Abstract
The International Maritime Organization (IMO) announced in April 2018 a target of cutting greenhouse gas (GHG) emissions from the sector by 50 percent below 2008 levels by 2050 and subsequent meetings of the IMO will develop a strategy for making headway on this commitment. This paper seeks to inform dialogue about the possibility of a carbon tax as a key element of GHG mitigation policy for international maritime transport. The paper discusses the case for the tax over alternative mitigation instruments, options for the practical design issues, and then presents estimates of the impacts of carbon taxation and other instruments from an analytical model of the maritime sector.
Executive Summary
It is an especially opportune time to consider market-based mechanisms (MBMs), or more specifically, an international maritime carbon tax or fuel levy (i.e., a tax/levy on shipping fuel in proportion to carbon content, referred to here as a carbon tax). International maritime fuels are underpriced from an environmental perspective as there is no charge for their greenhouse gas (GHG), particularly carbon dioxide (CO2), emissions (which are significant and expected to expand steadily without policy action). The International Maritime Organization (IMO) announced, in April 2018, a pledge to cut emissions by 50 percent by 2050 relative to the 2008 level, and the next step is to develop near- and longer-term policies for making progress on this goal.
This paper seeks to promote dialogue about the possibility of a carbon tax as a key element of a GHG mitigation strategy for international maritime transport. The paper discusses the case for the tax over alternative mitigation instruments, options for the practical design issues, and then presents estimates of the impacts of carbon taxation and other instruments.
The environmental case for a maritime carbon tax is increasingly recognized. Unlike most alternative mitigation instruments (e.g., standards for the technical efficiency of new ships), maritime carbon taxes promote, and strike the cost-effective balance between, the full range of potential opportunities (given the current state of technology) for reducing emissions (e.g., technical and operational improvements for both new and existing ships, shifting the fleet towards larger, more efficient vessels) and unlike other pricing instruments (e.g., emissions trading systems, offset schemes) a tax provides more certainty over prices and is simpler to administer and comply with.
Although some design specifics of carbon taxes may appear contentious, there are workable options for moving policy forward. As regards:
Responsibility for implementation—maritime carbon taxes could be collected domestically (through extending administrative capacity for domestic fuel taxes), but the more immediately relevant option (given delegation of GHG mitigation strategy to the IMO) would be international collection from ship operators (based on required reporting of their fuel consumption) through establishment of an IMO-administered fund;
Tax rates—economic models are available for assessing the future emissions impacts of carbon taxes though, for practical purposes, it may be challenging to implement prices considerably higher than in other pricing schemes (typically around $5-$30 per tonne of CO2 at present);
Compensation for vulnerable countries—compensation mechanisms, if required to reconcile the principle of common but differentiated responsibilities and respective capabilities (CBDRRC) and global application of the maritime carbon tax (preferred due to the high mobility of the tax base and the undesirability of introducing trade distortions), should be practical, not least because the burden of maritime carbon taxation is generally small in relation to countries’ GDP;
Revenue use—allocation of the (potentially sizable) revenues is highly contentious (e.g., some see maritime taxes as a natural and urgent source of climate finance and others a funding source for technology and other programs within the maritime sector) though an option (which might permit more aggressive pricing) is to limit revenues raised (while preserving mitigation incentives) by charging ship operators for the difference between their emissions and a benchmark level.
Some noteworthy modelling results include:
An illustrated carbon tax rising to US$75 per tonne1 of CO2 in 2030 ($240 per tonne of bunker fuel), and $150 per tonne in 2040, by itself reduces maritime CO2 emissions below business-as-usual (BAU) levels by nearly 15 percent in 2030 and 25 percent in 2040, raises revenues of about $75 billion in 2030 and $150 billion in 2040, while increasing shipping costs by 0.075 percent of global GDP in 2030;
A revenue neutral carbon tax with the same emissions price (i.e., one that taxes operators with relatively high emissions intensity and subsidizes operators with relatively low emissions intensity) is only slightly less effective at reducing CO2 and increases average shipping costs by a tiny 0.005 percent of global GDP in 2030;
A performance standard for new ships (currently implemented by IMO) has only one-third of the effectiveness of carbon taxes (for the same implicit CO2 price).
In short, maritime carbon taxes are an economically and administratively promising instrument; there are different candidate designs for carbon taxes that should be considered, including the possibility of a revenue-limiting tax; and the global burden of the tax appears to be rather small. Taxes would need to be accompanied by measures to develop and deploy alternative fuel technologies if the deep emissions reductions envisioned by mid-century are ultimately to be achieved. Nonetheless, maritime carbon taxation deserves serious attention at upcoming IMO deliberations as part of a comprehensive strategy to progress on mitigation commitments.
