In part-3 of our special series on digital decarbonisation, we are focussing on a method that the shipping industry (and other hard-to-decarbonise sectors) are using to deliver on their commitments to reducing net CO2 emissions – market-based measures such as carbon trading and levy schemes. But can these be considered progress?
According to the IMO’s fourth GHG emissions study, the shipping industry was responsible for 1,056 million tonnes of CO2 emissions in 2018, and is responsible for 2.89% of the world’s carbon dioxide emissions. This puts into perspective the role of the maritime industry in creating and delivering an impact in terms of preserving and protecting the environment.
With rising pressure from regulators and the societal shift towards sustainability, the maritime industry is just one of the many industries that are approaching emissions compliance in a variety of ways. Through global carbon levies and carbon permits to carbon allowances and carbon offset credits, these instruments could have a large role to play in transitioning the maritime industry towards a cleaner future.
In 2011, the IMO Marine Environment Protection Committee (MEPC) adopted a set of technical measures for new vessels and operational measures for all existing vessels. These measures focused on the enhancement of the energy efficiency of the global merchant fleet, and were also the first mandatory global greenhouse gas emission reduction program adopted for an entire industry.
Moving forward, industry stakeholders have continued to adopt several other measures aligned towards the IMO’s commitment to reducing greenhouse gas emissions from global shipping activity and, ultimately, to remove them as soon as possible in the coming decades.
The international maritime community has also made a combined effort in this progressive stance towards addressing the effects of climate change. Given that the frameworks for accounting greenhouse gas emissions differ from one approach to another, the industry is exploring several market-based measures that are intended to speed up the market’s shift towards emission-free operations. These measures would allow regulators and stakeholders to set a price on greenhouse gas emissions and would serve the industry by providing an economic incentive for industry stakeholders to reduce their consumption of fossil fuels, and by investing in more fuel efficient vessels, technologies and energy efficient operations. Several options such as the implementation of a proposed global carbon levy, the addition of shipping into an emissions trading system, and the use of an offsetting scheme are being considered in order to identify the best possible approach in the decarbonisation efforts of the maritime industry.
Carbon Levies
A carbon levy in the maritime industry can potentially become the instrument that will generate the most interest within the sector. Through a robust and well-designed framework for pricing carbon emissions, it offers an opportunity for the industry to create progressive change in the most economical and technically feasible way possible.
The International Chamber of Shipping (ICS) brought forth the proposal of the maritime industry’s first ever global carbon levy back in September 2021. The levy would be structured on mandatory contributions by internationally trading vessels with a gross tonnage of 5,000 and above for each tonne of CO2 that they emit. The contributions would then be placed into a fund established by the IMO for its strategic climate response initiatives which would be used to develop the infrastructure for the bunkering of alternative fuels in ports all around the world.
For this system to work, the implementation of a price on carbon emissions in the maritime industry will need to address several concerns. The design of the measurement, reporting, and verification (MRV) system, the enforcement of the measures, and the role of the compliance entity should be taken into consideration. Depending on fuel prices and future trajectories, this approach would be the most likely to generate change from both the ship operators and ship owners due to the stability and certainty that it offers their investments.
Emissions Trading Systems
Emissions trading systems operate on carbon allowances that are issued by a government body under a cap-and-trade system. A carbon allowance or permit typically allows an owner to emit one tonne of a pollutant such as CO2. Under this system, the supply of greenhouse gas allowances is limited by the program’s declared ‘cap’. Depending upon the government body and the program, these allowances can be allotted directly by the program administration, be purchased in auctions, or be purchased from other organisations that have a surplus of it. The emission sources covered in these cap-and-trade programs usually depend on the location and the regulatory or legislative scope included. Several emission trading systems have been established in the European Union, the United States, Canada, China, South Korea, and South America.
In July 2021, an option that has been considered within the European Union has been the proposed integration of the maritime industry to the EU emission trading system (ETS).
If shipping activity is added into the system, the proposal would require shipowners to acquire permits covering 100% of their emissions within the jurisdiction of the European Union, and 50% of their emissions from international voyages starting and ending in the EU. The proposal will have to pass through the European Parliament and EU countries in order to take legal effect.
Being the world’s first international emissions trading system, the EU ETS is the largest cap-and-trade program covering over 40% of the EU’s greenhouse gas emissions, as of 2020. It is focused on emissions that can be measured, reported and verified with a high degree of accuracy, such as carbon dioxide (CO2), nitrous oxide (N2O), and perfluorocarbons (PFCs).
The area of concern regarding this approach would have to be on the diminishing economic incentives towards the ship operators and ship owners when more emissions are gradually being reduced to lower levels. The system, together with the uncertainty of future prices, can also falter in its effect to aid in the industry’s decarbonisation efforts as it can potentially generate inconsistent operational reactions from ship owners and ship operators.
Offsetting Schemes
Several industries have implemented carbon offsetting schemes as a way to offer organisations an easy and cost-effective way of dealing with the complexities of emission reduction responses.
In an offsetting scheme, a carbon offset credit is used to convey the reduction of an emission-causing activity or the enablement of an emission-reducing activity. The acquisition of a carbon offset credit can allow the purchaser to utilise its value to claim the underlying reduction towards their own greenhouse gas emission reduction targets.
Both carbon allowances and carbon offsets represent the same amount of avoided carbon emissions at one tonne. However, the difference in these two approaches are on how they represent the reduction of emissions. The purchase of a carbon allowance or permit gives the emitter a right to emit a tonne, while the purchase of a carbon offset supports a prior reduction of a tonne.
An offsetting scheme in the maritime industry can be effective in reducing in-sector emission reductions, but it will depend on the price of the offset credits. Given that these price levels rely on a variety of external factors, it becomes highly uncertain and could potentially end up continuing the increase of emissions within the sector. Several organisations have started offering carbon offset credits within the maritime industry as a way for ship owners and ship operators to address their responsibility in curbing their emissions.
The development of an environmentally and economically effective response by the maritime industry is important as it dictates the sizable shift of the industry towards cleaner energy sources. It is also critical that the development of this comprehensive strategy includes the transparent objectives that are made in collaboration with the sensitivities of a wide variety of stakeholders, such as those from developing states and low-income countries, to ensure that the scheme considers every potential scenario. However, it is worth noting that these approaches are not sufficient and are only needed in order for the industry to progress further with the adoption of alternative fuels and energy efficient technologies.
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DIGITAL DECARBONISATION SERIES
In partnership with Inmarsat, Thetius launched a major report on digital decarbonisation at the Nor-Shipping conference in April 2022 to critical acclaim. Read by thousands of industry professionals across the globe, The Optimal Route examines the impact of digital technologies on the trajectory of decarbonisation in shipping.
Based on the findings of this research, we have put together a new series of articles on digital decarbonisation which will be released to our subscribers over the coming weeks. Each article will zoom in on an aspect of digital decarbonisation and together will provide a jam-packed analysis that includes the latest and greatest examples of how digital technologies can prove the difference between success and failure in decarbonising the ocean supply chain.
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