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Carbon Pricing in Shipping
Case-Specific Policy Analysis

Carbon Pricing in Shipping
Case-Specific Policy Analysis

The International Transport ForumThe International Transport Forum is an intergovernmental organisation with 64 member countries. It acts
as a think tank for transport policy and organises the Annual Summit of transport ministers. ITF is the only
global body that covers all transport modes. The ITF is politically autonomous and administratively
integrated with the OECD.
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understanding of the role of transport in economic growth, environmental sustainability and social
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The ITF organises global dialogue for better transport. We act as a platform for discussion and prenegotiation of policy issues across all transport modes. We analyse trends, share knowledge and promoteexchange among transport decision makers and civil society. The ITF’s Annual Summit is the world’s largest
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Case-Specific Policy Analysis Reports
The ITF’s Case-Specific Policy Analysis series presents topical studies on specific issues carried out by the
ITF in agreement with local institutions. Any findings, interpretations and conclusions expressed herein
are those of the authors and do not necessarily reflect the views of the International Transport Forum or
the OECD. Neither the OECD, ITF nor the authors guarantee the accuracy of any data or otherinformation contained in this publication and accept no responsibility whatsoever for any consequenceof their use. This work is published under the responsibility of the Secretary-General of the ITF. This
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Cite this work as: ITF (2022), “Carbon Pricing in Shipping”, International Transport Forum Policy Papers,
No. 110, OECD Publishing, Paris.

Acknowledgements
The author of this report is Olaf Merk of the International Transport Forum (ITF). The report is based on
original research and exchanges that took place during meetings held as part of the ITF DecarbonisingTransport: Driving Implementation Actions project.
The author would like to thank the following individuals for their contributions and insightful comments
during the review process: Michel Ardohain (French Directorate-General for Maritime Affairs andFisheries), Jacob Armstrong (Transport and Environment), Emilie Berger (Organisation for Economic
Co-operation and Development - OECD), Thomas Blomgren-Hansen (Danish Maritime Authority), Laurent
Daniel (OECD), Göran Dominioni (Dublin City University), Jagoda Egeland (ITF), Dominik Englert (World
Bank), Jasper Faber (CE Delft), Sotiria Lagouvardou (DTU), Christophe Pouts (Exxon Mobil), Michael Prehn(Solomon Islands Counsellor to IMO), Harilaos Psaraftis (DTU), Rico Salgmann (World Bank), Tristan Smith(University College London), Hanqiang Tan (High Commission of the Republic of Singapore), Jonas Teusch(OECD) and Elisabeth Windisch (ITF).
Thanks also go to Hilary Gaboriau (ITF) for copy-editing and co-ordinating the publication of the report.
The “Decarbonising Transport: Driving Implementation Actions” project is part of the ITF’s wider
Decarbonising Transport (DT) initiative. The DT initiative is a key instrument to help governments andindustry translate climate ambitions into actions. It currently unites more than 70 governments,organisations, institutions, foundations and companies. More information on the DT Initiative is available
at https://www.itf-oecd.org/decarbonising-transport. Funding for this work was kindly provided by
the European Union’s Horizon 2020 research and innovation programme under grant agreement
No. 101021600.

TABLE OF CONTENTS

Table of contents
Abbreviations and acronyms ............................................................................................................... 6
Executive summary ............................................................................................................................. 7
The decarbonisation imperative .......................................................................................................... 9
Reducing shipping’s emissions: Strategies and measures ...................................................................... 9
The potential role of carbon pricing and fuel standards ....................................................................... 11
Carbon pricing: What it is and how it works ...................................................................................... 13
Overview of existing carbon pricing schemes ....................................................................................... 14
Does carbon pricing alone effectively reduce emissions? .................................................................... 15
Carbon pricing schemes: Lessons learned ............................................................................................. 16
Carbon pricing in shipping: Is it applicable? ....................................................................................... 17
The practice of carbon pricing in shipping.......................................................................................... 20
Fuel tax exemptions for shipping .......................................................................................................... 20
Carbon pricing schemes that cover shipping ........................................................................................ 20
Other pricing schemes for shipping ...................................................................................................... 21
Impacts of carbon pricing in shipping ................................................................................................ 22
Carbon pricing’s potential effects on ship speed .................................................................................. 22
Carbon pricing and a move to more energy-efficient ships .................................................................. 23
Carbon pricing and the adoption of zero-emission fuels technologies................................................. 23
Carbon pricing and shipping routes ...................................................................................................... 24
Carbon pricing and shipping demand.................................................................................................... 25
Carbon pricing, shipping costs and trade flows..................................................................................... 25
Carbon pricing and the potential for carbon leakage ........................................................................... 26
Carbon pricing and competition ............................................................................................................ 27
Proposals for carbon pricing in shipping ............................................................................................ 28
Carbon pricing proposals at the International Maritime Organization ................................................. 28
Carbon pricing proposal in the European Union ................................................................................... 36
Carbon pricing proposals in other parts of the world ........................................................................... 37
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Policy implications of carbon pricing ................................................................................................. 39
Towards a global solution on carbon pricing for shipping .................................................................... 39
Addressing the interference of global and regional measures ............................................................. 42
Addressing competition issues .............................................................................................................. 43
References ........................................................................................................................................ 44

TablesTable 1. Decarbonisation goals and possible ways to achieve them ................................................... 22
Table 2. Studies on the emission-reduction potential of slow steaming induced by carbon pricing .... 23
Table 3. Proposals for carbon pricing or fuel standards submitted to the International Maritime
Organization, 2021-22 ....................................................................................................................... 28
Table 4. Design mechanisms of proposals submitted to the International Maritime
Organization, 2021-22 ....................................................................................................................... 30
Table 5. Types of emissions covered in the proposals to the International Maritime
Organization, 2021-22 ....................................................................................................................... 33
Table 6. Revenue use in carbon pricing proposals submitted to the International Maritime
Organization, 2021-22 ....................................................................................................................... 34

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ABBREVIATIONS AND ACRONYMS

Abbreviations and acronyms

6

CII

Carbon Intensity Indicator

CO2

Carbon dioxide

CO2eCarbon dioxide equivalentEC

European Commission

ECTS

Emissions cap and trade system

EEDI

Energy Efficiency Design Index

EEXI

Energy Efficiency Existing Ship Index

EP

European Parliament

ETS

Emission trading system

EU

European Union

GHG

Greenhouse gas

GT

Gross tonnage

HFO

Heavy fuel oil

ICSInternational Chamber of Shipping

IMO

International Maritime Organization

LCA

Life cycle analysis

LDC

Least developed countries

LNG

Liquified natural gas

MEPCMarine Environmental Protection Committee

MRV

Monitoring Reporting and Verification

NAP

National action plan

NDC

Nationally Determined Contributions

NOx

Nitrogen oxides

RD&D

Research development and deployment

SEEMP

Ship Energy Efficiency Management Plan

SEU

Ship emission units

SIDS

Small Island Developing States

TTW

Tank-to-wake

UNFCC

United Nations Framework Convention on
Climate Change

VLCC

Very large crude carrier

WTW

Well-to-wake

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EXECUTIVE SUMMARY

Executive summary
What we did
This report reviews the effectiveness of carbon pricing, how it might be applied to the shipping sector andwith what effects. It also evaluates recent proposals by countries to introduce a price on shipping’s carbon
emissions and examines related policy issues. The analysis draws on interviews and exchanges withstakeholders and experts who participated in the ITF's Common Interest Group on Decarbonising Shippingfrom June 2021 to November 2022.

What we foundThe 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 sourcescompetitive.
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 indicatethat carbon pricing on its own is often insufficient because prices are too low to trigger fulldecarbonisation. They are most effectively applied in tandem with other instruments, such as regulations
and standards. Carbon pricing schemes can generate significant revenues and thus provide funds forinvesting in zero-emission technologies and infrastructure. These could have a long-lasting impact bylowering the costs of zero-emission shipping.
Circumstances are favourable for a productive global discussion on carbon pricing for shipping. At aregional 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 theInternational 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 anda 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 ofvessels 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
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EXECUTIVE SUMMARY

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 tosecuring 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.

What we recommend
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 fuelstandard should accompany it.
Consider designing a carbon pricing mechanism for maritime shipping as a "feebate" system
Under a “feebate” system, all ships emitting greenhouse gas emissions pay a levy that is used to subsidisezero-emission fuels and energy sources. Ships operating with zero emissions receive a rebate thatcovers 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 emissions-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.
Complement carbon pricing with 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 orother zero-emission energy sources. Governments should also consider introducing a low-emission fuelstandard that would become progressively stricter and so help to phase out fossil fuels in shipping.
Use carbon pricing revenues from maritime shipping to facilitate an equitable transition to zero emissions
A substantial share of revenues from the carbon pricing mechanism would need to be reserved for generalclimate 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 theuptake of zero-emission energy sources are other potential uses.
Make sure that these 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.

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THE DECARBONISATION IMPERATIVE

The decarbonisation imperative
The planet is in a state of climate emergency. In 2022 alone, climate change resulted in a range ofcatastrophic 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 ofgreenhouse gas (GHG) emission increases, the world will likely reach a 1.5°C-temperature rise by the early2030s, and most likely before then (IPCC, 2021).
Maritime transport is a significant emitter of greenhouse gases. Shipping’s annual GHG emissions
increased by 9.6% in 2018 compared to 2012. In 2018, the shipping sector – including international anddomestic shipping and fisheries – emitted 1 076 million tonnes of GHG emissions (in carbon dioxide
equivalent, CO2e), of which 1 056 million tonnes were CO2 emissions. This represented 2.89% of the total
global anthropogenic CO2 emissions in 2018. (IMO, 2020)
Maritime transport is also one of the main facilitators of the continuing use of fossil fuels. The transport offossil fuels accounts for around one-third of maritime transport volumes: 11% is coal transport, 16% is
crude oil and 5% is gas (UNCTAD, 2021). In addition, maritime transport has allowed developed economies
to outsource manufacturing to developing countries – hence pushing a significant share of their emissions
to developing countries.
Decarbonising maritime transport is necessary for mitigating 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 (IMO, 2020).

Reducing shipping’s emissions: Strategies and measures
The IMO is the international organisation mandated to develop international regulations for the shipping
sector. This includes measures to reduce GHG emissions from international shipping. This role was
explicitly mentioned in the 1977 Kyoto Protocol and is left implicit in the 2015 Paris Agreement. One of
the legal instruments at the disposal of the IMO is the International Convention for the Prevention of
Pollution from Ships (MARPOL), adopted in 1973 and amended several times since (IMO, 2022). In
particular, Annex VI deals specifically with air pollution from ships.
The “Initial IMO GHG Strategy on Reduction of GHG Emissions from Ships” (IMO, 2018), adopted in 2018,lays out the direction towards decarbonising international shipping. It sets out the vision, levels of
ambition, guiding principles and a list of candidate measures to reduce ships’ GHG emissions. The levels of
ambitions in the Initial IMO Strategy cover the carbon intensity of an individual ship, the carbon intensityof international shipping and the absolute GHG emissions from international shipping. The level ofambition related to absolute emissions is to reduce the total annual GHG emissions by at least 50% by
2050 compared to 2008 (IMO, 2018). The Initial IMO Strategy provides a timeline for three types ofcandidate measures: short-term, mid-term and long-term.