Introduction
Although the aspirational goal of the 2015 Paris Agreement on climate change is to contain long-range, mean-projected planetary warming to 2°C above pre-industrial levels (and make efforts to achieve stabilization at 1.5°C), the more immediate policy framework is the country-level mitigation pledges in Nationally Determined Contributions (NDCs) submitted for the Agreement by 169 countries.2 A typical NDC among advanced G20 countries (Table 1) is to reduce GHGs by around 30 percent by 2030 relative to historical emissions in some cases, or projected business as usual (BAU) emissions in others.3
Mitigation Pledges for the 2015 Paris Agreement, G20 Countries
Mitigation Pledges for the 2015 Paris Agreement, G20 Countries
| 2014 | ||||
|---|---|---|---|---|
| Country | Mitigation pledge | share of global CO2 | tons CO2/$1,000 GDP | tons CO2 per capita |
| Argentina | Reduce GHGs 30% below BAU in 2030 | 0.6 | 0.39 | 4.7 |
| Australia | Reduce GHGs 26-28% below 2005 by 2030 | 1.0 | 0.25 | 15.4 |
| Brazil | Reduce GHGs 37% below 2005 by 2025 | 1.5 | 0.22 | 2.6 |
| Canada | Reduce GHGs 30% below 2005 by 2030 | 1.5 | 0.30 | 15.1 |
| China | Reduce CO2/GDP 60-65% below 2005 by 2030 | 28.5 | 0.98 | 7.5 |
| France | Reduce GHGs 40% below 1990 by 2030 | 0.8 | 0.11 | 4.6 |
| Germany | Reduce GHGs 40% below 1990 by 2030 | 2.0 | 0.19 | 8.9 |
| India | Reduce GHG/GDP 33-35% below 2005 by 2030 | 6.2 | 1.10 | 1.7 |
| Indonesia | Reduce GHGs 29% below BAU in 2030 | 1.3 | 0.52 | 1.8 |
| Italy | Reduce GHGs 40% below 1990 by 2030 | 0.9 | 0.15 | 5.3 |
| Japan | Reduce GHGs 25% below 2005 by 2030 | 3.4 | 0.25 | 9.5 |
| Korea | Reduce GHGs 37% below BAU in 2030 | 1.6 | 0.42 | 11.6 |
| Mexico | Reduce GHGs 25% below BAU in 2030 | 1.3 | 0.37 | 3.9 |
| Russia | Reduce GHGs 25-30% below 1990 by 2030 | 4.7 | 0.83 | 11.9 |
| S. Arabia | Reduce GHGs 130 million tons below BAU by 2030 | 1.7 | 0.79 | 19.5 |
| S. Africa | Reduce GHGs 398-614 million tons in 2025 and 2030 | 1.4 | 1.40 | 9.0 |
| Turkey | Reduce GHGs up to 21% below BAU by 2030 | 1.0 | 0.37 | 4.5 |
| UK | Reduce GHGs 40% below 1990 by 2030 | 1.2 | 0.14 | 6.5 |
| US | Reduce GHGs 26-28% below 2005 by 2025 | 14.5 | 0.30 | 16.5 |
Mitigation Pledges for the 2015 Paris Agreement, G20 Countries
| 2014 | ||||
|---|---|---|---|---|
| Country | Mitigation pledge | share of global CO2 | tons CO2/$1,000 GDP | tons CO2 per capita |
| Argentina | Reduce GHGs 30% below BAU in 2030 | 0.6 | 0.39 | 4.7 |
| Australia | Reduce GHGs 26-28% below 2005 by 2030 | 1.0 | 0.25 | 15.4 |
| Brazil | Reduce GHGs 37% below 2005 by 2025 | 1.5 | 0.22 | 2.6 |
| Canada | Reduce GHGs 30% below 2005 by 2030 | 1.5 | 0.30 | 15.1 |
| China | Reduce CO2/GDP 60-65% below 2005 by 2030 | 28.5 | 0.98 | 7.5 |
| France | Reduce GHGs 40% below 1990 by 2030 | 0.8 | 0.11 | 4.6 |
| Germany | Reduce GHGs 40% below 1990 by 2030 | 2.0 | 0.19 | 8.9 |
| India | Reduce GHG/GDP 33-35% below 2005 by 2030 | 6.2 | 1.10 | 1.7 |
| Indonesia | Reduce GHGs 29% below BAU in 2030 | 1.3 | 0.52 | 1.8 |
| Italy | Reduce GHGs 40% below 1990 by 2030 | 0.9 | 0.15 | 5.3 |
| Japan | Reduce GHGs 25% below 2005 by 2030 | 3.4 | 0.25 | 9.5 |
| Korea | Reduce GHGs 37% below BAU in 2030 | 1.6 | 0.42 | 11.6 |
| Mexico | Reduce GHGs 25% below BAU in 2030 | 1.3 | 0.37 | 3.9 |
| Russia | Reduce GHGs 25-30% below 1990 by 2030 | 4.7 | 0.83 | 11.9 |
| S. Arabia | Reduce GHGs 130 million tons below BAU by 2030 | 1.7 | 0.79 | 19.5 |
| S. Africa | Reduce GHGs 398-614 million tons in 2025 and 2030 | 1.4 | 1.40 | 9.0 |
| Turkey | Reduce GHGs up to 21% below BAU by 2030 | 1.0 | 0.37 | 4.5 |
| UK | Reduce GHGs 40% below 1990 by 2030 | 1.2 | 0.14 | 6.5 |
| US | Reduce GHGs 26-28% below 2005 by 2025 | 14.5 | 0.30 | 16.5 |
The international maritime sector accounted for 2.6 percent of global CO2 emissions in 20124 (only four countries produced more emissions—Table 1) and its emissions would expand steadily in the absence of mitigation policy.5 Exemption of the fuel from excise taxes (routinely applied to road fuels) appears to reflect informal convention and especially, extreme mobility of the tax base.6 As noted below, international maritime is also subject to a lighter business tax regime than other industries.
Global application of a maritime carbon tax would be consistent with the IMO’s guiding principle of non-discriminatory treatment of all ships regardless of the flag state. At the same time, member states emphasize the principle of common but differentiated responsibilities and respective capabilities (CBDRRC)—that countries in some way have a differentiated responsibility for their contributions towards GHG mitigation in recognition of their economic status and respective capabilities7—should be addressed in any IMO GHG strategy, though there is presently little consensus on how to achieve this. The IMO acknowledges the need to avoid adverse impacts on low-income countries (LICs) and small island developing states.8 The tension between the non-discrimination and CBDRRC principles may need to be addressed, one possibility (see below) being through compensation schemes, though it may be acceptable to limit these schemes only to cases where the burden of higher shipping costs is deemed significant.
