- Perhaps most fundamental in conceptual terms, it assumes that the burden of any increase in transport costs is always on the importer. So, for instance, the implicit assumption is that a fuel charge on exports from developing to developed countries is borne entirely by the latter (and vice versa for exports from developed to developing countries). To the extent that this is not the case—in the strict logic of simple trade models, it cannot possibly be the case in all countries—the scheme will not provide an exact level of compensation (though whether too little or too much is ambiguous). IMO (2011) also concluded that exporters may be affected significantly, in particular, if their main customers are a long distance away and they export high density, low value commodities. This could have a substantial impact on the numbers at stake, potentially in the order of doubling the compensation required. The formula in Box 10 suggests that reimbursement of the charge embodied in the freight costs of imports alone provides exact compensation, for a small charge, if and only if it so happens the elasticity of import demand in the country to be compensated is equal to the elasticity of export supply from the rest of the world. This perhaps suggests that exports should also enter the compensation formula.

- Allocation by reference to shares of global imports means that—unless the charges are proportional to import value in all countries—the compensation received by a country can be affected by changes in trade activities in which it has no part<sup>50</sup> —even though any adverse impact it may suffer remains unchanged. The same difficulty potentially applies to any allocation by reference to shares, though this does have the merit of limiting the extent of compensation relative to revenue raised.

74. **Perfect calibration of compensation to each country‘s circumstances will not be possible—but, since most effects seem to be small, may not be needed** . Even if the emissions associated with the marine transport a country‘s imports and exports were known— and experts continue to study if, in the absence of explicit measurement, reasonable proxies can be found—this would need to be combined with information on its trade patterns and responsiveness both domestically and in its trading partners to be sure of accurate compensation. But since most price effects seem likely to be small, it is reasonable to look for simpler approaches based on one or two cases (based say on import values or volumes and trade-weighted distance) that are scaled to build in adequate assurance—and perhaps with a guarantee of some minimum monetary amount—while providing some allowance for truly exceptional cases.<sup>51</sup>

> 50 More precisely, it would receive a large absolute transfer if imports increased in a country whose imports were charged at higher than the global average rate.

> 51 In any event, avoiding excessive compensation payments is important for increasing revenues available for socially productive purposes. Beyond climate finance revenues from maritime fuel charges might finance, for example, R&D into energy saving technologies for ships and port infrastructure upgrades in developing countries. Ideally, the costs and benefits of alternative projects would be carefully evaluated in order to prioritize among them.

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