Carbon Pricing in the Shipping Industry

Emissions from international shipping have climbed rapidly over the last decade and could account for more than 17% of global emissions by 2050. Yet the 2015 Paris Agreement does not cover emissions from the maritime sector and U.N. member countries do not include shipping emissions in their national reduction targets. The industry is currently grappling with historic supply chain disruptions instigated by the COVID-19 pandemic and compounded by rising prices and shortages of goods and labor. The resulting congestion is driving up emissions as ships stuck at bottlenecks continue emitting greenhouse gases. In order to meaningfully address shipping emissions, the international conversation is gravitating toward carbon pricing.

A working group of the U.N.’s International Maritime Organization (IMO) reached an agreement last year to price emissions by 2030. This is a notable development—the IMO has been considering and debating carbon pricing and other market-based measures for more than ten years. The agreement is part of the IMO’s broader strategy to cut shipping emissions by at least 50% below 2008 levels by 2050. The next step: to agree on the price and the use of revenue. To that end, several stakeholders in the shipping industry have put forward recommendations, underscoring the growing momentum.

Carbon Pricing and Alternative Proposals

A price signal would incentivize improvements in energy efficiency and introduce a glide path for alternative low-carbon fuel sources. The funds raised from a carbon price can support investments in alternative fuels and advance the shift toward cleaner shipping. Another key use of revenue: assisting developing countries decarbonize their shipping sectors and address additional climate objectives. Not only does this ensure a more equitable energy transition, but it can also help to secure developing countries’ support at the IMO, which is critical for getting measures adopted.

The Marshall and Solomon Islands floated one of the earliest proposals in 2021. It called for a global carbon tax of $100 per ton of CO2 by 2025, which would rise every five years. The proposal attracted tepid support from some European countries, but its prospects look dim due to strong opposition from China, South Africa, and Saudi Arabia.

Japan, the world’s second-largest ship-owning country, called last year for a global carbon tax of $56 per ton of CO2 beginning in 2025. If imposed, the tax would rise to $135 per ton in 2030, $324 per ton in 2035, and as high as $673 per ton in 2040. The money raised from the tax would fund subsidies for green energy sources. The IMO Marine Environment Protection Committee considered this proposal when it met last June, but it postponed a final decision.

China has offered an alternative efficiency-focused plan in place of a carbon fee. The framework would build upon existing IMO mechanisms that measure the carbon intensity of international shipping, penalizing ships with emissions above a certain level and rewarding those with lower emissions. A portion of the funds raised would finance sustainable development and climate mitigation in developing countries. While the plan attracted support from Argentina, Brazil, South Africa, and the United Arab Emirates, the shipping industry is concerned that low-emissions fuels may not be viable under the proposal.

Industry Proposals

Meanwhile, the industry itself has floated proposals to price its emissions. The International Chamber of Shipping, which represents more than 90% of the world’s merchant fleet, submitted a proposal to the IMO that calls for an unspecified global carbon tax on ships weighing over 5,000 gross tons. The funds raised would support investments in alternative fuels like hydrogen and ammonia. Maersk, the world’s biggest container shipping company, has proposed a carbon tax of $150 per ton CO2 whose revenues would support developing countries and subsidize green fuels. Another proposal comes from the Getting to Zero Coalition, an alliance of leading maritime companies and environmental NGOs. It calls for a carbon price of about $200 per ton, with the proceeds going towards subsidies for green fuels.

Regional Approaches

Although most proposals have called for a global price on carbon, other plans consider a regional approach. For example, the EU’s Fit for 55 initiative, which commits to reducing emissions by at least 55% by 2030, includes a component that will expand the EU’s Emissions Trading System to cover shipping emissions by 2026. It will require all ships to purchase carbon allowances for all emissions generated during voyages within the EU and for 50% of the emissions generated during international voyages starting or ending at an EU port.

Analysts say this regional approach could cause carbon leakage, prompting shipping emissions to migrate from one region to another. The concern: companies may look for shipping hubs outside the EU to avoid purchasing the allowances. Or they could engage in various forms of emissions arbitrage, like transferring goods to carbon efficient vessels for the EU portion of their transit, and then back to dirtier vessels once they leave European waters.

The shipping industry has also warned the regional approach could distort trade. It stated to the International Chamber of Shipping that a mandatory global charge is “strongly preferable over any unilateral, regional application” because such piecemeal approaches could significantly complicate “the conduct of maritime trade.”

What’s Next?

The IMO’s Marine Environment Protection Committee meeting in July 2023 resulted in a compromise agreement that received unanimous support from all 175 member states. The agreement outlines an eventual goal of achieving net-zero emissions from international shipping “close to” 2050, with interim targets of 20%-30% reduction by 2030 and 70%-80% reduction by 2040, compared to 2008 levels. To achieve these targets, the IMO confirmed that new standards on the GHG intensity of marine fuels will be developed and that a pricing mechanism will be enforced on maritime emissions.

The response to the agreement has been tepid, with environmental groups acknowledging its significance as a step in the right direction but emphasizing that it falls short of their ambitious expectations. Despite various carbon pricing proposals, the agreement provides only a general commitment to develop “an economic element, on the basis of a maritime GHG emissions pricing mechanism,” with the details to be worked on over the next year.

Although the IMO and member countries will need to maintain collaborative efforts to ensure that the agreement’s provisions are effectively implemented and that further ambitious measures are put in place, some companies are already taking steps to reduce their carbon footprint. For example, Maersk plans to replace several old vessels with new cargo ships that run on fuel alternatives. If Japan’s proposed global carbon price is adopted, this move would save Maersk $56 million per year in taxes.

Over time, a carbon price could also help address the industry’s logistical issues. It would provide a clear incentive to accelerate ongoing efforts at improving port operations and efficiencies, reducing idling times. It could also encourage marginally more onshoring or nearshoring of supply chains. This would help reduce transport emissions and the resulting costs.

Ultimately, a global approach to carbon pricing will cut global shipping emissions faster than alternative approaches, while preventing carbon leakage. And with maritime logistics likely to be remodeled as the world recovers from the supply chain crises, it may be an opportune moment to introduce a price that incentivizes decarbonization in a restructured system. Although such a proposal would have to garner robust support from government and industry stakeholders, the proliferation of proposals at the IMO suggests that a carbon price on international shipping may be the only way to move forward.

This piece was updated in August 2023 to reflect relevant takeaways from the July 2023 Marine Environment Protection Committee meeting.

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