CO2 Mitigation Initiatives for International Aviation and Maritime
Aviation
ICAO’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) will require airlines to purchase international emission offsets for any CO2 emissions exceeding 2020 levels. There is considerable uncertainty over future credit prices however, which depend on: (i) the extent and cost of future emission reduction projects in developing countries; (ii) the strictness of verification procedures meant to ensure projects are ‘additional’ (i.e., they would not have gone ahead anyway without the offset payment); (iii) competition for offsets from other carbon pricing schemes; and (iv) the willingness of countries (where offsets projects are undertaken) to not ‘double count’ these reductions when reporting progress on their Paris mitigation pledges.
Several design elements are meant to ease the transition to CORSIA, including:
The scheme is not mandatory until 2026, though 72 countries (e.g., China, the EU and US) have volunteered for a sub-global pilot phase from 2021 onwards;
Small island developing states, LICs, landlocked developing countries, and states with small shares in global aviation are all exempted from the scheme;
Initially, operators need credits for the difference between average industry-wide and 2020 emissions (which favors faster growing operators in emerging markets), though a transition to operator specific emissions growth will begin after 2030; and
New airline entrants are exempt from the scheme for three years (or until they reach 0.1 percent of 2020 global emissions).
CORSIA applies to routes between participating states (regardless of where operators are registered), but if either departure or arrival state is exempt the route is excluded from the offset obligation.
Maritime
In 2017, the IMO agreed on a timeframe for developing a comprehensive strategy for reducing GHG emissions from ships, following the establishment of a global data collection system (for ships of 5,000 gross tonnage and above accounting for about 85 percent of international maritime CO2) for fuel consumption and other characteristics associated with individual shipping voyages/1
The centerpiece of mitigation efforts to date is the Energy Efficiency Design Index (EEDI), providing ship-specific requirements for grams of CO2 per capacity-mile, which entered into force in 2013. This carbon intensity standard leaves the choice of technologies in ship design to the industry, with the standard tightened every five years in line with the requirement of reducing emission rates relative to a baseline efficiency by 10 percent for ships built from 2015 to 2020; 20 percent for ships built between 2020 and 2025; and 30 percent for those built after 2025.
Sources. www.icao.int/environmental-protection/Pages/A39_CORSIA_FAQ2.aspx and www.imo.org/en/MediaCentre/hottopics/ghg/pages/default.aspx./1 The European Parliament has declared its intention to proceed with regional carbon pricing in the absence of a global agreement. For an analysis of the challenges facing regional carbon pricing schemes for international maritime transport, see Dominioni and others (2018).The International Civil Aviation Organization (ICAO) has announced a strategy to stabilize that sector’s emissions at 2020 levels through an international offset scheme, though there are significant exemptions and implementation delays and verification procedures remain unclear (Box 1). And the IMO announced in April 2018 a commitment to cut emissions by 50 percent below 2008 levels of 1,135 million tonnes by 2050. 9 The next step is to agree on specific policies to begin making headway on this pledge—previously, the IMO has implemented new vessel carbon intensity standards for technical efficiency (Box 1) and considered proposals for market-based mechanisms (MBMs) to reduce CO2.10
This paper seeks to inform dialogue about the possibility of a carbon tax as a key element of GHG mitigation policy for international maritime transport—design specifics for complementary measures to develop alternative fuel technologies that will ultimately be needed, is largely beyond our scope.11 The first half of the paper reviews the case for the tax, how it differs from some other mitigation instruments, and design options. The second half presents an analytical model of the international maritime sector providing a transparent assessment of its environmental, fiscal, and economic impacts and trade-offs with other instruments.
II. Conceptual Rationale for, and Design of, an International Maritime Carbon Tax.
This section discusses the conceptual rationale for maritime carbon taxes, elaborates on key design issues, and compares taxes (qualitatively) with selected other mitigation instruments.
A. Rationale for a Maritime Carbon Tax
As increasingly recognized12, a key rationale for carbon taxation is that it is the most effective instrument for promoting all potential behavioral responses for mitigating international maritime emissions (given the state of technology) and striking the cost effective balance among them. As the carbon tax is passed forward in higher prices for carbon-based fuels,13 this signal promotes the following responses:14
improvements in technical design efficiency of new vessels, for example, design modifications to lower their empty weight, increase engine/propulsion efficiency, and accommodate lower carbon technologies like batteries, biofuels, liquefied natural gas (LNG), and (in the longer term) hydrogen;
improvements in operational efficiency (for a given cargo weight), for example, optimizing average vessel speeds, route lengths, and port dwell time and better maintenance or retrofitting engines, propellers, and hulls of existing ships;15
other operator responses to lower carbon intensity, primarily shifting to larger (more fuel-efficient) ships (within a broad cargo classification) and increasing load factors; and
shifting consumer demand away from heavy/long-distance products, whose prices rise relative to light/short-distance products (e.g., high-value electronics) and non-shipped goods and services.
Cost-effectiveness is achieved because the carbon tax provides the same reward per tonne of CO2 reduced, regardless of how it is achieved, which promotes equalization of the cost of the last tonne reduced across mitigation responses. And in a dynamic context, setting a robust and predictable carbon tax is likely the single most important instrument for promoting emissions-saving investment.16
Carbon taxes can also raise significant revenues. If taxes were collected domestically, it would be logical for this revenue to go to national budgets, but with international collection, climate finance might be a more natural use of the revenue, as national governments have a weaker claim on the tax base (which is combusted in international waters). In fact, it might be especially timely to raise a new revenue source for the Green Climate Fund (GCF), given that many developing countries’ (more ambitious) mitigation commitments are contingent on receiving external finance. Alternatively, some funds might be retained by the industry, most obviously for clean technology research and deployment, though the efficient amount of spending is likely a small fraction of potential carbon tax revenues17—put another way, if tax rates were set based on industry spending needs they may fall well short of the levels needed for meaningful mitigation incentives.
