Carbon revenues from shipping: A game changer for the energy transition

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Photo: Igor Korchak, Inkoly and Antoniokhr / iStock.
Photo: Igor Korchak, Inkoly and Antoniokhr / iStock.

By moving the world’s goods from factories and farms to shops and households, international shipping plays a key role in global trade and economic development. Yet, shipping is also a significant source of greenhouse gas emissions (GHG), accounting for around three percent of global GHG emissions annually. These emissions continue to grow and are far from being aligned with the Paris Agreement’s temperature goal of limiting global warming to 1.5 degrees Celsius.
 

Figure 1: Historical and projected transport demand and GHG emissions from international Shipping| Source: UNEP, World Bank
Figure 1: Historical and projected transport demand and GHG emissions from international Shipping| Source: UNEP, World Bank


The case for a revenue-generating market-based measure

To combat the rapid growth in GHG emissions, international shipping has committed to reducing its carbon footprint by at least 50% of 2008 levels by 2050.  Within this context, the International Maritime Organization (IMO) – shipping’s global regulator – is discussing various policy options to tackle those GHG emissions. Besides already agreed short-term measures, such as construction and operational standards to improve the energy efficiency of the fleet, the debate is now focusing on mid-term measures. Among these, the IMO is contemplating policies that incentivize polluters to reduce their GHG emissions through price signals, such as applying a carbon price to ship emissions. Some of these so-called market-based measures would not only reduce GHG emissions, but could at the same time generate up to 3.7 trillion US dollars in revenues by 2050.

 

Figure 2: Measures envisaged under the initial IMO GHG Strategy with respective timelines
Figure 2: Measures envisaged under the initial IMO GHG Strategy with respective timelines


The advantages of addressing equity considerations through the strategic use of revenues

Central to the IMO debate is how to ensure that the transition to zero-carbon shipping will be equitable, i.e. that no country is left behind. The Initial IMO GHG Strategy provides guidance by making reference to two guiding principles directly related to the question of equity.

Firstly, it outlines that all IMO member states have a common responsibility to address climate change as well as the need to account for each member state’s differing circumstances. Secondly, it stresses the need to assess and address situations where GHG reduction measures in shipping may disproportionately affect certain states.

Carbon revenues, amongst others, could significantly help support these two principles—as long as the carbon revenue measures in question are designed and implemented strategically. For instance, carbon revenues could go primarily toward those countries which may face greater difficulties in coping with shipping’s energy transition, may have historically contributed less to climate change or may have less capacity to address it. In a recent World Bank analysis, our team found that this strategic use of carbon revenues appears much more advantageous than fully or partially exempting less developed countries from a market-based measure in international shipping. This is because exemptions are likely to result in less developed countries being left with older, less energy-efficient, and less safe vessels as the shipping companies may deploy the newer, more energy-efficient and often safer vessels on those routes where the carbon price needs to be paid.

 

Figure 3: Two main solutions considered to address the challenges resulting from the need for an equitable transition
Figure 3: Two main solutions considered to address the challenges resulting from the need for an equitable transition


The benefits of using revenues in the shipping sector as well as beyond

Carbon revenues from international shipping could be spent on a variety of uses, both within and out of the shipping sector.  Yet, the World Bank’s analysis found that the revenue use options most aligned with guiding principles of the Initial IMO GHG Strategy and desirable key features would be to support in-sector climate change mitigation, enhance maritime transport infrastructure and finance broader climate goals. In particular, the use of carbon revenues should be considered both inside and outside the shipping sector. Firstly, because potential carbon revenues raised are likely to exceed the investments needed to meet the sector’s emission reduction targets. Depending on the carbon price and complementing policy, they may even enable the full decarbonization of the sector by 2050. Secondly, the financing of broader climate and development goals beyond the shipping sector may yield climate and development benefits that could potentially be more cost-effective and impactful. This could result in win-win situations such as carbon revenues from the shipping sector being used to finance the production of renewable electricity. In turn, the increased availability of greener energy could support many sectors on their transition toward sustainability—including in the maritime industry, where the production of zero-carbon shipping fuels will likely require significant amounts of renewable electricity.

 

Figure 4: Win-win situation exploiting synergies between strategic in-sector use and out-of-sector use of carbon revenues from international shipping
Figure 4: Win-win situation exploiting synergies between strategic in-sector use and out-of-sector use of carbon revenues from international shipping

Our analysis also found that a substantial share of carbon revenues should go to governments, specifically the governments of developing countries.  This would ensure that disproportionately negative impacts and equity considerations be addressed effectively. However, by providing a certain share of carbon revenues to the private sector as well (especially the shipping industry , e.g. for the deployment of low- and zero-carbon vessels), climate and development outcomes could be maximized thanks to the complementarity of public sector and private sector finance.

An open invitation to policymakers

In brief, these findings are to be understood as an open invitation to policymakers to consider implementing a revenue-raising market-based measure in support of shipping’s decarbonization. Such a policy would not only reduce GHG emissions most cost-effectively but also enable a new, additional, and equitable set of climate and development actions—a unique feature not offered by any other mid-term measure currently considered.

 

 

 

Authors

Yoomin Lee

Junior Professional Officer, Transport GP Global unit

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