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The current global measures aim to improve ships’ energy efficiency. Since 2015, all newly delivered ships
must meet a minimum design energy efficiency standard – the Energy Efficiency Design Index (EEDI). The
EEDI regulation requires that new ships meet minimum energy efficiency levels based on the ship type andsize segment. These energy efficiency levels become more stringent every five years (ITF, 2020a). At thesame time, the IMO also introduced voluntary guidance on the operational efficiency of ships, the Ship
Energy Efficiency Management Plan (SEEMP). These voluntary measures apply to both new and existingships and aim to improve energy efficiencies via operational measures such as optimising routes andspeeds (ITF, 2020a). However, the emission reduction impacts of these measures are fairly limited.
Since the adoption of the Initial IMO Strategy in 2018, other measures have been adopted. The EEDI
reduction factors became more stringent so to accelerate the expected emission reductions from energy
efficiency. IMO members agreed on two additional measures in 2021: the Energy Efficiency Existing Ship
Index (EEXI) and the Carbon Intensity Indicator (CII). EEXI is a technical requirement that aims to improvethe energy efficiency for existing ships that are in service. The CII consists of a set of operational carbon
intensity reduction requirements. The idea of the measure is that ships are rated according to their carbon
intensity on an A to E scale: A indicates a major superior performance level; B, a minor superior
performance level; C, a moderate performance level; D, a minor inferior performance level; or E, an inferior
performance level. If a ship is rated D or E for three consecutive years, its owners must submit a corrective
action plan to improve the rating to at least C. Administrations, port authorities and other stakeholders
could provide positive incentives to A- or B-rated ships (IMO, 2020c). The EEXI and CII measures will likely
be insufficient to reach the Initial IMO Strategy’s ambition levels. It is particularly doubtful they will reduce
the total annual GHG emissions by at least 50% by 2050, compared to 2018. CII reduction post-2026 has
not been adopted yet.
Some countries have developed national shipping decarbonisation policies. Nineteen of the 194 Nationally
Determined Contributions (NDC) mention maritime transport or define concrete measures to decarbonise
maritime transport (ITF, n.d.). Most countries that mention maritime transport in their NDCs come from
Asia, Pacific Island States and Sub-Saharan Africa, according to the ITF’s Transport NDC Tracker (ITF, n.d.).
The Initial IMO GHG Strategy lists developing national action plans (NAP) to deal with the decarbonisationof international shipping as a short-term candidate measure. Moreover, IMO’s Marine Environmental
Protection Committee (MEPC) adopted a resolution in 2020 to encourage member states to develop andsubmit voluntary National Action Plans to address GHG emissions from ships; the resolution included anumber of areas that such NAPs could cover (IMO, 2020b). Seven countries have submitted a national
action plan to the IMO: Finland, India, Japan, Marshall Islands, Norway, Singapore and United Kingdom.
The main policy measures in these NAPs relate to research and development, demonstration projects andcapacity building.
Supra-national organisations, such as the European Union, have also developed strategies for
decarbonising maritime shipping. The EU’s Fit for 55 package is an overarching strategy to reduce GHG
emissions by 55% by 2030 compared to 1990 levels. Five of the Fit for 55 proposals have an impact on
CO2 emissions from shipping (European Council, n.d.):

10•

The inclusion of shipping in the EU emission trading system (ETS) which would mean that GHG
emissions from ships that call at EU ports would start to be priced. This measure will be discussed
in more detail in later sections.

•

A new regulation on sustainable maritime fuels, called FuelEU Maritime. The proposal is essentiallyto introduce annual average targets for the GHG intensity of energy used by ships. These
reductions would start in 2025 with a 2% improvement compared to a 2020 baseline.
Requirements would become increasingly stringent over time, with a 6% improvement required
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in 2030 and an improvement in 2050 that would lead to a 75% cut in reductions compared to thebaseline. This fuel standard would apply to all energy used on board ship voyages between EU
ports and to 50% of the energy used for voyages between EU and non-EU ports.
•

A revised directive on alternative fuels infrastructure that aims to raise the availability of liquified
natural gas (LNG) by 2025 and shore-side electricity in main EU ports by 2030.

•

A revised directive on energy taxation that aims to end the tax exemptions for conventional marine
fuels and incentivise the uptake of alternatives.

•

A revised renewable energy directive (RED III) that sets up the new EU economy-wide target of ashare of at least 40% of energy from renewable sources by 2030 and a new target of GHG intensity
reduction of at least 13% by 2030 in the transport sector, including shipping.

The potential role of carbon pricing and fuel standards
There are various potential challenges to decarbonising maritime transport. These include access totechnology, the commercial viability of new technologies, renewable energy production, on-shore
infrastructure for alternative transport fuels and transition costs.
Full decarbonisation of maritime shipping requires that:•zero-emission fuels are available at scale•

all ships have access to these fuels•

there is demand for zero-emission fuels and related on-board technology so both arecommercialised•

there is sufficient production and onshore infrastructure for refuelling or recharging and•there is some mitigation of transition costs related to zero-emission shipping.

The greatest barrier to zero-emission shipping is the lack of commercial viability (Netherlands and OECD,2021). A basket of measures, including carbon pricing in shipping, could resolve zero-emission shipping’s
lack of commercial viability. Certainty of demand will create supply. Creating a market for zero-emission
shipping – stimulating commercial viability – will, in turn, drive the resolution of other barriers to zeroemission shipping (Baresic et al., 2022):•

Decarbonising technologies will only develop or mature if there is a market for zero-emission
shipping or a credible perspective that a substantial market will emerge shortly. There will be no
market if shipowners and operators find conventional shipping operations more attractive (costless) than zero-emission shipping operations.

•Zero- or low-emission shipping will require onshore infrastructure. However, the presence ofonshore infrastructure alone will not spur zero- or low-emission shipping unless it comes with an
obligation to use it. This is, for example, the case in the US state of California, where ships are
obliged to use the onshore power facilities installed in its ports (ITF, 2020). Ideally, investment in
low-emission ships takes place simultaneously with investment in the appropriate onshore
infrastructure; for example, in Norway the simultaneous government subsidies for batterypowered ships and electric charging systems in ports have facilitated the quick uptake of batterypowered ships there (ITF, 2020). The costs for shore-based infrastructure are estimated to be

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THE DECARBONISATION IMPERATIVE

almost seven times higher than the costs for on-board infrastructure (Krantz, Sogaard and Smith,2020).
•

Transition costs can be mitigated with new revenue sources from carbon pricing.

Carbon pricing is controversial. Some countries fear that carbon pricing will affect the prospects of theirfossil fuel industries. Others fear potential price impacts on imported and exported goods.
Nevertheless, there seems to be growing momentum for introducing carbon pricing in shipping. Several
industry leaders and representative organisations have come out in favour of carbon pricing schemes forshipping. Various countries have submitted proposals for carbon pricing schemes for shipping. The needfor renewable energy to produce zero-emission ship fuels creates potential economic opportunities forvarious countries. In addition, impact studies have shown the trade effects to be limited, as will beelaborated later in this report. Despite what seems to be emerging support for the principle of carbon
pricing in shipping, the momentum is fragile.
In that context, it is very important to get the design and process right. This report aims to contribute to
the emerging global debate by assessing the merits of carbon pricing, analysing current proposals andaddressing policy issues relevant to its effective introduction.

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CARBON PRICING: WHAT IT IS AND HOW IT WORKS

Carbon pricing: What it is and how it works
Climate change presents the largest potential for market failure from an economic standpoint (Stern,
2006; Stiglitz et al., 2018). Carbon pricing corrects that market failure by pricing the social costs of carbon,
which are the negative externalities related to the use of fossil fuels, including the damages that result
from emitting additional carbon dioxide into the atmosphere. If the social costs of carbon were fully priced,
producers would have a stronger incentive to invest in low-emission production factors. Similarly,
consumers would have a stronger incentive to buy low-emission products. The social costs of carbon – theeconomic damage of emitting one additional tonne of carbon dioxide into the atmosphere – have been
calculated to be in the range of USD 44 to USD 805 per tonne of CO2e (Rennert et al., 2022; Ricke et al.,2018).
Carbon pricing can have short-term and long-term effects. The short-term effects of carbon pricing are
related to operational changes in existing assets, e.g. a switch within a power plant fleet from coal to gas
power (Vogt-Schilb, Meunier and Hallegatte, 2018). Longer-term effects are when carbon pricing triggers
investments in new low- or zero-emission assets or when it induces innovation in new low- or zeroemission technologies or practices.
Conceptually, there are two principal ways to design carbon pricing: a carbon tax (or levy) or emissions
cap-and-trade schemes (or emissions trading systems). Under the carbon tax, there is a set carbon price
but no decreasing limit on emissions – although the carbon price provides incentives for emissions to falland can be adjusted to meet climate targets. Under emissions cap-and-trade schemes, there is anestablished maximum cap on emissions that will decrease over time, but the price of carbon emissions canfluctuate. In other words: carbon taxes ensure the price, whereas emissions cap-and-trade schemes
ensure the quantity (Green, 2021).
There are conceptual merits for both measures. Emission trading provides governments with certainty
over emission reductions, which cannot exceed the cap. Emission trading is thus an effective measure,provided that the emissions cap is well calibrated and initial allowances are auctioned instead of provided
freely to companies. The downside of emission trading systems is their administrative complexity; theyrequire a lot more investment in design and human capital. In addition, their price volatility may delay
investments in green technologies and zero-emission systems. In comparison, carbon taxes are simpler todesign and implement and reduce uncertainty over carbon prices.
In practice, the distinction between carbon taxes and emission trading schemes is sometimes blurred(Hepburn, 2006). This is the case, for instance, when a form of price regulation – e.g. a maximum andminimum carbon price – is introduced in emission trading systems to limit price volatility.
Theory favours a global universal carbon-pricing scheme that covers all sectors. Including as many sectors
as possible would increase the potential allocative efficiency of the market mechanism. At the same time,
including sectors with very different levels of abatement potential into the same ETS could make it difficult
to achieve emission reductions from all, which is essential for a successful transition to net zero emissions.
In addition, including many sectors with very different abatement potential has given rise to offsetting
schemes (e.g. tree-planting schemes to compensate for aviation emissions) that have, in many cases,
proved ineffective.

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Ideally, considering that various sectors compete beyond country borders, carbon pricing schemes should
be global. Global carbon pricing schemes limit the opportunity for shipping companies to evade the carbon
pricing scheme, which would result in carbon leakage (wherein entities may evade paying carbon prices orcarbon taxes in a jurisdiction with a carbon pricing scheme by moving operations into a jurisdiction withoutone). A second-best option would be to link national or sub-national carbon pricing schemes to each other,resulting in a network of stitched-together carbon pricing schemes. That said, carbon prices are likely tocontinue to differ substantially across countries and sectors.

Overview of existing carbon pricing schemes
In 2022, 68 carbon pricing schemes were operational worldwide. Thirty-seven of these were explicit
carbon taxes, and 34 were emission-trading schemes (WB, 2022). The 68 carbon-pricing schemes coveredaround 23% of global GHG emissions in 2022, and their revenues reached approximately USD 84 billion in
2021 (WB, 2022). In addition, almost all countries levy fuel excise taxes, which effectively price carbon(OECD, 2022). Fuel excise tax rates on road fuels often exceed carbon tax rates and tradable permit prices.
However, their rates are not aligned with the carbon content of fuels and often do not extend beyond
fuels used in the road transport and building sectors.
Most of the carbon pricing schemes are implemented at the national level. However, there are also supranational schemes (the EU ETS) and various sub-national schemes, e.g. in Canadian provinces andterritories, Mexican sub-national governments and US states. The oldest schemes are from the Nordic
countries and the European Union. Denmark, Norway and Sweden introduced their schemes in the early
1990s. The EU introduced the EU ETS, the world’s first compulsory emission trading system, in 2005.
People’s Republic of China hosts the world’s largest carbon market by emissions, whereas the largest
carbon market by traded value is the EU ETS.
The price of carbon in these schemes is generally lower than the social cost of carbon and the carbon
prices needed to meet climate targets. Only eight carbon pricing schemes had a carbon price of USD 80
per tonne of CO2e or higher in 2021, the largest of which are the EU ETS and the UK ETS. The highest
carbon prices are in the carbon taxes in Uruguay (USD 137 per tonne) and in Liechtenstein, Sweden and
Switzerland (all at USD 130 per tonne). Even these carbon prices are on the lower end of the USD 44-805
range of the social costs of carbon calculated by Rennert et al. (2022) and Ricke et al. (2018). Carbon prices
have generally risen over time, and various countries have established more ambitious price trajectories
for the coming years. However, recent energy commodity price hikes might delay this timing.
There is significant pressure from citizens and businesses to exempt certain sectors from carbon pricing
schemes or reduce the schemes’ scope. Citizens are most likely to oppose carbon pricing when it impacts
the cost of consumer goods, as is the case of fuel prices for private cars. Industries that depend on energy
prices and are highly exposed to global trade, e.g. export-oriented commodity businesses, are also
sensitive to carbon pricing. A global carbon pricing measure would minimise the effects of carbon pricing
on relative competitiveness. Firms that trade in local jurisdictions will be less sensitive to cost changes, soless likely to oppose carbon pricing.
Almost all major carbon pricing schemes include the electricity sector because it is the most inwardlooking, the least trade-sensitive and the most manageable through existing regulatory structures. Fewercarbon pricing schemes include industrial sectors because they are more trade-sensitive. Forestry andagriculture are almost excluded from carbon pricing. Although fuel taxes frequently apply to the transport
sector, relatively few carbon pricing schemes include transportation (Cullenward and Victor, 2020), wherefuel excise taxes dominate (OECD, 2022).
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Tax instruments in many political systems require qualified or super-majority votes to pass into legislation.
This is not the case for emission trading systems, which is one of the practical political reasons why
some jurisdictions choose to introduce ETS instead of carbon taxes. For instance, when the EU did not
get universal support for a European carbon tax in the early 1990s, it decided to introduce a cap andtrade system.