Revenue-Recycling and the Costs of Carbon Taxation
The environmental tax literature has demonstrated the significant difference in (economy-wide) costs between emissions pricing instruments that do, and do not, exploit the potential gains in economic efficiency from recycling revenues. Consider the figure below where imposition of a fuel tax reduces fuel use and causes an economic welfare cost—commonly termed the ‘Harberger triangle’—and defined prior to netting out the benefits from reduced future climate change. This cost is the red triangle, equal to the loss of consumer benefits (the trapezoid area under the demand curve integrated over the fuel reduction) less reductions in fuel production costs (the corresponding area under the supply curve), and the cost increases approximately in proportion to the square of the tax rate. In addition, the tax raises revenue indicated by the grey rectangles combined. The darker grey rectangle is also the economic efficiency benefit from recycling the revenue, that is, the revenue times the efficiency gain per dollar recycled reflecting, for example, reductions in various distortions in the economy (like disincentives for work effort and investment, excessive informality and other tax-sheltering behavior) from cutting taxes on labor income. Suppose, for illustration, that the efficiency gain is 30 cents per dollar of revenue recycled, then from simple geometry, the revenue recycling benefit is 5.4 times and 2.4 times the Harberger triangle for fuel reductions of 10 and 20 percent respectively.
There is another, counteracting, effect to consider however, termed the ‘tax-interaction effect’, which refers to the efficiency loss from the impact of higher product costs on reducing the overall level of economic activity, which in turn (slightly) compounds the dampening effect of taxes on labor and capital on work effort and investment. Under plausible assumptions, up to a point the revenue-recycling benefit exceeds the tax-interaction effect, but the latter effect can also be large relative to the Harberger triangle—hence the need to counteract it through efficient revenue recycling. If, however, the carbon tax is designed not to raise revenues (as discussed in the text) the tax-interaction effect is substantially reduced, as there is no pass through of (large) tax payments in higher product costs./1
Costs, Revenue, and Benefits from Fuel Taxes
Citation: IMF Working Papers 2018, 203; 10.5089/9781484374559.001.A001
Costs, Revenue, and Benefits from Fuel Taxes
Citation: IMF Working Papers 2018, 203; 10.5089/9781484374559.001.A001
Costs, Revenue, and Benefits from Fuel Taxes
Citation: IMF Working Papers 2018, 203; 10.5089/9781484374559.001.A001
There is probably little basis for full retention of carbon tax revenues within the industry on compensation grounds either if, as noted above, most of the tax passes forward into higher fuel prices rather than squeezing shipping margins.
In short, if diverting significant revenues from the industry is not (initially) viable, a way forward might be to design the carbon tax to avoid raising large revenues in the first place, by taxing the difference between emissions and a benchmark level. This also limits the broader burden of the tax on economic activity because of the weaker impact on shipping costs (i.e., there is less pass through of tax revenue into these costs). Box 2 elaborates on the broader, though somewhat technical, implications for economic costs.
B. Other Instruments
This subsection discusses the main alternative mitigation instruments and, conceptually, how they differ from maritime carbon taxes.
(i) ETS
An ETS would require operators to acquire allowances for the CO2 emissions associated with their fuel use—total allowances, and hence emissions, would be capped with allowance trading establishing an allowance or emissions price.18 In principle (for equivalently scaled instruments), an ETS promotes similar mitigation responses as the pure carbon tax; auctioning of allowances generates the same revenue; and allowance requirements could be modified (i.e., set in reference to a baseline emissions) to mimic a revenue-limiting tax scheme discussed below.
The ETS is potentially less cost effective than a carbon tax in a dynamic sense, to the extent that short term volatility in emissions prices causes significant differences in (discounted) incremental abatement costs at different points in time, though empirical studies for more general carbon pricing schemes suggest this effect is of only moderate importance.19 Besides being volatile, prices in ETSs to date have also been depressed20, partly due to their incompatibility with other mitigation instruments—for example, if a carbon intensity standard for ships is combined with an ETS this lowers the allowance price without affecting emissions which are fixed by the cap (under a carbon tax the emissions price is fixed so the standard would reduce emissions).21
(ii) Carbon intensity standards—design
Carbon intensity standards—as currently implemented by IMO for the technical design efficiency of new ships—are less effective than carbon taxes (for the same implicit CO2 price). Unless accompanied with a mechanism to review the design specification of existing ships in a comparable manner, they are limited in application to newbuild ships, and therefore do not promote responses in (2), (3) and (4) above. Carbon intensity standards, moreover, do not provide an automatic mechanism for equating incremental costs of CO2 reductions across different operators which undermines cost effectiveness. Furthermore, the environmental economics literature suggests that non-pricing mitigation instruments are generally less effective at promoting clean technology investment than pricing instruments.22
Carbon intensity standards may have some reinforcing role if carbon pricing is constrained (e.g., by political acceptability issues) and, arguably, to overcome obstacles to technology deployment (though there is potential for overlap if industry-retained funds are used for similar purposes). Ideally standards should include flexibility provisions, like out-of-compliance fees allowing operators to fall short of the standard (if meeting it is relatively high-cost for them) and rebates for operators exceeding the standard (if meeting it is relatively low-cost for them).
