enhanced under a more flexible scheme that set a uniform price, allowing individual countries to voluntarily impose higher taxes and keep the corresponding extra revenues for themselves. This also makes it easier for countries to apply same tax to domestic and international fuel use. Seeking an agreement over a common price floor may be easier than agreeing over a uniform price for all countries. Indeed coordination over price floors is a standard policy recommendation when tax bases are internationally mobile: the EU, for example, sets minimum tax rates for excises. This provides tax floors that guard against tax competition and provide some protection for countries wishing to set relatively higher tax levels.<sup>57</sup> 85. **Valuation and adjustment procedures would be needed under either approach.** Since the appropriate tax is specific (not ad valorem), a tax common to a number of countries would need to be specified in terms of some basket of currencies. In addition, an automatic ramp-up rate needs to be agreed (e.g., say 5 percent annual in real terms), along with periodic reviews of the level, growth rate, and local currency equivalents. Similarly, under an ETS the overall cap (and price stability provisions) would need to be updated periodically.

86. **Cap-and-trade may create more momentum for international linking of permit markets and flows of climate finance to developing countries** . Nonetheless, carbon taxes could easily promote carbon markets through credits against tax liabilities for international emissions offsets. In the maritime context a truly global scheme can be envisaged under which the international shipping sector is treated as a separate ̳bubble‘. With a global scheme established under a separate treaty instrument under IMO, the cap would be set and maintained by the parties to the treaty following rules of procedure laid down in the treaty. The ETS proposals under review within IMO have 100 percent auctioning to avoid the need for allocation to individual ships or flag States and not to penalize shipping companies that have taken early actions, or newcomers.

87. **On balance, a (minimum) tax based approach to carbon pricing in international aviation and shipping would likely be the most appealing in principle** . Account though must be taken of initial conditions and practical considerations. These are addressed next.

# **B.   Practical Issues**

# **Governance**

88. **Internationally coordinated MBIs for aviation and maritime raise difficult governance issues** . They arise in relation to the charges themselves, and in relation to the ceding of revenue to a global fund outside national treasuries. Precedent does exist in the collection side in the IOPC Funds (Box 4). The climate finance objective would have similarities as the funds are used to compensate for environmental damage. Precedent also exists in a number of IMO treaties in force on the implementation and enforcement side through flag and port state controls where the basis would be to deny ships port entry if they do not participate in the scheme (no more favourable treatment) and detain ships that have not

> 57 A slight drawback of this approach is that differentiated prices imply somewhat higher global mitigation costs compared with a uniform price system (for the same global emissions reduction).

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