Does carbon pricing alone effectively reduce emissions?
Surprisingly few ex-post impact studies on carbon pricing exist. Green’s (2021) overview study of ex-post
evaluations of the performance of carbon pricing policy found 37 studies that can be considered rigorous,
as they isolate the amount of emission reductions attributable to the carbon pricing policy. There are also
impact studies that do not isolate the effect of carbon pricing; the emission reductions in those studies
might be caused by factors other than the carbon pricing policy.
Green’s overview study shows that the overall effect on emissions reductions for carbon pricing is quite
small: generally between 0% and 2% of emission reductions per year (Green, 2021). Incremental solutions,
including fuel switching, enhanced efficiency and reduced consumption of fuels, are driving these modest
reductions (Tvinnereim and Mehling, 2018). Such operational shifts are helpful because they rapidly
decrease emissions and increase the remaining carbon budget. However, they do not help to reach fulldecarbonisation. Even in the few jurisdictions with high carbon prices, such as Sweden and Finland, theemission reduction estimates are relatively modest (Shmelev and Speck, 2018; Andersson, 2019;
Fernando, 2019; Lin and Li, 2011). The limited effectiveness of carbon pricing might be caused by carbon
leakage and the wide-spread use of offsets (Green, 2021). However, these studies were conducted on
historical data for periods where carbon prices were very low and free allocation of allowances in emissions
trading systems pervasive (OECD, forthcoming).
Carbon taxes appear to perform slightly better than emission trading systems in generating reductions,but the evidence is not altogether convincing. Carbon taxes in European nations have resulted in emission
reductions of up to 6.5% over several years; however, countries without a carbon tax reduced emissions
faster than those with a carbon tax, suggesting that other policies may have contributed more to reducing
emissions than carbon taxes (Haites, 2018). On the other hand, another study found that for every EUR 10
increase in the price of carbon, emissions decrease by 7.3% (Sen and Vollebergh, 2018).
Studies also show that carbon pricing has not resulted in more technological innovation that could drive
decarbonisation. Seven studies looked into the effect of carbon pricing on low- or zero-emission
investment, according to Liliestam et al. (2021). All seven concluded that carbon pricing did not have aneffect on zero-emission investment, and six of them found no effect for low-carbon investment. Liliestam
et al.’s (2021) overview study was contested by Van den Bergh and Savin (2021), who identified the study’s
shortcomings. Their assessment showed “that carbon pricing has had a small but positive and significant
effect on low-carbon innovation” (Van den Bergh and Savin, 2021). In response, Liliestam and his coauthors expanded their review and found that carbon pricing has triggered weak innovation increases but“that there is no evidence that carbon pricing has triggered zero-carbon investments” (Lilliestam, Patt andBersalli, 2022).
The studies describe three main reasons for the limited impact of carbon pricing on technologicalinnovation. First, schemes might have suffered from design and implementation problems, such as overallocation of certificates leading to a low carbon price and excessive exemptions. Second, other pricedevelopments could have masked or eliminated the price signal effect from carbon pricing. Third, otherpolicy instruments, such as renewable energy support schemes, were much better at stimulating rapid
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innovation and development of zero-emission technology. Other studies agree with the last of these: othermeasures than carbon pricing seem to have had impacts that are more fundamental to decarbonisation.
Particularly substantive GHG emissions reductions are often achieved via regulatory instruments(Cullenward and Victor, 2020; Tvinnereim and Mehling, 2018). These studies on the impact of carbon
pricing have important implications for the appropriateness of carbon pricing as a policy measure: thedesign and introduction of carbon pricing schemes directly impact the schemes’ effectiveness.

Carbon pricing schemes: Lessons learned
The extensive literature on carbon pricing seems to converge in many respects. The following lessons fromthat literature could be drawn that might be relevant for the discussion on carbon pricing in shipping:

16•

Carbon pricing schemes have been notoriously difficult to introduce. Australia, Canada and theUnited States have faced fierce political fights over carbon pricing, often because many citizens
and businesses opposed it. Part of successfully introducing carbon pricing schemes is in thepresentation. The schemes’ design parameters must be accurate and realistic. Observers also
recommend calling carbon taxes “carbon levies”. (Carattini et al., 2018; Carattini et al., 2017)•

Most successful carbon pricing schemes have gradually increased their ambitions. The Center for
Climate and Energy Solutions (C2ES, n.d.) explains, “Economic theory suggests a carbon tax should
be set equal to the social cost of carbon, which is the present value of estimated environmental
damages over time caused by an additional ton of carbon dioxide emitted today. The tax rateshould also rise over time to reflect the growing damage expected from climate change. An
increasing price over time also provides a signal to emitters that they will need to do more andthat their investments in more aggressive technologies will be economically justified.” Carbon
prices could increase over a certain period: schemes could provide free allowances andexemptions in the first phase, for example, and withdraw them over time. However, the transition
phase with generous allocations and exemptions should not last. Were it to, stringent and effective
carbon pricing would never be reached. The EU ETS is an example of a carbon pricing scheme that
becomes more stringent and effective over time (Cullenward and Victor, 2020).

•

Carbon pricing should be part of a package of measures. Studies indicate that carbon pricing alone
is often insufficient to reach full decarbonisation. For carbon pricing to be effective, it should beenacted in tandem with other instruments, including regulation, such as fuel standards andtechnical requirements. (Baranzini et al. 2017)•

Carbon pricing is a significant revenue-raising mechanism. Carbon pricing has generated asignificant amount of revenue. Countries such as France have used the additional income to invest
in zero-emission technologies and infrastructure that could have a positive, long-lasting impact on
the climate (Carattini et al., 2018). However, governments must safeguard against the politicallyoriented spending of carbon pricing revenues, and there appears to be limited transparency on
the impacts of spending programmes for decarbonisation.

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Carbon pricing in shipping: Is it applicable?
While carbon pricing schemes are becoming more common, very few cover shipping. The question arises:
Can carbon pricing be applied to the shipping sector, or do 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 thisquestion depends on the carbon pricing scheme’s geographical scope, who pays the carbon price and who
receives the carbon price revenues.
Carbon pricing’s geographical scope: When different carbon pricing schemes are applied to limited
geographical zones, the risk of evading carbon pricing rises. Attempts at evasion are less likely if the costsof evasion for shipping companies outweigh the benefits of evasion. A global carbon pricing scheme forshipping would provide a level playing field for all taxed entities and eliminate any incentive for evasion. A
global measure would require international agreement on the specific terms. Achieving consensus on suchterms could result in a lowest-common-denominator scenario and a low carbon price. An alternative but
less desirable option consists of a supra-national scheme – for example, at the level of the EU. A supranational scheme could be linked to regional schemes. However, one must acknowledge that such links are
hard to realise. The appropriateness of such a constellation depends on who pays the carbon price andwho benefits from the revenue.
Who should pay the carbon price? The overarching idea of carbon pricing is the “polluter principle”. In thecase of shipping, this would mean that the more polluting ship would pay more. A structure would need
to be established that ensures that each ship pays the appropriate carbon price. This could be collected byflag administrations (the marine regulator under which the ship operates), by port state administrations,or centrally by an international institution. It has also been suggested that carbon levies could be collected
at the level of ship bunker facilities (Parry et al., 2018). Energy-efficiency depends on both thetechnological and operational specifications of the vessel. For the technological specifications, theresponsible entity is the shipowner. In contrast, the operational specifications fall to the shipowner if thevessel is chartered in the spot market and the charterer if it is chartered in the time charter market.
Who receives the revenues from carbon pricing? If one accepts that shipping activity is predominantly
global, it stands to follow that there would be constraints on the amount of revenue that states could
automatically claim for themselves. An international institution or mechanism charged with allocating anddistributing 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 (Dominioni and Englert, 2022).
The shipping sector is disintegrated into many different 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

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shipping emissions. It also makes it hard to define which actor should pay the carbon price and what partof it.
Any discussion on carbon pricing in shipping will need to take account of the well-established international
principle of equal treatment of ships. This rule of no more favourable treatment, which ensures that all
ships – regardless of the flag under which they sail – are held to the same standards, is enshrined in IMO
Conventions, including the Marpol Convention. Respecting this principle limits the possibilities for regional
carbon pricing schemes, as it discourages regional authorities from introducing a carbon pricing schemethat only applies to ships registered under certain flags.
Shipping facilitates global trade. As such, its character is slightly different from other sectors that compete
in global markets. A carbon price for shipping would increase the cost to customers of traded goods
transported by sea. For long-distance shipping, there is no real alternative to ships, whereas short-sea
shipping might have land-based transport alternatives. One must assume that economies that are farther
from export and import markets would suffer more than less remote ones. In turn, their trade-sensitive
sectors would be harder hit than those in the parts of the world that are closer to consumer markets.
However, historical fuel price fluctuations have shown very few practical impacts. Although one of theobjectives of carbon pricing might be to discourage carbon-intensive supply chains, these potential global
distributional impacts could present an obstacle to implementing carbon pricing in shipping.
Such discussions on global distributional impacts of measures to decarbonising maritime transport haveoften become linked to discussions on common but differentiated responsibilities, a principle formalisedin the United Nations Framework Convention on Climate Change adopted in 1992. The common-butdifferentiated-responsibilities principle acknowledges that every state has a shared obligation to address
climate change but also stipulates that this responsibility is differentiated considering that not all states
are at similar stages of economic development or have similar mitigation capabilities. Many discussions on
decarbonising maritime transport have to deal with reconciling the no-more-favourable-treatment andcommon-but-differentiated-responsibilities principles. (Aidun, Metzger, Gerrard, 2021; Dominioni, Heine,
Martinez Romera, 2018; Psaraftis, Zis, and Lagouvardou 2021).
Various actors could push for carbon pricing in shipping: countries highly exposed to climate change,
efficient shipping companies, and countries and companies that might benefit from producing renewablefuels. There are, however, at least three main stakeholders that may oppose carbon pricing in shipping:18•

Governments from countries at the periphery of global trade routes may be concerned about the
public backlash from potential impacts on trade costs from increases in maritime transport costs.
Private citizens are not directly impacted by the costs of maritime transport, unlike those of othersectors. For example, they are highly sensitive to increases in fuel costs for private cars and heating
and tend to blame their governments for the rising prices. One can assume that citizens will notraise concerns against carbon pricing in shipping, but their governments likely will, fearing theripple effect of carbon pricing on trade.

•

The shipping industry will generally oppose high carbon prices; high carbon prices in shipping
might reduce the amount of global trade, hence the amount of maritime transport. International
shipping is highly energy-intensive and trade-sensitive. Carbon pricing only makes sense if thegeographical coverage is global – or if carbon leakage effects can be minimised, in the case ofregional coverage. There are exceptions within the shipping industry, however, where
representatives of some high-profile shipping companies favour high carbon levies for the shipping
sector. Some shipping companies might consider carbon pricing an opportunity to increase their

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competitive advantage. For instance, if they have already invested in energy-efficient and zeroemission ships, they will be able to adapt to the new situation faster than their competitors.
•

Fossil fuel companies also maintain interest in seaborne trade. They charter considerable parts ofthe dry and liquid bulk fleet and manage to have their governments represent their interests ininternational fora.

In the design and introduction of carbon pricing schemes, concerns from engaged parties should be
addressed, such as the predictability of the policies, scalability of the infrastructure and the technicalreadiness of zero-emission GHG technologies.

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THE PRACTICE OF CARBON PRICING IN SHIPPINGThe practice of carbon pricing in shipping
The greenhouse gas emissions from shipping are currently not priced in most parts of the world. Fuels forshipping are generally exempted from taxation, in particular for international shipping, but also fordomestic shipping in many countries. Despite the emergence of carbon taxes and emission trading
schemes, the shipping sector is generally not included in these schemes, with a few notable exceptions.
Finally, there are a few pricing schemes that are applied to the shipping sector, although these schemes
do not price carbon emissions but other emissions, such as nitrogen oxide (NOx) emissions.

Fuel tax exemptions for shipping
Fuels for international shipping are generally exempted from taxation. The reason is that ships could very
easily circumvent ship fuel taxation in one jurisdiction by getting ship fuel in a jurisdiction where it is not
taxed. So any attempt to tax ship fuel would need international co-operation.
Taxation of ship fuel that is used for domestic shipping is somewhat easier. Consequently, there are several
countries that have taxes for domestic shipping, including Canada, Colombia, Switzerland and theUnited States. Estonia taxes marine fuels used inside its territorial waters (OECD, 2019). The State ofCalifornia applies a partial exemption of the sales and usage tax (SUT) on ship fuel required to get from
California to its first out-of-state destination (ITF, 2019).
The EU aims to facilitate the taxation of fuels for domestic and intra-EU shipping by changing its Energy
Taxation Directive. This directive currently states that shipping shall be exempt from taxation on “energy
products supplied for the use of fuel for the purposes of navigation within Community waters” and, assuch, explicitly forbids taxation of ship fuels (European Council, 2003). As the alternatives to conventional
ship fuels, for example electricity, are not benefitting from the same tax exemption, the directive provided
a disadvantage for low-carbon technologies and shore power in comparison with conventional fuels. The
EU has allowed various member states to provide tax exemptions for electric charging systems for ships,
to take away this disadvantage. The revised EU directive on energy taxation being proposed by theEuropean Commission aims to end the tax exemptions for conventional marine fuels, which will reducethe competitive disadvantage for alternative fuels and energy sources.