(iii) Carbon intensity standards—operation and design
Generalizing the concept of a carbon intensity standard on design specification to include operation by (i) applying it to existing (rather than just new) ships and (ii) accounting for both technical and operational efficiency in the standard, would substantially increase its environmental effectiveness. Moreover, allowing operators who exceed the standard to sell credits to those falling short of the standard, would promote cost effectiveness (i.e., trading provides an alternative flexibility mechanism to the fee/rebate provision just mentioned).23 The approach, as previously proposed by the United States24, and as represented below, may do little to promote response (3) above however as, for practical purposes, it would involve significant disaggregation of vessel types (e.g., different size container ships) with different standards applied to those types, which can limit incentives for shifting to larger ship sizes (if this implies meeting a tighter standard).
A technical challenge for carbon intensity standards for operation and design is whether a carbon intensity metric can be obtained which is environmentally effective, compatible with available or collectable data, and does not unintentionally penalize ships with special operational requirements (which would distort shipping markets)—these issues can increase the administrative burden and political acceptability of such standards. More generally, as with ETSs, the standards provide less certainty over (implicit) emissions prices than a carbon tax.
(iv) Offsets
Finally, under an offset scheme (like that for international aviation) operators would be required to purchase credits for emission reduction projects outside of the maritime sector for any excess of their CO2 emissions above a benchmark level. In theory, by establishing a uniform reward for each tonne of CO2 reduced (i.e., the need to purchase fewer offset credits), this approach can cost-effectively promote similar, within-industry behavioral responses as under carbon taxes (albeit the revenue-neutral version—see below), as well as promoting outside-industry emissions reductions. In practice however, the supply, and therefore price, of future offsets is highly uncertain (Box 1).
(v) Summary
A key theme from the above discussion is that design details matter. A carbon tax should be considered as a preferable mitigation instrument, so long as a robust and predictable price is established and (large) revenues are either used efficiently or the tax is on the difference between emissions and a benchmark amount to limit revenues. An ETS could be a reasonable alternative, but the same issues apply, and price stability mechanisms are then needed. Carbon intensity standards can have a reinforcing role, though they should be designed flexibly given heterogeneity in compliance costs among ship operators, and applied broadly to promote more mitigation opportunities, even though this adds administrative complexity. Offsets provide an alternative form of emissions pricing, but considerable uncertainties surround their price and credibility.25
C. Design Issues for Carbon Taxes
(i) Administration
International maritime carbon taxes could be collected on shipping fuels at the refinery gate as an extension of fuel tax administration procedures long-established in most countries and this would involve collection from a small number of large, easily identifiable, taxpayers. Collection at the international level from ship operators, through an IMO-administered fund, appears the more relevant option however, given delegation of maritime mitigation strategy to the IMO, and to avoid difficulties in coordinating policy across national governments.26 Capacity for measuring shipping fuel use by trip is being developed and operators could pay the tax on either an annual or individual route basis, with denial of port access, or ship arrest, for non-compliant operators potential enforcement mechanisms.27
More precisely, a ship operator’s tax liability would be given by
where: τCO2 is the tax rate on CO2 emissions; FSHIP is the ship’s fuel use; and βCO2 is the emissions factor for the fuel being used, which are well known (e.g., lower for LNG per unit of energy than for conventional heavy fuel oil sold as bunker fuel).28
Revenue-neutral variant. Under a variant of the carbon tax that limits the amount of revenue raised, the tax liability for the operator would instead be given by:
where BENCHSHIP is an (exogenous) benchmark level of emissions assigned to the operator, so operators pay taxes or receive subsidies depending on whether their emissions are above or below their benchmark. If the benchmark is set at the emissions that would have been generated on the operator’s routes by the average ship within a cargo classification (e.g., container ships) then overall this carbon tax variant will be revenue neutral (tax payments from operators with above-average emissions intensity would offset rebates to operators with below-average emissions intensity). In this case the benchmark could be calculated by:
where TMSHIP is tonne-miles for the individual operator and (CO2/TM)AV is emissions per tonne-mile for the average ship within the relevant classification. Scaling back the benchmark (for all ships) would result in a positive amount of revenue on net, and the scheme would converge to a pure revenue-raising carbon tax if the benchmark is reduced to zero.
The revenue-neutral carbon tax provides the same incentives as the pure (revenue-raising) carbon tax (for a given CO2 price) for responses (1) and (2) above, but essentially fails to promote response (4) as there is no pass through of (large) emissions tax payments into higher shipping costs for heavy or long-distance products. Response (3) is promoted, as operators benefit from reduced tax payments or increased in rebates from, for example, shifting to larger, more efficient ships (at least within a vessel classification).
(ii) CO2 prices
In principle, the CO2 tax rate trajectory might be based on the following possibilities:
The ‘social cost of carbon’ (SCC) (i.e., the discounted value of worldwide damages from the future global climate change associated with an additional tonne of CO2 emissions), but reaching agreement across IMO member states would be challenging, not least given widely differing estimates of the SCC in the literature;29
Global emissions price trajectories consistent with the 2°C target in the Paris Agreement, but a recent review30 suggests global CO2 prices of $40-80 per tonne (in addition to any pre-existing fuel taxes) would be needed in 2020, which is highly ambitious given the current global average price of about $1 per tonne of CO2;31
Estimated emissions prices countries will need to phase in by around 2030 to implement their Paris Agreement mitigation pledges, but estimates are uncertain, vary considerably across countries32, emissions targets may be adjusted in the interim, and regulatory instruments may be used in part to meet targets;
Modelling assessments of the price trajectory consistent with emissions goals for the maritime sector (given candidate technologies and expected growth in shipping demand) but extremely high prices (perhaps over $300 per tonne) might be needed in the absence of other technology deployment policies;33 and
Prices in other carbon pricing schemes, the main point being that tax rates for maritime considerably higher than prices elsewhere might be challenging from a political perspective.
