A meeting of the International Maritime Organization (IMO) in mid-March featured a big step for global cooperation in the fight against climate change. The IMO, a UN agency that regulates the shipping industry, reached an agreement in 2022 to price emissions from international shipping by 2030. In its most recent convening in March, the IMO’s Marine Environment Protection Committee (MEPC) agreed on a draft outline of a net-zero framework that contains a carbon pricing mechanism. This progress reflects global recognition that shipping industry emissions must be addressed.
Shipping accounts for roughly 3% of global emissions, slightly more than aviation. Shipping emissions have increased by 20% over the last decade and could account for more than 17% of global emissions by 2050. And yet, these emissions are not covered by the 2015 Paris Agreement and are not included in emissions reduction targets of member states. To meaningfully address the emissions footprint of the shipping industry, the international conversation has turned to carbon pricing.
Design Elements and Impact Assessment
The IMO steering committee decided in September 2023 to solicit feedback on all possible combinations of the carbon pricing design elements under consideration. Countries and stakeholders were asked to propose their preferred policy designs using the following four categories:
- Economic elements – includes the type of fee, its price, and its application to specific entities
- Technical elements – describes the emissions that are covered by the policy, including the threshold for ships subject to the fee and the upstream and downstream boundaries of covered emissions.
- Flexibility elements: considers exceptions for shipping routes to and from ports in Least Developed Countries (LDCs).
- Revenue disbursement: provides several options for use of revenue from research and development to funds for an equitable green transition.
The MEPC has commissioned modeling on the impacts of various combinations of these elements. The impact assessment will be ready for review and consideration at the upcoming MEPC 82 meeting in late September/early October this year.
The Pricing Mechanism
Feedback from countries and stakeholders on the economic elements has revolved around two general approaches to a fee structure. The first approach involves a simple levy on ships based on the fuels that they consume. The second approach is a fee-bate system, which imposes a fee on ships for their use of high carbon fuels and uses this revenue to provide rebates for the use of low carbon fuels.
Government and industry have proposed a range of initial prices for the simply levy spanning from approximately $50 to $200 per ton of shipping emissions produced. In January, several island nations proposed a fee of $150 / ton of emissions starting in 2027. They retracted their previous support for a starting price of $100 / ton, arguing that the price should now be higher to account for the delay of measures that would ensure an equitable green transition for island states. This sentiment relays the growing sense of urgency from some players address the climate crisis, while others remain opposed to decarbonization efforts that could increase short-term shipping costs.
The alternative fee-bate option utilizes a circular fee and rebate approach to incentivize shipping industry decarbonization. The favored design within MEPC discussions would use a pre-determined rebate amount for the use of clean fuels to determine how much revenue should be generated through the fee on the use of dirty fuels. In January, Japan suggested an alternative that would fix both the rebate and fee rates for 5-year periods. Japan argued that fixed rates would create a more predictable price signal and therefore encourage more preemptive decarbonization activity.
Scope of Coverage and Emissions Boundaries
Moreover, proposals to the MEPC have differed in their view of the emissions that should be subject to the pricing mechanism. In this context, scope of coverage describes the threshold of ships subject to the fee and emissions boundaries stipulate the upstream and downstream bounds of covered emissions within the shipping fuel’s supply chain.
Recommendations from the EU, island nations, and others this year have favored a complete over partial scope of coverage. These submissions argued that by applying the fee to all ships engaged in international trade, a price mechanism would provide more predictable incentives for early action and avoid unnecessary complexity. Japan and Canada countered that initial coverage should focus only on ships above a volumetric threshold of 5,000 gross tonnage, since this threshold already captures 90% of shipping emissions and aligns with existing data collection standards.
Similarly, there has been disagreement over emissions boundaries. In September, the MEPC asked for input on which emissions should be subject to the pricing mechanism within the broader shipping fuel supply chain, either well-to-wake (WtW) or tank-to-wake (TtW). WtW refers to the entire process of fuel production including raw material extraction, processing and refining, and fuel combustion. TtW only includes the emissions associated with fuel combustion once the fuel is in the tank.
A submission from South Korea argued that WtW would be more effective at curbing emissions since it more accurately reflects the emissions footprint of a fuel’s supply chain. Japan expressed similar sentiment, but also recommended that the pricing mechanism start with just TtW emissions because the guidelines for monitoring, reporting, and verification of WtW emissions are not sufficiently developed. Canada proposed a combination of the two approaches in which the pricing mechanism only applies to TtW emissions, but the fuel-specific rate is set based on the fuels whole WtW supply chain. This approach would acknowledge current data limitations while increasing the price for fuels with greater overall life cycle emissions.
Implementation Questions and Next Steps
As an intergovernmental organization, the IMO does not have any implementation power without the cooperation of individual governments. The MEPC has been charged to collect member state feedback and approval on the global carbon pricing mechanism, but implementation will still hinge on formal acceptance by individual governments and adoption into national law.
A MEPC meeting next Spring will aim to approve a final draft, which will then be considered for adoption by the MEPC in Fall 2025. The rule will require approval by individual governments before it is implemented with a target date of early 2027.