Carbon pricing schemes that cover shipping
Shipping is not included in the scope of carbon taxes of most countries, with a few exceptions. The carbon
tax applies to domestic shipping in Norway. In Norway, the carbon tax rates for inland transport dependon the energy source, with the highest rates for petrol and the lowest rates for heavy mineral oils, such as
ship fuels. Since 2018, Norway has applied the standard carbon tax rate also to LNG and liquefied
petroleum gas (LPG) for domestic shipping (ITF, 2020).

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THE PRACTICE OF CARBON PRICING IN SHIPPINGInternational shipping is excluded from all emission trading schemes in the world, but domestic shipping
is included in some. A notable example is the case of Shanghai. This is one of the Chinese regional pilots
on emission trading schemes, introduced in 2013. In the scheme of Shanghai, both ports and domestic
shipping are included (ITF, 2020).

Other pricing schemes for shipping
There are examples of pricing schemes for shipping emissions, other than greenhouse gas emissions. Oneof the most referenced examples is Norway’s NOx Fund. In this scheme, firms that operate ships in
Norwegian waters can pay a NOx fee related to the NOx emissions of the ship instead of paying the regular
NOx tax. The revenues of the scheme fund innovative projects aimed at reducing NOx emissions from ships.
The rates of payment to the NOx Fund in 2020 were NOK 10.5 (EUR 1) per kg for the shipping sector.
Companies need to report their emissions to the NOx Fund based on a defined methodology and havethem approved by an accredited firm (ITF, 2020). Not only domestic shipowners and operators can apply
for this financial support, but also foreign owners that operate their ships in Norwegian waters. For
example, various Swedish shipowners indicated that approximately 80% of the additional costs of LNG
ships related to equipment were covered by the NOx Fund (ITF, 2018).

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Impacts of carbon pricing in shipping
There are essentially three ways to reduce GHG emissions from shipping: improve energy efficiency (byreducing the energy needed per tonne-mile); use lower carbon-intense fuels (measured in GHG emissions
per unit of energy used) and; reduce the demand for maritime transport (the total amount of tonne-miles
carried out by the shipping sector). There are different ways to achieve these decarbonising objectives.
For example, ships are more energy-efficient when travelling at slower speeds, and shipping companies
can deploy more energy-efficient ships and adapt their operations to become more energy-efficient.
Table 1. Decarbonisation goals and possible ways to achieve them
Objectives for decarbonisation

Possible levers

Energy efficiency

Lower ship speed
More energy-efficient ships
More efficient shipping operations

Carbon intensity

Bridge the price gap between conventional and alternative fuels
Advance in zero-carbon technologies

Reduced demand

Shorter shipping routes
Fewer goods transported by sea

Carbon pricing could be instrumental in decarbonising efforts. It can make shipping more energy-efficient,spur a transition to less carbon-intensive ship power, and reduce the demand for shipping altogether.
Carbon pricing can also influence trade costs, trade flows, carbon leakage and competition. The following
assessment of these impacts comes from studies that have modelled the likely effects of introducing
carbon pricing in shipping. Currently, there are practically no carbon pricing schemes for shipping. With
this in mind, these assessments are not based on real-life experiences and should be interpreted withcaution.

Carbon pricing’s potential effects on ship speed
Carbon prices could potentially influence a speed reduction for ships, which translates directly into
emission reductions (Wang, Fu and Luo, 2015). Studies indicate up to 50% potential emission reductions,depending on the carbon price level and the prevailing fuel price (Table 2).
The effect on ship speed depends on fuel prices. High fuel costs create incentives for slow steaming (sailingat slow speeds), leaving little room for carbon pricing to trigger further speed reductions (Gu, Wallace andWang, 2019; Giovannini and Psaraftis, 2019). The emission-reducing effects of carbon pricing are moresignificant if the geographical coverage of the carbon price is global. In the case of regional schemes, ships
slow down in the region where a carbon price is applied but make up for lost time by speeding up outsidethat region. This carbon leakage effect could undo the emission reductions intended by the regional carbon
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pricing scheme. Carbon pricing might also be the necessary incentive for shipping companies to optimise
ship speed and just-in-time-operations via digitalisation and data-sharing between actors within thetransport chain.
Slow steaming’s potential in liner shipping is limited by the company’s commitment to provide a regularservice. For them to maintain the same service on a route, additional ships would need to be added if the
fleet were to travel below a certain average speed.
Table 2. Studies on the emission-reduction potential of slow steaming induced by carbon pricing
Study

Potential CO2 emission
reductions

Carbon price(USD per tonne CO2)

Fuel price(USD per tonne)

Ship type

Devanney (2010)6%
12%

USD 50
USD 150

USD 465

VLCC

Gkonis and Psaraftis (2012)50%

USD 400-1 000

USD 370-480

VLCC

Psaraftis (2019)50%

USD 500

USD 500

Containerships

Lagouvardou, Psaraftis andZis (2022)

43%

USD 400

USD 400

Tankers

Note: VLCC=Very large crude carrier.

Ship speed also depends on charter rates and freight rates. When charter rates are high, operators will sailat high speeds to complete the trip quickly and save costs. Carbon pricing is not very effective. However,when charter rates are low, shipping companies will fully utilise idle ships and slow shipping speeds to savefuel costs. Here, the additional costs of carbon pricing can hardly push the speed to an even lower level(Gu, Wallace and Wang, 2019). Similarly, introducing a carbon levy in periods with high freight rates will
have a limited effect on emission reductions in the short term. In these conditions, only a significantly
higher levy would counterbalance the profit incentive to sail faster. At low freight rates, ships are often
already slow steaming, and the margin for achieving a significant speed reduction – and thus CO2 emission
reductions – is much lower (Lagouvardou, Psaraftis and Zis, 2022).

Carbon pricing and a move to more energy-efficient ships
Carbon pricing could provide incentives for retrofitting ships to make them more energy-efficient andreplacing high-energy ships with more energy-efficient ones. In depressed shipping markets, shipping
companies tend to store less energy-efficient ships. In such market conditions, carbon pricing incentivises
shipping companies to lay up less energy-efficient ships earlier, particularly when bunker costs are high(Zhu et al., 2018). Huang et al. (2015) found that installing a waste heat recovery system is one of the mostprofitable measures for improving containerships’ energy efficiency; carbon pricing in shipping might
stimulate the deployment of this measure.

Carbon pricing and the adoption of zero-emission fuels technologies
Carbon pricing schemes could raise the price of conventional fuels to such an extent that zero-emission
fuels or energy sources become economically competitive. In that case, the carbon pricing scheme would
have bridged the price gap between conventional fuels and zero-emission fuels.

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Marginal abatement cost curves (MACC) could help to estimate the carbon price needed to bridge theprice gap. A MACC plateaus at a value representing the carbon price required to make zero-emission
technologies competitive with conventional propulsion. A carbon price between USD 100 and USD 500 per
tonne CO2 would be necessary to achieve the Initial IMO Strategy’s objective of at least 50% absolute
reductions in GHG emissions by 2050 (Smith, 2020). Much depends on assumptions. For example, in ahypothetical scenario with ample availability of biofuels, significant absolute reduction emissions could beachieved even at a low marginal cost of carbon (USD 50 per tonne) because it is available at the same priceas the fossil fuel equivalent and not dependent on the carbon price to stimulate its uptake (IMarEsT, 2018;
Smith, 2020).
The carbon price could be lower than the USD 100 and USD 500 per tonne CO2 range if the carbon pricing
scheme’s revenues were used to offset the cost of alternative fuels. Were those revenues fully re-invested
in zero-carbon fuels and technologies, the magnitude of the carbon price needed to achieve the level ofambition of the Initial IMO Strategy would drop to between USD 50 and USD 250 per tonne CO2 (Smith,2020). Carbon pricing will increase the attractiveness of zero-carbon fuels and, as such, require
adjustments in ports, such as zero-carbon fuel bunkering facilities, energy supply infrastructure, potentiallyto be developed in ports.
The effectiveness of carbon pricing depends to a large extent on the level of the bunker fuel price. Zhu etal. (2018) modelled the impacts of different maritime emissions trading systems. Their calculations showthat in scenarios with high bunker fuel prices (up to USD 583 per tonne), even emission trading schemeswith loose allowance rules and moderate initial CO2 prices could motivate an emissions reduction ofaround 8%. However, CO2 price increases in low bunker price scenarios (USD 348 per tonne) would notlead to noticeable improvements in emission mitigation. Shipping operators indicate that costs, risks andvolatility of CO2 allowances in existing emission trading regimes are of much less importance to them thanbunker costs (Koesler, Achtnicht and Köhler, 2015).
Bridging the price gap might not be enough to stimulate the uptake of zero-carbon fuels. It could be argued
that zero-carbon fuels will need to be less expensive than conventional fuels, because shipping companies
will have to incur costs related to shifting fuels. For example, for some fuels, shipping companies will haveto retrofit or renew their fleets to accommodate these new fuels. The costs for retrofits could be spreadout over many years – and investment in new ships usually implies cost savings through enhanced energyefficiency, but these costs might still constitute a barrier for shipping companies.

Carbon pricing and shipping routes
Higher fuel costs increase the voyage costs of ships. Shipping companies will generally use shorter shipping
routes to reach the destination. One can reasonably expect similar results from carbon pricing in shipping:likely raising the voyage cost and potentially changing the shipping routes. For example, were shipping
included in carbon pricing schemes, the Cape of Good Hope route would become less attractive than theSuez Canal route. The Cape of Good Hope route between Asia with Europe is much longer than the Suez
Canal route, leading to greater fuel consumption and higher carbon emissions. Carbon pricing would thus
make this route more costly (Wang et al. 2021). The drop in fuel prices at the beginning of 2020 resulted
in more container ships taking the Cape of Good Hope route and, thus, higher GHG emissions.
A more or less similar logic applies to perspectives of Arctic shipping. As the Northern Sea Route is much
shorter than the Suez Canal route, carbon pricing makes the Northern Sea Route a more attractive option– despite additional costs related to this route, such as the need to use ice-breaking ships at certain periods
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IMPACTS OF CARBON PRICING IN SHIPPINGof the year. The higher the carbon tax, the higher the cost difference between the Northern Sea Route andthe Suez Canal route (Ding et al., 2020).

Carbon pricing and shipping demandWith hardly any carbon pricing schemes in the shipping sector, there is no empirical evidence to illustrate
how carbon pricing may change the demand for shipping. However, factual, observable changes in theprice of ship fuels provide indications of shipping’s price elasticity and a potential means of assessing
carbon pricing’s impacts on shipping demand due to the rise in fuel costs. Existing studies suggest that therise in fuel costs (that are likely to result from carbon pricing) could affect, to some extent, the demand formaritime transport of low-value goods.
Price elasticities differ substantially across products and industries, with effects ranging from -0.03 to -0.42
in a study that looked at goods at a highly disaggregated level (Mundaca, Strand and Young, 2021). In
general, the largest impacts of carbon taxes on tonne-nautical miles were on low-value goods: productswith low trade values relative to their weight. For such products, a global maritime carbon tax of USD 40
per tonne CO2 would stimulate reductions in tonne-nautical miles (so, more regional trades or less trade),
resulting in reductions of carbon emissions in the order of 8.1% for fertilisers, 8.3% for iron and steel, 8.4%
for cereals, 10.5% for ores and 11.5% for fossil fuels (Mundaca, Strand and Young, 2021).
Such effects could be more significant for certain parts of the world. For example, the per-unit transport
costs for Pacific Small Island Development States (SIDS) are, on average, 6% higher than the rest of theworld; they might also face more severe impacts from further increases. An increase of 10% in per-unit
transport costs would result in a reduction of exported units of 8.3% to 18.5% for these countries, withparticularly considerable impacts on Fiji Exports of coffee were the most sensitive to changes in per-unit
transport costs for the region, with a decrease between 20% and 30% for every 10% increase in transport
costs. (Rojon et al., 2021)