On pragmatic grounds, the last option might be the most practical and is used to infer an illustrative price path in the modelling below.
(iii) Addressing differentiated responsibilities
One possible, indirect solution to the CBDRRC issue might be to remit carbon tax revenues to the GCF, which would in turn be allocated for climate adaptation and mitigation projects in targeted developing countries34—funding allocations might also be skewed towards countries most vulnerable to higher shipping costs, to provide more finely-tuned compensation.
Another approach might be to allocate some carbon tax revenue to compensation mechanisms for specific countries (e.g., small island developing states and LICs). There are at least a couple of alternative approaches, though neither by itself may be entirely satisfactory. For example, reimbursing target countries for taxes attributed to their maritime fuel sales would overcompensate some countries (hubs where ships frequently refuel prior to offloading cargo in other countries) while undercompensating others (like small island developing states where ships frequently offload cargo without re-tanking).35 Another possibility is to base compensation on countries’ shares of global import values,36 but import value is not necessarily a reliable predictor of CO2 (e.g., light electronic equipment has a low ratio of CO2 to import value) and some of the incidence also stems from higher costs for exporters.
Workable compensation schemes should be practical however, given the generally modest to tiny incidence (see below) of carbon taxation. As measured here, incidence is the loss of consumer surplus—the first order revenue payment plus the second order economic welfare cost, as indicated by the (combined) gray rectangles and red triangle in the figure in Box 2 (there are no losses in producer surplus given the assumption of full pass through of fuel taxes in higher prices).37
III. Quantitative Policy Analysis
This section describes an analytical model (implemented in a spreadsheet) for evaluating international maritime carbon taxes and other mitigation instruments, data used to parameterize the model, and results and sensitivity analyses. The mathematical specifics of the model, along with data documentation, are described in the Appendix.
A. Analytical Model
(i) Model Description
The model distinguishes (to allow a comparison of segment-specific policies) the two main (and quite distinct) types of shipping, namely wet/dry bulk (e.g., oil products, steel, iron ore, coal, grain). The main behavioral responses for reducing emissions, as classified above, are also distinguished. A discrete time-period model is used, going out to 2040, though distant projections are especially speculative (e.g., due to uncertainty over the future availability and cost of low-emission technologies).
The model begins with 2016 maritime fuel use, 334 million tonnes, equivalent to 1,051 million tonnes of CO2 emissions, with 55 percent of it allocated to bulk shipping and the rest to container shipping. Fuel use is then projected forward in a BAU scenario (with no mitigation measures beyond those implicit in recently observed fuel use) using global GDP (assumed, based on IMF forecasts, to expand 20 percent between 2017 and 2023, and grow at 2.9 percent a year thereafter) along with income elasticities38 of 0.5 and 0.8 for bulk and container products respectively. Future fuel use also depends on bunker fuel prices, which are based on the crude oil price assumed to remain constant in real terms at $70 per barrel ($513 per tonne) and a (permanent) one-off price increase of $13.4 per barrel ($100 per tonne) from 2020 onwards reflecting low sulfur requirements. Higher fuel prices reduce carbon intensity through technical design, operational, and other improvements (as defined above), with each corresponding elasticity39 taken to be -0.15 (the combined elasticity, -0.45, is approximately consistent with other, technology-based modelling for the maritime sector), and through changes in the demand for tonne-miles, though the latter response is modest given the small share of fuel costs in the price of landed imports. Other factors aside, carbon intensity is assumed to decline autonomously at a rate of 0.5 percent a year (e.g., due to gradual turnover of older, less fuel-efficient ships).
To the extent other fuels are used, these are implicitly expressed in terms of the bunker fuel that would yield the equivalent amount of CO2 emissions, therefore the CO2 emissions factor in the model is fixed (the emissions effect of shifting to cleaner fuels is implicitly included in the technical design and operational efficiency elasticities).
(ii) Policy scenarios
Six alternative mitigation policies are considered, where policies are compared for a given explicit price, or implicit ‘shadow price’, they place on CO2 emissions—policies therefore differ in their effectiveness at reducing CO2, depending on the behavioral responses they promote. The policies include:
Pure (revenue-raising) carbon tax—this policy increases future fuel prices according to the CO2 emissions factor for bunker fuels (3.15 tonnes of CO2 per ton of bunker fuel). For illustration, a carbon tax starting in 2021 and rising at $7.5 per tonne of CO2 each year (equivalent to $24 per ton of bunker fuel) to reach $75 per tonne of CO2 ($240 per ton of fuel) by 2030 and $150 per tonne of CO2 ($480 per ton of fuel) by 2040. In carbon pricing schemes elsewhere (see Table 2), prices were around $5-$20 per tonne of CO2 in ETSs and $5-$30 per tonne in carbon tax regimes in 2017, however: prices are likely to rise over time; Scandinavian countries have much higher tax rates; Canada is requiring provinces to phase in a US$40 per tonne carbon price floor by 2022; and France’s carbon tax (for non-ETS emissions) is slated to rise to $100 per tonne by 2022. The carbon tax trajectory illustrated here seems broadly in line with (and perhaps at the high end of) prices that might emerge in other carbon pricing schemes in the next decade or two.
Carbon Prices, Selected Countries and Regions, 2017
Slated price for 2022 (in 2017$).
