expectation] that other countries will follow and that the IMO will do what it is supposed to.” 

The measure only applies to ships over 5,000 gross tons and there are various exemptions, such as for vessels servicing offshore oil and gas. According to analysis by Transport & Environment, over 25 million tonnes of CO2 – equivalent to the total annual emissions of Denmark – will be exempt.

Reducing maritime emissions requires new technology, ships and fuels. There are fuel alternatives, such as hydrogen, which do not produce carbon dioxide when burned, but they are not currently cost competitive. The ETS measure aims to narrow the price gap between fossil fuels and zero-emissions alternatives, but it won’t bridge it completely. 

EU ETS carbon prices, even at their recent high levels of around 85 euros ($95) per tonne of CO2, would not make a significant impact in closing the price gap between fossil fuels and zero-carbon fuels for shipping, according to a recent report by the University Maritime Advisory Services (UMAS), which is partnered with University College London’s (UCL) Energy Institute.  

An average carbon price of just under $200 per tonne of CO2 is needed to fully decarbonise the shipping industry by 2050, according to the analysis

“Initially, the ETS is not going to create a hugely impactful [carbon] price, but it will generate a significant amount of revenue,” said Dr Alison Shaw, research fellow at UMAS and co-author of the report. 

Funds for innovation 

The EU will direct revenue raised by the ETS into its innovation fund, designed to “support breakthrough innovations towards climate neutrality.” Based on the scenarios outlined in the UMAS report, the ETS would raise $5 billion in 2030 at a price of around 50 euros ($56) per tonne of carbon. If this price increased to 103 euros per tonne of carbon ($116) by 2030, the total revenue generated from shipping would be $9 billion, according to Shaw. 

This is significantly higher than funds raised by a carbon tax proposal by the International Chamber of Shipping, which represents shipowners. The ICS has put forward a tax proposal of $2 per tonne of bunker fuel, which works out at just $0.7 per tonne of CO2 emitted, to fund research and development projects worth $5 billion over the next decade.

However, according to Shaw, it is unclear whether all the revenue generated by including shipping under the EU ETS would be channelled directly into shipping innovation. “There is currently no guarantee that a fixed proportion would be dedicated to the maritime sector.” The head of the European Commission’s unit responsible for maritime affairs did not respond to China Dialogue’s request for comment on this subject. 

It is important that developing countries have access to the fund as that is where the renewable and fuel potential lies, said Shaw. Many developing countries, including Mexico and South Africa, are rich in renewable resources and could help the industry navigate to zero-emissions sailing if provided with opportunities to access finance, she said. “Shipping is a global industry which needs a global perspective.”

“The funds generated by the ETS [provide a] mechanism to reward first movers, by subsidising new fuel and establishing fuel infrastructure,” said Freda Fung, a consultant for the Asia green shipping programme at the Natural Resources Defense Council. “It is a really huge step that helps facilitate the [sustainable] transition.” 

When California mandated fuel efficiency standards, it didn’t have a major impact on global emissions, but it drove the vehicle industry to innovate and produce electric vehicles, said Abbasov. “It’s exactly the same logic [with this shipping measure],” he said. “The immediate priority is to give rise to new technologies and incentivise regional action.” 

The impact on Chinese shippers

The inclusion of shipping in the EU ETS will drive up transport costs for ship companies worldwide. Much of the additional cost borne by cargo operators will be passed onto consumers. “The price increase for a pair of sneakers will be minuscule,” said Martin Cresswell, technical director of the Hong Kong Shipowners Association. “It won’t be noticeable to most Europeans.” 

The Asian Shipowners’ Association (ASA) strongly opposes the EU measure. “The extension of the EU ETS to shipping will only serve to impede the process of decarbonisation of international shipping, putting the EU in conflict with the achievement of both IMO and UNFCCC climate change objectives,” the ASA said in a statement. 

“At the IMO, countries work by consensus and [regulation] is much slower than what the EU can produce. There is generally quite a lot of annoyance about the EU moving ahead unilaterally,” said Cresswell. 

Chinese operators may look for shipping hubs outside the EU to lower their costs, said Cresswell. They could, for example, dock their big cargo ships in Morocco and transfer the goods on to smaller vessels, with a lower carbon output, he said. 

“The UK could benefit significantly from this [situation] and become a major bunkering country if they put their minds to it,” he added, referring to the UK’s withdrawal from the EU in 2020. 

China has its own emissions trading scheme, which currently only covers the power sector. The government has indicated that it plans to include other sectors over the next five years. “Shipping could be included in this scheme. It might be accelerated by the EU plans,” said Cresswell. 

“There hasn’t been an announcement about the inclusion of shipping, [but] there have been a lot of internal discussions,” said Fung. “The Chinese government has said they are in favour of putting a price on carbon to stimulate innovation and accelerate the deployment of low-carbon technology.”

This article was originally published on China Dialogue under a Creative Commons licence.

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