Carbon pricing, shipping costs and trade flows
A variety of studies analyse the extent to which carbon pricing may increase maritime shipping costs. In an
overview of the literature on the subjet, Rojon et al. (2021) showed that – depending on chosen
assumptions – carbon pricing would increase maritime freight costs by between 0.4% and 16%.
Increases in maritime transport costs could differ according to the ship segment. In the case of an emission
trading scheme in which emission allowances are fully auctioned or partially freely allocated on the basisof a uniform benchmark, Roll-on/Roll-off and Roll-on/Roll-off/Passenger ships would face relatively highimpacts due to their high fuel consumption per transport activity, compared to oil tankers and bulk carriers(Christodoulou et al., 2021).
Higher costs for shipping companies do not necessarily translate into higher maritime trade costs for
freight shippers. It depends on whether or not the carriers pass those costs on to their customers: theshippers and, ultimately, the final buyer or consumer.
The extent to which a carbon price will be shared between producers and consumers depends on the
supply-and-demand balance, specifically, the extent of competition in the market. When market
conditions are favourable to shipping companies with high freight rates, a higher share of the carbon
pricing scheme’s costs can be transferred to shippers. A modelling exercise of a potential fuel tax levy for
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shipping showed that the cost pass-through rate (the percentage of the levy costs borne by the consumer)
would have been 52% in 2007 when market conditions were favourable to the shipping sector, but only
10% in 2013 when conditions were less favourable (Kosmas and Acciaro, 2017). The long-term effects on
pass-through from a carbon tax could be expected to be higher than the pass-through from short-term
fluctuations in oil prices.
The existing literature seldom considers the general equilibrium effects and the changes in trade flowsthat could result from carbon pricing in shipping. However, these effects are important. A carbon priceraises the cost of importing commodities and, therefore, encourages domestic production. As this importsubstitution expands production, prices of primary inputs, such as land, labour and natural resources,
could rise due to their increased scarcity. This, in turn, could push up the price of exporting commodities.
The magnitude of the net impact depends on the overall change in import prices, primary input prices andthe commodities’ responsiveness to the price change related to carbon pricing (Sheng, Shi and Su, 2018).
The few studies that applied computable general equilibrium (CGE) modelling found that carbon pricing inshipping would have a minimal impact on global trade and production. Carbon pricing in shipping reduces
the trade of low-value, high-volume commodities from relatively distant sources while encouraging thetrade of high-value, low-volume commodities. However, Sheng, Shi and Su (2018) estimated the impact
on real GDP (assuming a bunker emissions charge of USD 18 per tonne of CO2) at less than -0.5% anddemonstrated that less-developed countries would not be disadvantaged with a properly designed
revenue distribution mechanism. Lee, Chang and Lee (2013) found that even a high global maritime carbon
tax (USD 90 per tonne CO2) would not lead to significant economic impacts: the highest loss in real GDP
was modelled to take place in China, but even there, the reduction in real GDP would be small, around
0.02%. The same study found that a maritime carbon price would discourage distant trade but promotetrade with neighbouring countries in Asia and Europe.
A study for the European Commission (EC, 2021) typically found carbon pricing’s effects to be much lessthan 0.1% for most countries and regions. The reason for the relatively small impact is that imports andexports often constitute a small share of GDP, and changes in import and export values are often partly
offset by changes in domestic production, consumption and investments. In this study, middle andemerging economies had predominantly net-positive impacts, whereas most Small Island Developing
States (SIDS) and least developed countries (LDC) had negative impacts. The most significant net-negative
impact among SIDS and LDCs was up to -3% of GDP. (EC, 2021)

Carbon pricing and the potential for carbon leakage
Carbon pricing schemes face the risk of carbon leakage when their coverage is not global and universal,e.g. with regional carbon pricing schemes. In the case of shipping, shipping companies could evade carbon
pricing schemes by changing the ship’s flag (if the carbon pricing is connected to a country flag) or bychanging ports and routing (if the carbon pricing applies to specific ports or territorial waters). Most of thestudies on carbon leakage in shipping focus on the possible effects of including shipping in the EU’s
emission trading scheme (Hermeling et al. 2015; Lagouvardou, Psaraftis and Zis 2020). They will be
described in more detail in the following sections. However, it is important to note here that the EU
proposal’s scope not only includes shipping emissions between EU ports but also 50% of the emissions
from voyages from a non-EU to an EU port and 50% of the emissions from voyages from an EU port to a
non-EU port.
Studies show mixed assessments on the possibility of carbon leakage from the inclusion of shipping in the
EU ETS. According to CE Delft (2022), there are at least seven different ways in which shipping companies
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could avoid cost increases related to the EU ETS, but the report considers only two of them realistic: adding
an extra port call just outside the EU and feeding to EU ports from a non-EU hub port. The report’s costbenefit analysis generally considers the changes in EU ETS costs, container handling costs, fuel costs,
charter costs, port costs and opportunity costs. Its general assessment is that the impact of such carbon
leakage would be limited (CE Delft, 2022). The ex-ante impact assessment for the EU proposal to include
shipping in the EU ETS indicated that the potential for shipping companies to engage in evasive port calls
is only expected to be significant for options with high carbon prices in 2030 or full geographical scope(100% coverage of voyages from non-EU to EU ports and from EU ports to non-EU ports). It indicates thatthe risk for evasion could increase with higher carbon prices in 2040 but will likely be mitigated by further
decarbonisation policies adopted by countries outside the EU (Pons et al., 2021a, 2021b). This assessment
is in line with those from Transport and Environment (2020). A more pessimistic assessment than the threestudies cited above finds that evasion via a non-EU hub will become attractive for container shipping
operators when the carbon prices in the EU scheme would be well below EUR 25 per tonne CO2(Lagouvardou and Psaraftis, 2022).

Carbon pricing and competition
Carbon pricing for the shipping industry could raise competition concerns. Carbon pricing schemes could
discriminate against smaller operators, most of which have smaller and older ships and might have lessaccess to allowance trading markets.
There are concerns that carbon pricing schemes could accelerate the trend towards market concentration.
Large global carriers have the necessary financial capability to renew their fleets and adapt shipping
services. Smaller companies would face the risk of being squeezed out (Franc and Sutto, 2014). This effectcould be particularly significant when freight rates are low and the advantage of larger, more energyefficient ships is more evident (Luo, 2013).
There is also a risk of two-tier shipping markets – with more energy-efficient vessels operating on
international routes and less energy-efficient vessels on regional or domestic routes – or secondary
markets, likely to be located in developing or emerging economies.
The rate of concentration in the different shipping segments could impact the price of carbon emission
allowances in shipping-specific emission trading schemes. When carriers compete more intensively, theemission allowances will be traded at a higher price, as carriers are more geared towards the growth of
output and thus require more emission allowances (Wang, Fu and Luo, 2015). It is generally assumed thatthe container shipping sector will be buyers of emission allowances, as they are more fuel-intensive thanthe dry and liquid bulk sector. At the same time, the container sector is more concentrated and increasingly
so. This loss in competition intensity of buyers of emission allowances could translate into lower emission
allowance prices.

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Proposals for carbon pricing in shippingOver the last decades, academics, international organisations, shipping companies and governments havedeveloped multiple proposals for carbon pricing in shipping. This chapter focuses on recent government
proposals put forth as part of the IMO’s discussion on decarbonising shipping. It also covers the European
Union’s carbon pricing proposal for shipping and possible initiatives in other parts of the world.

Carbon pricing proposals at the International Maritime Organization
From 2006 to 2013, IMO member countries discussed introducing market-based measures (MBMs) to help
reduce GHG emissions in shipping. Eleven different proposals were submitted to the IMO in 2010. These
ranged from essentially doing nothing to a carbon levy, emission trading schemes for shipping and various
hybrid proposals. In 2010, the IMO installed an expert group to assess the proposals. The resulting report,
released in 2010, evaluated each proposal according to specific criteria that included the impacts on tradeand developing countries (IMO, 2010). However, the report contained no horizontal comparison of the
proposals and no recommendations on which proposals should be further pursued (Psaraftis, 2012). The
meetings that followed did not lead to a decision, and the discussions on MBMs were suspended in 2013.
Table 3. Proposals for carbon pricing or fuel standards submitted to theInternational Maritime Organization, 2021-22
Proposal

Submitted byYear

IMO reference

Universal mandatory greenhouse gas
emission levy

Marshall Islands, Solomon Islands

2021

MEPC 76/7/12

Levy-based market-based measures

International Chamber of Shipping,Intercargo

2021

ISWG-GHG 10/5/2
ISWG-GHG 12/3/7

Zero-Emission Vessels Incentive Scheme

Japan

2022

MEPC 78/7/5

International Maritime Sustainability
Funding and Reward mechanism

Argentina, Brazil, China (People’s
Republic of), South Africa, United ArabEmirates

2022

ISWG-GHG 12/3/9

Emission Cap and Trade System

Norway2022

ISWG-GHG 12/3/13

Note: The different documents referenced under “IMO reference” are available to delegates of IMO meetings(IMODOCs) on a password-protected part of IMO’s website. They are referenced in the Reference section of thisreport, though they are not publicly available. This report refers to the documents with the names used in IMO
meetings, for example: “Argentina et al.” refers to the proposal by Argentina, Brazil, People’s Republic of China,
South African and United Arab Emirates. MEPC refers to IMO’s Marine Environment Protection Committee; ISWGGHG to IMO’s Intersessional Working Group on Reduction of GHG emissions from Ships. The IMO reference is thenumbering used in the IMO meetings to identify the documents.
Source: Marshall Islands and Solomon Islands (2021), ICS and Intercargo (2021), Japan (2022a), Argentina et al.
(2022), Norway (2022).

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PROPOSALS FOR CARBON PRICING IN SHIPPINGA decade later, circumstances are more favourable for a fruitful discussion on carbon pricing at the IMO.
The Initial IMO Strategy formulates a level of ambition related to GHG emissions from shipping thatprovides a common base that did not exist ten years ago. The European Union is advancing its own carbon
pricing proposal (by including shipping in the EU ETS) that puts pressure on the IMO to move forward on
carbon pricing. A growing number of representatives from the shipping industry have called for carbon
pricing in the shipping industry, either individually (e.g. Trafigura, 2020) or via organisations like the Global
Maritime Forum. The International Transport Forum has hosted workshops on market-based mechanisms
for the shipping sector. Finally, a growing number of countries – including many developing countries –consider carbon pricing for shipping a promising measure. The Dhaka-Glasgow declaration, issued during
COP26, is an example of the emerging political support for carbon pricing in shipping. In the declaration,
55 climate-vulnerable countries call for “urgent discussion, study and work of the IMO for establishing amandatory GHG levy on international shipping to ensure that IMO emission measures are fully alignedwith a 1.5ºC pathway” (CVF, 2021).
Since 2021, five proposals related to carbon pricing have been submitted to the IMO. These include
proposals for global carbon levies (one put forth by Marshall Islands and Solomon Islands and another by
the International Chamber of Shipping and Intercargo), a global feebate system (from Japan), a global
emission trading system for shipping (proposed by Norway), and a reward and penalty system (byArgentina, Brazil, People’s Republic of China, South African and United Arab Emirate and hereby referred
to as Argentina et al., in alignment with IMO practice). The proposals are outlined in Table 3. In addition,
all EU27 countries, Norway and the European Commission submitted a proposal for a global GHG fuelstandard (ISWG-GHG 12/3/3 hereafter referred to as Austria et al., in alignment with IMO practice). This
proposal is not a carbon pricing proposal, but will be included in our analysis below, as it is closely related
to carbon pricing.
The following sections explain the different proposals. Although there are differences between theirapproaches, there are also considerable overlaps and even ways for them to complement each other.
Carbon pricing mechanisms

In the proposal by Marshall Islands and Solomon Islands, the carbon price is set at an amount that would
create a level playing field between heavy fuel oil and zero-emission fuels. The proposal suggests that a
carbon price of USD 250-300 per tonne of CO2e by 2030 (Table 4) achieves this goal. The proposal also
acknowledges that setting this price at the outset is difficult, so it proposes an entry-level of USD 100 per
tonne by 2025, with upward ratchets on a five-year review cycle. The suggested mechanism is a levy
collected at the point of bunkering (refuelling for ships). All ships pay the carbon levy, but ships that are
more energy-efficient or use less carbon-intensive fuels pay relatively less for the same transport activity.
The proposal foresees that part of the revenues from the levy will be spent on research development anddeployment (RD&D), and suggests that the cost-effectiveness of this could be improved by a feebate
mechanism to reward first movers. However, the proposal does not elaborate on this suggestion. (MarshallIslands and Solomon Islands, 2021)
The proposal by the International Chamber of Shipping (ICS) and Intercargo is similar in its basic premiseof a global fuel levy. However, it does not indicate the carbon price it wants to set. Its objective is to bridge
the price gap, but it also states that “it will be premature to impose a disproportionally high carbon priceon shipping”. The likely implication of this statement is that the carbon price will not be high enough tobridge the price gap between heavy fuel oil (HFO) and zero-carbon fuels. As a result, the main emissionreduction effect is not likely to come from the carbon price but from how revenue is distributed. The
proposal indicates that the revenues from the fuel levy could be used to accelerate R&D and deployment
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PROPOSALS FOR CARBON PRICING IN SHIPPINGof new bunkering infrastructure. It assumes that this will decrease the price gap between HFO and zerocarbon fuels. (ICS and Intercargo, 2021)
Japan’s proposal is an explicit feebate system. It uses revenues from a carbon levy as rebates for zeroemission fuels. In this proposal, the carbon price corresponds to the funds needed to provide enoughrebates to zero-emission fuels to make the transition to them commercially viable. The price gap between
conventional fuels and zero-emission fuels is then bridged, but since there will initially be few zeroemission ships, revenues from the levy will be limited. Consequently, the rate of the levy can be relatively
low initially and then increase with the uptake of zero-emission vessels. (Japan, 2022a)
Table 4. Design mechanisms of proposals submitted to theInternational Maritime Organization, 2021-22
ProposalCarbon price

Which ships benefit?