Carbon Prices, Selected Countries and Regions, 2017
| Government/region | year introduced | Price US$/ton CO2, 2017 unless noted | Coverage, % of GHGs | Government/region | year introduced | Price US$/ton CO2, 2017 unless noted | Coverage, % of GHGs |
|---|---|---|---|---|---|---|---|
| CARBON TAXES | Sweden | 1991 | 140 | 42 | |||
| Chile | 2014 | 5 | 55 | Sweden | 1991 | 140 | 42 |
| Colombia | 2017 | 5 | 40 | Switzerland | 2008 | 87 | 33 |
| Denmark | 1992 | 27 | 45 | UK | 2013 | 24 | 25 |
| Mexico | 2014 | 1-3 | 46 | TRADING SYSTEMS | |||
| Finland | 1990 | 60-65 | 15 | California | 2012 | 15 | 85 |
| France | 2014 | 100a | 35 | EU | 2005 | 6 | 45 |
| Iceland | 2010 | 12 | 50 | Kazakhstan | 2013 | 2 | 50 |
| Ireland | 2010 | 24 | 40 | Korea | 2015 | 18 | 68 |
| Japan | 2012 | 3 | 66 | N. Zealand | 2008 | 13 | 52 |
| Norway | 1991 | 56 | 50 | RGGI | 2009 | 4 | 21 |
| Portugal | 2015 | 8 | 25 | PRICE FLOORS | |||
| South Africa | 2016 | 10 | 80 | Canada | 2016 | 40a | 80 |
Slated price for 2022 (in 2017$).
Carbon Prices, Selected Countries and Regions, 2017
| Government/region | year introduced | Price US$/ton CO2, 2017 unless noted | Coverage, % of GHGs | Government/region | year introduced | Price US$/ton CO2, 2017 unless noted | Coverage, % of GHGs |
|---|---|---|---|---|---|---|---|
| CARBON TAXES | Sweden | 1991 | 140 | 42 | |||
| Chile | 2014 | 5 | 55 | Sweden | 1991 | 140 | 42 |
| Colombia | 2017 | 5 | 40 | Switzerland | 2008 | 87 | 33 |
| Denmark | 1992 | 27 | 45 | UK | 2013 | 24 | 25 |
| Mexico | 2014 | 1-3 | 46 | TRADING SYSTEMS | |||
| Finland | 1990 | 60-65 | 15 | California | 2012 | 15 | 85 |
| France | 2014 | 100a | 35 | EU | 2005 | 6 | 45 |
| Iceland | 2010 | 12 | 50 | Kazakhstan | 2013 | 2 | 50 |
| Ireland | 2010 | 24 | 40 | Korea | 2015 | 18 | 68 |
| Japan | 2012 | 3 | 66 | N. Zealand | 2008 | 13 | 52 |
| Norway | 1991 | 56 | 50 | RGGI | 2009 | 4 | 21 |
| Portugal | 2015 | 8 | 25 | PRICE FLOORS | |||
| South Africa | 2016 | 10 | 80 | Canada | 2016 | 40a | 80 |
Slated price for 2022 (in 2017$).
Revenue-neutral carbon tax—this policy causes the same fuel price increase as the pure carbon tax, though there is no first-order pass through of tax revenues in higher shipping costs.
Carbon intensity standards—three variants of this policy are considered and implemented in the model through various shadow prices. One applies (denoted CIS—DES) to the technical design efficiency (of new ships)—it imposes a shadow price that promotes technical design efficiency but does not exploit the other three mitigation responses discussed above. Second is a standard (denoted CIS—DES/OP) that also applies to operational efficiency (of new and used ships), and exploits (cost-effectively) the first two of the above behavioral responses. Third is a carbon intensity standard (denoted CIS—DES/BULK) promoting technical design efficiency improvements for bulk shipping only. In each of these policies, the shadow prices are aligned with the CO2 prices under the pure carbon tax.
Offsets—finally, an offset scheme is modelled that has the equivalent effect on promoting carbon intensity reductions as the pure carbon tax (because for each tonne of CO2 reduction there is less need to purchase emissions offsets at the same price as assumed under the carbon tax) though, as under the revenue-neutral carbon tax, there is no pass through into shipping costs of charges for infra-marginal emissions. Given the lack of data for parameterizing the future offset supply curve (which, as noted above, is highly speculative) two purely illustrative scenarios are considered—a ‘low cost’ scenario where the marginal cost of offset reductions is approximately the same as that for reducing the CO2 intensity of shipping, and a ‘high-cost’ scenario where the marginal cost of offsets is three times as high. The offset supply curve determines the additional emissions reductions that occur outside of the maritime sector, though in practice there might be considerable difficulty in establishing that offset projects are additional (i.e., would not have gone ahead in the absence of the offset payment).
(iii) Caveats
One caveat is that the model is static in the sense that fuel use adjusts instantly to fuel price changes (rather than gradually as the shipping fleet turns over), though this simplification seems reasonable given that policies are likely anticipated, phased in gradually, and the model’s focus is on longer-term impacts—the elasticities in the model therefore represent long-run responses (allowing for significant turnover of the vessel fleet).
Most of the price-responsiveness of fuel use in the model reflects reductions in carbon intensity rather than in shipping volumes. One implication is that, even though revenue-neutral carbon taxes and emission offset prices do not charge for infra-marginal emissions the resulting difference in environmental effectiveness compared with a pure carbon tax is not very significant. Another implication is that it should be reasonable to omit the capital and labor costs of efficiency improvements in computing fuel use changes from mitigation policies,40 and fiscal or market power distortions in the shipping market in computing their economic welfare effects.41
Furthermore, the model does not capture the possibility of non-linear responses that might result from sudden switching from current fuels to a clean fuel alternative—however, this possibility seems a distant prospect and, as already noted, with current technical knowledge would likely require carbon prices far above those considered below.
B. Results
This subsection discusses BAU projections, the impacts of carbon taxes, the emissions impacts of other instruments, and sensitivity analyses for carbon taxes.