Which ships pay?

GHG levy (MarshallIslands, Solomon
Islands)

USD 100 per tonne CO2e (2025)
USD 250-300 per tonne by 2030

Dependent on re-investmentof revenues from levy

All ships, according to theirCO2e emissions

Levy (International
Chamber of Shipping,Intercargo)

Not defined

Dependent on reinvestmentof revenues from levy

Ships according to carbon
intensity of their fuels

Feebate (Japan)

USD 56-73 per tonne CO2 (2025)
USD 135-176 per tonne by 2030

Zero emission ships

All the other ships

Reward and penalty
system (Argentina et
al.)

n.a.

Ships with emissions below
reward benchmark

Ships with emissions above
contribution benchmark

Cap and trade(Norway)

Market price of cap and trade

Ships with low GHG emissions

Ships with high emissions

Global fuel standard(Austria et al.)Cost compliance with standard

Note: Argentina et al. refers to Argentina, Brazil, People’s Republic of China, South Africa and United ArabEmirates. Austria et al. refers to all EU27 countries, Norway and the European Commission.
Source: Marshall Islands and Solomon Islands (2021), ICS and Intercargo (2021), Japan (2022a), Argentina et al.
(2022), Norway (2022), Austria et al. (2022a).

Japan’s proposal contains model calculations showing that a feebate of USD 56 per tonne of CO2 from2025-2030 would close the price gap between low-sulphur fuel oil and zero-emission fuels. This would
lead to a 17% deployment of zero-emission ship fuels by 2030. At some point, the levy required to financethe rebate would be so high that fossil-based shipping would become impossible. Japan’s proposal also
considers it necessary to introduce technical requirements, such as mandating newbuild ships and existingships to use zero-emission fuels. (Japan, 2022a)
The International Maritime Sustainability Funding and Reward mechanism set forth by Argentina and likeminded countries bears superficial resemblance to the Japanese proposal in that the taxes collected fromhigh CO2 emission-emitting ships are paid to ships that emit less CO2. The specificity of this proposal,
though, is that it uses the IMO Carbon Intensity Indicator (CII) mechanism to define the upper and lower
benchmarks. As described earlier, the CII consists of a set of operational carbon intensity reduction
requirements wherein ships are rated on an A-E scale according to their carbon intensity. The proposal
indicates that the upper benchmark would be the upper boundary of the “C” rating (“moderate
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performance”) in the CII mechanism, and the lower benchmark, the lower boundary of the “C” rating. In
normal circumstances, this would roughly mean that ships that are rated D and E would have to contributeto the system, ships rated A and B would get rewarded, and ships rated C would neither contribute nor be
rewarded. (Argentina et al. 2022)
However, the proposal mentions that contributions and rewards will be based on a ship’s actual annual
CO2 emissions average. This clause provides a loophole in which certain ships could get rewarded even if
they are not rated A or B. For example, a ship could be unduly rewarded when it operates in an energyefficient way, uses LNG or operates with a very low-capacity utilisation (hence realising actual
CO2 emissions below the lower benchmark). Another clause is that the benchmark levels will be adjusted
for ships that have consumed “a certain proportion of alternative low/zero-carbon fuels (to be defined in
LCA guidelines) and/or has served one or more ports of developing countries likely to be negatively
impacted.” (Argentina et al. 2022)
The reward rate – the amount of money rewarded per tonne of CO2 emission reductions below the reward
benchmark level – will likely vary from year to year. If a large number of ships were to emit more CO2 thanthe upper-level benchmark (and only a few ships emit less than the lower benchmark), the reward ratewould be high. In this scenario, there would be a lot of revenue available to reward the ships with low
CO2 emissions. The high reward rate would incentivise shipping companies to invest in decarbonisation. In
the proposal, the share of revenues from the system is fixed at 40%; the rest should be used for capacity
building, RD&D and administration costs. The proposal provides for a reward ceiling to avoid an excessively
high reward rate. The proposal does not specify the benchmark levels and reward rates; it is not clear
whether the incentives will be sufficient to phase out GHG emissions from shipping.
Norway’s proposal is an emissions cap and trade system (ECTS). Central to the proposal is a cap on
emissions that will ensure an annual reduction of total GHG emissions along an agreed pathway alignedwith the ambitions of the Initial IMO Strategy and the revised GHG Strategy, still to be agreed upon andslated for adoption in 2023. This cap determines the total amount of allowances available for ships;
Norway’s proposal calls these allowances ship emission units (SEUs). The annual amount of SEUs madeavailable to ships would be defined for the whole period until 2050. These SEUs would be regularly
distributed to ships via auctions. Ships should surrender an amount of SEUs equal to the actual GHG
emissions of that ship. These are the verified annual GHG emissions reported via the IMO Data Collection
System (DCS). When a ship surrenders the required number of SEUs, it receives a certificate. Ships would
not be able to sail without such a certificate; they would be able to resume sailing when they havesurrendered the required amount of SEUs and received the certificate. SEUs could be traded freely
between ships but valid only for one specific calendar year; unused SEUs would be cancelled after thecompletion of the calendar year. (Norway, 2022)
The Norway proposal conceives the ECTS as a closed system specific to the shipping sector. However, it
indicates that opening the system to other sectors could be considered at a later stage so ships could
acquire allowances from outside sources. The Norway proposal suggests price control to avoid large pricefluctuations. Norway has indicated that its cap and trade system could be combined with a global fuelstandard. Norway has co-sponsored the submission of such a proposal by the EU27 countries and theEuropean Commission (Austria et al., 2022a) referred to in Table 4.
Austria et al. propose a global fuel standard requiring all ships to use fuels or energy sources with a GHG
intensity below a specific limit value. GHG intensity is here defined as GHG emissions per unit of energy
used onboard a ship (Austria et al. 2022a). The global fuel standard would be strengthened over time todecrease the GHG intensity of ship fuels in line with the Initial IMO Strategy or a stronger ambition, suchas phasing out GHG emissions in maritime fuels by 2050. In the proposal, shipping companies would need
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to monitor the GHG intensity of the fuel their ships consume and demonstrate compliance with the global
fuel standard to their administration. The administration would issue a document of compliance forcompliant ships, which would be retained onboard. The proposal does not specify which administration
would issue the compliance document. The proposal anticipates a transitional period, during which not all
ships may be capable of sailing on low- and zero-GHG fuels, and proposes “flexibility mechanisms” to deal
with this situation. The two flexibility mechanisms identified are: 1) surplus rewards for overachievers that
could be transferred to non-compliant ships or carried over to the next year, and 2) paying a higher pricethan the price differential to an IMO GHG fund to avoid non-compliance.
How carbon pricing mechanisms can develop over time

Global fuel standards must develop over time to ensure that the emission pathways are declining. Austria
et al. propose GHG fuel intensity reductions that decrease by five-year increments. For example, in a highambition scenario, the fuel GHG intensity relative to 2008 would need to have decreased to at least 95%
by 2025, 85% by 2030, 70% by 2035, and so forth. The degree by which GHG intensity must drop per fiveyear period has not been defined in the proposal.
Similarly, in cap and trade systems, the system is designed so that a declining cap ensures emission
reduction. Norway’s proposal indicates that the cap should be established every year and decrease inaccordance with the pathway outlined by the Initial IMO Strategy and the pending 2023 Revised Strategy.
The proposal also envisages a gradual phase-in of the costs related to the scheme, implementing a unit
price ceiling that will gradually increase. This phase-in method is preferred over the free allocation of SEUs,
free market pricing, and reducing the emissions subject to the cap-and-trade system.
Japan’s proposal presumes a step-based increase of the carbon price so the revenues of the carbon levy
minimise the price gap between conventional and zero-emission fuels. In the proposal’s model
calculations, the carbon price would increase every five years. By 2040, the required carbon levy would be
USD 673-874 per tonne of CO2; by 2045, it would rise to USD 1 284-1 682 per tonne. The proposal hints atthe need to terminate the scheme in the long term when the penetration of zero-emission vessels haveadvanced.
The proposals by Marshall Islands and Solomon Islands and the ICS and Intercargo foresee a similar fiveyear adjustment to the carbon price. However, the motivation behind these proposals is the perception of
the measure’s political feasibility, not their design, as in the case of Japan’s proposal. The Marshall Islands
and Solomon Islands’ proposal assumes that the desired level of USD 250-300 per tonne of CO2e can only
be achieved gradually via the first step of USD 100 per tonne by 2025.
Types of emissions covered in the proposals to the International Maritime Organization

The Marshall Islands and Solomon Islands proposal hints at the possibility of exempting shipping routes tocountries facing potentially disproportionately negative impacts from carbon pricing. It prefers tocompensate these countries via the revenues from carbon pricing rather than exemptions. The proposal
made by Argentina, Brazil, China, South Africa and the United Arab Emirates indicates that the benchmark
levels that play a significant role in the reward system should be adjusted for ships that have “served one
or more ports of developing countries likely to be negatively impacted” (Argentina et al. 2022). As such,they introduce a differentiated approach to MBMs.
An essential difference between the five proposals is the coverage of only CO2 emissions or all greenhousegas emissions and whether they cover well-to-wake (WTW) emissions or tank-to-wake (TTW) emissions.
TTW emissions only take into account the emissions from ship operations; they do not account for
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emissions from the production of ship fuels. WTW emissions cover emissions from the entire process offuel production, delivery and onboard use. WTW emissions should be assessed when a ship’s fuels do notemit emissions when used (e.g. hydrogen-powered ships), but their production process could emit moreor less GHG emissions depending on whether renewable energy is used in that process.
Table 5. Types of emissions covered in the proposals to
the International Maritime Organization, 2021-22
Proposal

Ship size

Carbon emissions(CO2) or all
greenhouse gas(GHG) emissions?

Well-to-wake emissions or tankto-wake emissions?

GHG Levy (Marshall Islands,
Solomon Islands)

Not definedGHG

Well-to-wake

Levy (International Chamberof Shipping, Intercargo)

Ships > 5 000 GT

CO2

Tank-to-wake, open to expanding
to well-to-wakeFeebate (Japan)

Ships > 5 000 GT

CO2

Tank-to-wake, but exclusion fromscope if WTW of zero-emission
fuels are higher than WTW fromfossil fuels.

Reward and penalty system(Argentina et al.)Not defined

CO2

Tank-to-wake

Cap and trade (Norway)

Ships > 400 GT

GHG

Tank-to-wake, open to expanding
to well-to-wake

Global fuel standard (Austria
et al.)

Ships > 5 000 GT or 400 GT

GHG

Well-to-wake

Note:GT= gross tonnage. Argentina et al. refers to Argentina, Brazil, People’s Republic of China, South Africa andUnited Arab Emirates. Austria et al. refers to all EU27 countries, Norway and the European Commission.
Source: Marshall Islands and Solomon Islands (2021), International Chamber of Shipping and Intercargo (2021),
Japan (2022a and 2022b), Argentina et al. (2022), Norway (2022), Austria et al. (2022a).

The proposals by ICS and Intercargo, Japan, and Argentina and like-minded cover only CO2 emissions.
Those from Marshall Islands and Solomon Islands, Norway and Austria et al. cover all GHG emissions(Table 5). Of the six proposals, the proposal by Marshall Islands and Solomon Islands and Austria et al.
explicitly cover WTW emissions. Norway’s proposal would cover TTW emissions but is open to expanding
to WTW emissions if solid methods of measuring WTW emissions were available. In refinements to its
proposal, Japan indicates that zero-emission fuels that have higher WTW GHG emission factors than fossil
fuels should be excluded from the scope of the reward (Japan, 2022b). In the proposal by Argentina andits partner countries, WTW emissions are, to a certain extent, taken into account, as benchmark levels
would be adjusted for ships that have consumed “a certain proportion of alternative low/zero-carbon fuels(to be defined in LCA guidelines)” (Argentina et al. 2022). Table 5 shows that two proposals do not define
which ships will be covered by the scheme, two proposals cover all ships larger than 5 000 GT, one proposal
covers all ships larger than 400 GT and one proposal leaves this boundary open.
Covering WTW emissions would require transparent and harmonised reporting of WTW emissions. The
IMO created a Correspondence Group to develop and finalise the life cycle analysis (LCA) guidelines before
the July 2023 meeting of the Marine Environment Protection Committee (MEPC 80). It is expected theseguidelines will support the upcoming basket of measures for the decarbonisation of maritime transport.
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What to do with the revenues?

Table 6 outlines how revenues from the proposed carbon pricing schemes might be used. Two of the six
proposals provide indicative numbers on revenues from their carbon pricing proposal. ICS and Intercargomention that a levy of USD 50 per tonne of CO2 emitted would generate almost USD 40 billion per year.
The Norway proposal would generate USD 130 billion to USD 140 billion annually from 2030. Extrapolating
the ICS and Intercargo numbers to the Marshall Islands and Solomon Islands proposal suggests revenues
in that scheme of USD 80 billion per year by 2025. The freely available revenues in the proposals of Japanand Argentina and its partner countries will likely be smaller, if only because, by design, they will use alarge share of the contributions to reward lower-emission ships. Argentina and its partner countries put
this share at 40%, while Japan leaves it undefined. In principle, Austria et al.’s proposal would not generate
any revenues. However, it mentions the possibility of “flexibility mechanisms”, one of which would becontributions of under-complying ships to an IMO GHG fund.
Table 6. Revenue use in carbon pricing proposals submitted to theInternational Maritime Organization, 2021-22
Proposal

Main spending categories

Administered by

GHG Levy (Marshall Islands,
Solomon Islands)

Climate change adaptation/mitigation (at least 51%)
Research development and deployment (up to 33%)
Administrative costs (16%)

Green Climate Fund1
International Maritime Researchand Development Board (to beestablished)

Levy (International Chamberof Shipping, Intercargo)

Research and development, new bunkering
infrastructure, assist maritime GHG reduction ofdeveloping countries

IMO Climate Fund (to beestablished)

Feebate (Japan)

Incentives for first movers, technical co-operation, carbon
offset credits

IMO’s Integrated TechnicalCooperation Programme2

Reward and penalty system(Argentina et al.)Rewards to ships with emissions below benchmark (40%)
Capacity building (30%)
Research development and deployment (20%)
Administration costs (10%)

An International Maritime
Sustainability Funding andReward Board (to beestablished) within the IMO
structure

Cap and trade (Norway)

Address disproportionate impacts on states, uptake lowand zero-emission fuels, production of zero-emission
fuels, infrastructure, R&D

Green Climate Fund

Notes: 1. https://www.greenclimate.fund/; 2. https://www.imo.org/en/OurWork/TechnicalCooperation/Pages/
ITCP.aspx; IMO= International Maritime Organization; Argentina et al. refers to Argentina, Brazil, People’s
Republic of China, South Africa and United Arab Emirates.
Source: Marshall Islands and Solomon Islands (2021), International Chamber of Shipping and Intercargo (2021),
Japan (2022a), Argentina et al. (2022), Norway (2022), Austria et al. (2022a).

In the Japan proposal, the main spending category – in addition to the rebates for zero-emission vesselsthat form the essence of the proposal – is technical co-operation to facilitate an equitable transition. The
proposal singles out IMO’s Integrated Technical Cooperation Programme, which could be up-scaled toassist maritime GHG reduction efforts in vulnerable states. They suggest that this could help mobilise moresignificant amounts of external resources for projects, such as establishing new bunker fuel infrastructures.
Capacity building also is a major spending category in the Argentina group’s proposal. This could beallocated to an International Maritime Sustainability Funding and Reward Board under the IMO’s purview.
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Other major spending categories in this proposal are RD&D and administration costs. Similar spending
categories feature in the Marshall Islands and Solomon Islands’ proposal. There, the funds for RD&D could
be allocated by a structure similar to the International Maritime Research Board suggested by shipping
associations and discussed in various IMO meetings. The Marshall Islands and Solomon Islands’ proposal
foresees channelling spending for climate change adaptation and mitigation through the Green Climate
Fund of the UNFCCC. Norway’s proposal suggests the same: the Green Climate Fund would collect andallocate the revenues to mitigate disproportionate impacts on states and stimulate the uptake of low- andzero-emission fuels, the production of zero-emission fuels, infrastructure maintenance and R&D.
How effective these proposals might be

At current price levels, the Marshall Islands and Solomon Islands’ proposal only manages to bridge theprice gap between HFO and zero-emission fuels when fully implemented in the second phase, wherein thelevy rises from USD 100 to USD 250-300 per tonne CO2e. In the meantime, the measure’s effectiveness
depends on reinvestment in the decarbonisation of shipping via RD&D. The proposal suggests that part of
the RD&D could be in the form of feebates. However, it does not detail how to do so. It is thus unclear
which ships would qualify for the feebate and the compensation amount. Subsidies on R&D mightbring down the costs for zero-emission vessels, but this will likely be a long-term process dependent on
how targeted these subsidies will be. It is unlikely they will create a market for zero-emission fuels in the
short term.
Such an assessment is even more relevant for the ICS and Intercargo proposal. The carbon price of the levy
in this proposal is likely lower than the one proposed by Marshall Islands and Solomon Islands. The lower
the carbon price, the less likely the levy will be effective in itself. The effectiveness of the ICS and Intercargo
proposal depends largely on its character as a revenue-generating mechanism. However, the assumptionthat more spending on RD&D for new bunker infrastructure will reduce the price gap between HFO andzero-carbon fuels has not been demonstrated. New bunker infrastructure for alternative fuels is important,but it will not reduce the price gap by itself. Certain design features of the fuel levy – as proposed by ICS
and Intercargo – risk hindering the measure’s effectiveness, even to the point of making it counterproductive. The principle drawback is the proposed exemption for fuels with zero TTW emissions, such as
ammonia and hydrogen: “…it is suggested that when a levy system is first established it should not initiallydifferentiate, for example, between green and grey hydrogen” (ICS and Intercargo, 2021). Such design
features risk creating incentives for the use and lock-in of fuels that are wholly undesirable from a well-towake perspective. Similar counterproductive elements form part of the proposals of Japan and theArgentina group.
The Japan proposal promises to be considerably more effective than the two levy proposals. It is designed
to bridge the price gap. As such, it makes zero-emission vessels commercially viable via a carbon levy that
does not dissuade the use of non-zero-emission vessels. This might seem paradoxical, but it might beexactly this feature that makes the proposal politically palatable at the initial stage. That said, the scheme’s
effectiveness will decrease in later decades. As the pool of zero-emission vessels grows and the base of
non-zero-emission vessels to finance the rebate falls, an ever-larger levy will be needed to finance a
feebate. For this reason, it will probably make sense to reconsider the sensibility of the scheme once acertain penetration rate of zero-emission vessels has been reached.
The Argentina country group’s proposal aims to set a predictable pathway towards decarbonisinginternational shipping. However, the proposed system does not do so and is not likely to provide a
sufficient incentive for bridging the price gap between conventional and zero-carbon fuels. In Japan’s
proposal, the base of contributing ships is substantial, and the number of rewarded ships is initially quite
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small. As such, the proposal’s measures manage to create a strong incentive for change (for first movers)
while minimising the impacts on the other vessels.
In comparison, the Argentina country group’s proposal has a much smaller base of contributing vessels
and a much larger number of potential beneficiaries in the initial phase. The only way to create a significant
incentive in this system is to charge a substantial fee to the contributing vessels. However, the proposal
claims that the negative impacts on the fleet are moderate. The incentive created will thus be insufficient
to bridge the price gap. This is inherent to the way the proposal is designed: if many ships emit less CO2
than the reward benchmark levels and only a few ships emit more than the contribution benchmark, thereward rate would become very low. The proposal’s design provides incentives to decarbonise to a level
just below the reward benchmark.
In theory, the target pathway for GHG emissions in the Norway proposal guarantees its effectiveness.
Similarly, the target pathway for GHG fuel intensity in Austria et al.’s proposal ensures its effectiveness. In
practice, however, the extent to which these targets will result in emission reductions will depend on
enforcement mechanisms. Specifically, incompliant vessels must be removed from operation. The targets
in both proposals refer to all ships and decline gradually over time. In the Norway proposal, the price gap
between conventional and zero-emission fuels will likely only be bridged after a certain period. Considering
the long lifetime of ships, full decarbonisation by 2050 would require that a substantial share of new ships
be capable of running on zero-emission fuels or other zero-emission energy sources in the next five years.
It is not clear how both proposals would be able to stimulate this development.

Carbon pricing proposal in the European Union
The European Union is at an advanced stage of decision-making on including shipping in EU ETS. Different
proposals from the European Commission (EC), the European Parliament (EP) and the EU Council of
Ministers (EU Council) will have to be merged into a compromise. The European Union believes that the
IMO has not enacted sufficiently stringent measures to decarbonise shipping. As a result, its different
decision-making bodies have joined to implement carbon pricing measures for ships calling EU ports.
The general idea is to include shipping in the existing EU ETS. The aim is to include shipping in a wider,
open system in the EC proposal, not create a separate, closed system for maritime shipping. To do so, the
EU ETS would apply to ships with tonnage over 5 000 GT, in alignment with the EU Monitoring Reportingand Verification (MRV) regulation. The EU Council retains this size threshold for all ships except generalcargo ships, which would report in the MRV and pay in the ETS above 400 GT. The EC, EP and EU Council
all have similar stipulations on the coverage of the system, namely voyages between EU ports, 50% of
every voyage between a non-EU port and an EU port, and 50% of every voyage between an EU port and a
non-EU port. The EP (2022) has proposed that this scope rises to 100% from 2027, but may remain at 50%
for countries with equivalent measures on shipping, or for voyages to and from LDCs and SIDS. This applies
to all ship flags, so is flag neutral. CO2, N2O (nitrous oxide) and CH4 (methane) emissions are included in
the extension of the EU ETS to maritime transport activities in the EP proposal (EP, 2022).
The inclusion of shipping in the EU ETS is embedded in a larger package of measures, Fit for 55, briefly
described above. The FuelEU Maritime fuel standard is the most relevant Fit for 55 package shipping
measure for this discussion. The proposal essentially introduces annual average targets for the GHGintensity of energy used onboard ships. Reductions would start in 2025 with a 2% improvement compared
to a 2020 baseline. Requirements would become increasingly stringent over time, with a 6% improvement
required in 2030 and an improvement in 2050 that would lead to a 75% cut in emissions compared to thebaseline. This fuel standard would apply to all of the energy used onboard ship voyages between EU ports,
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but to 50% of the energy used for voyages between EU and non-EU ports (European Council, n.d.). The
design of the EU fuel standard resembles the global fuel standard proposed by (Austria et al, 2022a).
An element of the EP and EU Council proposals covers the relationship between shipowners and ship
operators. The proposals suggest the commercial operator should be responsible for the final payment of
the EU ETS price. When the commercial operator is not the compliant entity, shipowners’ costs should be
passed to the ship operators. To ensure this, the EP proposal requires that contractual agreements
between shipowners and operators include a binding clause explicitly stating so. When the commercial
operator is not the compliant entity, the EU Council proposal requires that national jurisdictions ensurethat contracts between owners and operators provide the right to pass on costs. (EP, 2022)
In principle, shipowners and ship operators both have a responsibility to decarbonise. Ship operators are
responsible for the choice and purchasing of ship fuel and the operation of the ship (e.g. the routing andthe ship speed). However, shipowners also have an important role in decarbonising through, for example,
investing in zero-emission propulsion technologies, implementing energy-efficiency measures on board
and retro-fitting ships. The argument for passing on costs could be that it provides the incentive tocharterers to look for more efficient ships. In this constellation, owners will benefit from improving theirships and making them more attractive to charterers.
The EP proposal foresees the creation of an Ocean Fund to facilitate the transition to zero-emission
shipping. This Ocean Fund would consist of revenues generated by auctioning allowances related tomaritime transport activities (at least 75% of the auction revenue) and revenues earned from penalties
imposed under the FuelEU Maritime. The Ocean Fund could support projects and investments related toenergy efficiency, innovative technologies and infrastructure (including short-sea shipping and ports),
deploying sustainable alternative fuels, zero-emission propulsion technologies (including wind), anddeploying innovative technologies and fuels for ice-class ships. The proposal suggests that the European
Commission engages with third countries (countries that are not members of the European Union) to
explore options as to how they, too, could use the Ocean Fund. (EP, 2022)
Special treatment is provided for ice-class ships in the EP’s and EU Council’s proposals; for example, thereis specific support for the innovation and decarbonisation of ice-class ships through the Ocean Fund in theEP (2022) proposal. The motivation for this special treatment is that certain northern European countries
depend on ice-class ships for navigation in the winter months, which can generate additional emissions
due to higher fuel consumption.
An important issue for certain ports is the potential risk of evasion, resulting in fewer EU port calls. The EC(2021) proposal believes there is a limited risk of evasive port calls and a shift of transhipment activities to
non-EU ports. However, both the EP and EU Council have adopted amendments to tackle carbon leakage,whereby third country container ports within a certain distance of EU ports will, in some cases, beconsidered part of the EU system (EP, 2022). More simply put, when ships call at an EU port before or after
calling at those non-EU ports, the net leg past or before that non-EU port shall be considered part of the
MRV and ETS.

Carbon pricing proposals in other parts of the world
Carbon pricing parameters for shipping could be included in various carbon pricing schemes throughout
the world. The UK Climate Change Committee has suggested that shipping could be subject to a carbon
tax or included in the UK ETS, which largely mirrors the EU ETS. The UK government is currently discussing

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the possibility of including domestic shipping in the UK ETS by the mid-2020s, based either on vessel
activity, fuel supplied, or a combination of the two. (Bakhsh, 2022)
The national emission trading system launched in China in 2021 only covers the power generation sector.
All companies covered by the system “are allocated their emission allowances free of charge. This
allocation is based on a national benchmarking method, whereby the average carbon intensity of key
sectors and products is calculated and compared with that of individual emitters. Each emitter will beallocated allowances equal to its verified emissions” (Roldao, 2022). Roldao continues to say that the China
ETS does not have a declining cap on emissions. Chambers (2021) reports that the ultimate aim of thesystem is to include any company that discharged over 26 000 tonnes of CO2e in any year between 2013
and 2019, which could well include shipping companies.

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Policy implications of carbon pricing
There is ample experience with carbon pricing in a variety of sectors. Research shows both the potential
and the limitations of carbon pricing. The lessons learned thus far should be considered when designing
an appropriate carbon pricing scheme for the shipping sector. Three central policy issues emerge from thecurrent discussions on carbon pricing in shipping: reaching a compromise on global carbon pricing forshipping; tackling the interference of global and regional or national carbon pricing schemes; andaddressing competition issues related to carbon pricing in shipping.

Towards a global solution on carbon pricing for shipping
A core challenge to decarbonising maritime transport is the lack of commercial viability of zero-emission
ships. The technological solutions are known and sometimes available, but zero-emission fuels andtechnologies are not yet cost-competitive with conventional fuels. This hampers the uptake anddeployment of cleaner operating solutions. Carbon pricing could help bridge the price gap: it would
increase the price of conventional fuels to stimulate the uptake of zero-emission fuels and technologies.
Carbon pricing in shipping is most effective as a global measure. The IMO has been investigating the
introduction of global carbon pricing measures for shipping since 2021. This report has outlined the six
different proposals currently under consideration. Stakeholders must find ways to combine the best partsof these proposals to advance the discussion on carbon pricing in shipping.
The differences between the six proposals might seem more significant than they actually are. Both Japan’sand Austria et al.’s proposals provide potential extensions that make them more hybrid. Austria et al.’s
proposal, a regulatory measure in essence, is a fuel standard. However, the proposal suggests combining
it with an MBM and hints at the possibility of “flexibility mechanisms”, namely a surplus reward for overcompliant ships and a contribution to an IMO GHG fund for non-compliant ships. Such mechanisms
resemble the incentives that are part of the other proposals, in particular, the proposal by Argentina, Brazil,
China, South Africa and the United Arab Emirates. Japan’s proposal is a feebate, but it also opens thepossibility of trading CO2 allowances between ships, increasing the proposal’s similarities with Norway’s.
Despite the hybrid character of some of the proposals, there are obviously real choices to be made as tothe design of a compromise proposal. Three essential questions are:•

What is the pathway’s vision to decarbonising shipping?

•

What is the best use of carbon pricing revenues?

•

Should carbon pricing be combined with regulation and standards?

What is the pathway’s vision to decarbonising shipping?

The distinctive difference between Japan’s proposal and the others is the vision of how to fully decarbonise
shipping. In Japan’s proposal, full decarbonisation is achieved through the early deployment of zeroCARBON PRICING IN SHIPPING © OECD/ITF 2022

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emission ships by first movers. The deployment of zero-emission ships will increase over time and this will
drive the decarbonisation of the shipping sector. All the other proposals assume – more or less explicitly –that decarbonisation will initially take place via low-emission ships; they do not exclusively focus on
stimulating zero-emission ships. As such, there is a transition period in which ships will be low-emission
before they become zero-emission. The fuel standard’s flexibility mechanism intends to promote firstmovers and early uptake. The mechanism levels out the disadvantage of being a first mover.
Considering the long lifetime of ships, full decarbonisation by mid-century would require that a substantial
share of the new ships could operate on zero-emission fuels or other zero-emission energy sources in thenext five years. Technology for zero-emission ships is known and, in some instances, already available (e.g.
battery-powered ships, wind-propulsion and alternative fuels like bio/e-methanol, bio/e-diesel, bio/eammonia). A decarbonisation pathway that takes an immediate leap to zero-emission fuels or other zeroemission energy sources is preferable to one that creates an intermediary phase wherein shipping
companies operate on low-emission fuels before operating on zero-emission fuels or other zero-emission
energy sources.
Global carbon pricing could help to facilitate this leap to zero-emission shipping if it is well-designed andtargeted. Japan’s feebate-proposal, for example, provides for a relatively modest carbon levy on all shipsthat could help level the playing field for zero-emission ships, provided that the eligible fuels are limited torenewable fuels and not TTW zero-emission fuels. A similar leap to zero-emission shipping could also be
achieved by the Marshall Islands and Solomon Islands’ proposal, as long as in-sector revenue spending
bridges the price differential between conventional fuel and zero-emission fuels and other zero-emission
energy sources.
What is the best use of carbon pricing revenues?

Of the carbon pricing proposals, those by Marshall Islands and Solomon Islands and the Argentina countrygroup provide the most detail for using carbon pricing revenues. These proposals list the specific shares ofrevenues that should be allocated to certain spending categories (see Table 6). At the other extreme,
Austria et al.’s proposal does not generate revenues, so it does not address infrastructure investment
needs or requirements to mitigate disproportionate impacts on states. However, Austria et al. intend thatthe proposal be implemented in conjunction with an MBM, which could potentially address this issue.
The central questions to answer here are: to what extent should carbon pricing revenues be allocated todecarbonising maritime transport; and what support should wider adaptation and mitigation measures
receive? In addition, what spending priorities would there be for decarbonising maritime transport notalready provided for by private actors in the market?
Carbon pricing revenues should stimulate the decarbonisation of maritime transport. In a feebate
mechanism like the one proposed by Japan, the automatic rebates for zero-emission ships would be themain lever for stimulating the deployment of zero-emission fuels. In addition, carbon pricing revenues
could be used to support developing countries that, with their renewable energy resources, haveconsiderable potential for producing zero-emission shipping fuels (WB, 2021). Revenues from shipping’s
carbon pricing could help finance the necessary bunkering and recharging infrastructure in thosecountries.
IMO members are unlikely to agree on any global carbon pricing mechanism that does not provide thepossibility of mitigating disproportionate negative impacts on states. There are two ways in which negative
impacts could be mitigated: via in-sector spending or out-of-sector spending. In-sector spending would
use carbon pricing revenues to invest in projects within the maritime transport sector. An example of in40

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sector mitigation spending would be when carbon pricing revenues fund the improvement of port
infrastructure to reduce transport costs or the build-up of renewable energy infrastructure that could be
used to produce zero-emission energy for shipping. Such projects would mitigate negative impacts
because they would likely generate local economic development.
An advantage of spending carbon revenues out of the shipping sector is that it may allow for greaterclimate outcomes. It is unlikely that all the most cost-effective opportunities for climate change action
relate to international shipping, so out-of-sector spending of carbon pricing revenues might be more
effective from the perspective of general climate mitigation or adaptation (Dominioni and Englert, 2022).
Furthermore, spending carbon revenues for non-shipping related activities can guarantee that countries
with limited opportunities for in-sector projects (e.g. those with limited potential to produce zero-emission
bunker fuels) can receive some revenues. This not only makes implementing carbon pricing more equitable
but also more politically feasible.
Should carbon pricing be combined with regulation and standards?

Which regulatory measures would be most complementary in carbon pricing schemes for shipping? The
combination of carbon pricing with regulation and standards is explicitly foreseen in the proposals by Japan(2022a), Norway (2022), Marshall Islands and Solomon Islands (2022), and Austria et al. (2022b). Carbon
pricing alone does not drive long-term emission reductions or technological advances, according tofindings from the general literature on carbon pricing and research on shipping-specific carbon pricing
schemes. The positive effects of carbon pricing are often in the revenues it raises. However, they are evengreater when carbon pricing is part of a larger package of measures, including regulation and standards.
In the leap forward to a zero-emission shipping pathway underlying Japan’s proposal, combining monetary
incentives for zero-emission ships with a regulatory stick may make sense. Japan’s proposal describes thisas “technical requirements, such as mandating newbuild ships and even existing ships to use zero-emission
fuels” (Japan, 2022). The strength of Japan’s carbon pricing proposal is its “all-or-nothing” character.
However, that could also have a downside, as the proposal would not support ships with partial emission
reductions. This could be problematic if shipping companies decided not to pursue low-emission solutions
because they would only get incentives for zero-emission solutions. The right regulation could help solve
this eventuality by, for example, introducing a fuel standard that becomes gradually more stringent, suchas those proposed by the World Shipping Council (WSC, 2022), Austria et al. and – on a regional level – theEU’s FuelEU Maritime standard.
A way forward

To accelerate maritime transport’s decarbonisation, a global carbon pricing scheme for shipping should beconsidered. It should combine elements of the five different carbon pricing proposals put forward to the
IMO, and be accompanied by regulatory instruments such as a technical design requirement and a low
carbon fuel standard:•

A feebate system to finance zero-emission vessel operations consists of a carbon levy paid by all
ships lacking zero-emission operations; the revenues will be used as an automatic rebate to ships
operating with zero emissions. This rebate will be high enough to completely bridge the price gap
between conventional and zero-emissions fuels and energy sources, based on assumptions on fuelprice developments and the price of zero-emission fuels and energy sources. This feebate systemshould be introduced as soon as possible.

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In addition to introducing carbon pricing for shipping, policy-makers would need to agree on a
“zero-emission vessel readiness” technical design requirement for newbuilds that would require
all new vessels to be capable of running on zero-emission fuels or other zero-emission energy
sources. In addition, policy makers would need to consider introducing a low-emission fuelstandard with gradually more stringent targets that would help phase out the use of fossil fuels inshipping.

•

A substantial share of revenues from the carbon pricing mechanism would need to be reserved
for general climate-mitigation and adaptation projects in SIDS and LDCs, including specific insector projects related to decarbonising maritime transport. Doing so will foster decarbonisation
and an equitable transition for those countries. In-sector use of revenues preferentially spent indeveloping economies can help balance out the potential increase in transport costs and negativetrade impacts. Other in-sector use of revenues could support retrofitting ships to make them zeroemission ready or through projects that private-market actors would not be able to provide forthemselves, such as adapting or building port infrastructure that accelerates the uptake of zeroemission fuels and other zero-emission energy sources.

•

A carbon pricing scheme would need to cover GHG emissions from well to wake. Well-to-wakeemissions cover the emissions from the entire process of fuel production, delivery and onboarduse. The well-to-wake life cycle view of GHG emissions in shipping will maximise emission
reductions. Moving to a well-to-wake basis requires the availability of reliable data on emissions
from the entire energy production process of the alternative ship fuels.

Addressing the interference of global and regional measures
The EU ETS is likely to cover shipping by 2024. The proposed EU directive foresees the possibility that a
global market-based measure will be adopted at the IMO level. If the IMO’s measure turns out to be atleast comparable to the EU’s measure, in the EU Council proposal the EU would consider a proportionate
reduction in its measure’s scope to avoid creating a double burden. In the EP proposal, if the IMO measure
were not ambitious enough, the EU could extend its own measure to cover 100% of the emissions fromship voyages from non-EU to EU ports or from EU ports to non-EU ports. This assessment shall take place
upon adoption by IMO of its measures and, in any event, no later than 2028. The IMO discussion on global
pricing for shipping should have concluded by then.
In the absence of a global carbon pricing mechanism for shipping, it would make sense to try to link the
EU ETS’s measures for shipping to other carbon pricing mechanisms in the world. The EU proposal toinclude shipping in the EU ETS covers 50% of the emission from voyages from non-EU ports to EU ports
and 50% of the emissions from ship voyages from EU to non-EU ports. The EP has proposed that this scope
rises to 100% from 2027 but stays at 50% for countries with equivalent measures on shipping or forvoyages to and from LDCs and SIDS. The EP proposal suggests that the European Commission will reachout to other countries to establish bilateral agreements on market-based mechanisms to bring thecoverage up to 100%. One obvious link would be with the UK ETS, should it decide to include shipping in
its ETS. This link appears feasible, considering that the UK ETS mirrors the design of the EU ETS. Other
linkages would be more complicated, considering the differences between EU ETS and other emission
trading systems in the world.

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Addressing competition issues
Carbon pricing could increase industry consolidation and concentration in shipping. This competition
concern should be addressed. There are various ways to design carbon pricing schemes that guarantee
access for small operators. In emission trading schemes, this could, for example, be done by holding
frequent auctions to reduce buyers’ risk, a threshold on the number of allowances which can be boughtby each body to reduce the risk of a cornering strategy, and the implementation of a specific noncompetitive platform for small carriers with a fixed price based on the equilibrium price identified at theprevious auction (Franc and Sutto, 2014). A more general consideration relates to the need for upgrading
the knowledge and resources of competition authorities regarding shipping, as also highlighted in ITF(2022).

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This project has received funding from theEuropean Union’s Horizon 2020 research andinnovation programme under grant agreement
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Published: 12/2022 | Photo credit: Sea-Cargo

This report reviews the effectiveness of carbon pricing, how it might beapplied 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.