(i) BAU Scenario
Figure 1 shows the BAU scenario with no mitigation measures (beyond those implicit in recently observed fuel use). World GDP is 33 percent and 77 percent higher in 2030 and 2040 respectively, compared with 2020. The expansion in bunker fuel use or CO2 emissions is far more gradual, however—14 percent by 2030 and 31 percent by 2040 (CO2 emissions are 1,172 and 1,343 million tonnes in 2030 and 2040 respectively), that is, CO2 to GDP falls by 14 percent and 26 percent by 2030 and 2040 respectively below the 2020 level. This reduction reflects both the assumption of below-unity income elasticities and improving energy efficiency. 42
BAU GDP, Energy Efficiency, and Fuel Trends, 2020=100
Citation: IMF Working Papers 2018, 203; 10.5089/9781484374559.001.A001
Source. See text.BAU GDP, Energy Efficiency, and Fuel Trends, 2020=100
Citation: IMF Working Papers 2018, 203; 10.5089/9781484374559.001.A001
Source. See text.BAU GDP, Energy Efficiency, and Fuel Trends, 2020=100
Citation: IMF Working Papers 2018, 203; 10.5089/9781484374559.001.A001
Source. See text.(ii) Carbon Taxes
The (pure) carbon tax, rising at $7.5 per tonne from 2021 onwards, reduces CO2 emissions by 14 percent below BAU levels in 2030 and 23 below BAU in 2040 (Figure 2a), which would roughly stabilize emissions at just over 1,000 million tonnes in these years—approximately the BAU level in 2020. The policy increases bunker fuel prices by about 40 percent above BAU levels in 2030 and 75 percent above BAU levels in 2040 and 96 percent of the CO2 reductions reflect reductions in the carbon intensity per tonne-mile (i.e., behavioral responses (1)-(3) from Section 2 combined), while 4 percent reflects reductions in tonne-miles (response (4)). Half of the CO2 reductions in 2030 comes from bulk shipping (whose emissions share is gradually declining over time the BAU) and half from container/other shipping. CO2 reductions from the revenue-neutral carbon tax are almost as large as under the pure carbon tax as this policy has the same effect on reducing carbon intensity per tonnemile but (to an approximation) does not affect tonne-miles.
Impacts of Carbon Taxes
Citation: IMF Working Papers 2018, 203; 10.5089/9781484374559.001.A001
Source. See text.Note. Welfare calculations abstract from linkages with the broader fiscal system (see Box 2).Impacts of Carbon Taxes
Citation: IMF Working Papers 2018, 203; 10.5089/9781484374559.001.A001
Source. See text.Note. Welfare calculations abstract from linkages with the broader fiscal system (see Box 2).Impacts of Carbon Taxes
Citation: IMF Working Papers 2018, 203; 10.5089/9781484374559.001.A001
Source. See text.Note. Welfare calculations abstract from linkages with the broader fiscal system (see Box 2).The two carbon taxes differ dramatically in revenue raised—the pure tax raising 0.07 percent of world GDP, or $76 billion in 2030, and 0.11 percent of GDP, or $155 billion, in 2040 (Figure 2b). By design (and given there are no pre-existing fuel taxes), the revenue-neutral carbon tax has no revenue implications. Intermediate cases, with some positive amount of revenues raised, could be obtained by adjusting the benchmark emissions accordingly.
Figure 2(c) indicates the economic welfare cost of the tax (as defined by the triangle in Box 2), which does not account for the benefits of reducing future global warming. Although the economic welfare costs of the two policies rise over time faster than the tax rate, welfare costs are still modest—roughly 0.006 percent of GDP, or $6.2 billion, in 2030 and 0.016 percent, or $23.4 billion, in 2040 for both carbon tax policies.
The sum of the revenue and welfare cost from Figures 2(b) and(c) indicate the overall burden or incidence of the carbon tax at the global average level, again underscoring the relatively small size of these impacts relative to global GDP—under the pure tax, a modest 0.075 percent of GDP in 2030, and under the revenue-neutral variant, a pretty tiny 0.005 percent of GDP.
(iii) Policy Comparisons
As indicated in Figure 3, the CIS—DES policy reduces CO2 emissions by about 5 and 8 percent below BAU levels in 2030 and 2040 respectively, that is, it has about a third of the effectiveness of that for the (pure) carbon tax, as it only promotes one of the four behavioral responses. Limiting the policy to bulk ships only (the CIS—DES/BULK policy) further reduces environmental effectiveness, by about half, so this policy only has about 15 percent of the effectiveness of the pure carbon tax. On the other hand, the carbon intensity standard promoting technical and operational improvements across new and existing ships (CIS— DES/OP) is twice as effective as the CIS—DES policy. The offset policies have about the same impact on reducing within-sector maritime emissions as the revenue-neutral carbon tax, given they are taken to establish the same emissions price (and hence reward for reducing within-industry emissions) but (to an approximation) do not pass through a first-order tax payment into tonne-mileage prices. The policies also reduce CO2 emissions outside of the maritime sector, thereby implying total emissions reductions that, in the high- and low-cost offset cases, are 28 and 85 percent higher than those under carbon taxation. Whether offset schemes could establish the level of prices assumed here is highly questionable however and, most likely, not all offsets would be fully additional.
CO2 Reductions Under Alternative Mitigation Instruments
Citation: IMF Working Papers 2018, 203; 10.5089/9781484374559.001.A001
Source. See text.CO2 Reductions Under Alternative Mitigation Instruments
Citation: IMF Working Papers 2018, 203; 10.5089/9781484374559.001.A001
Source. See text.CO2 Reductions Under Alternative Mitigation Instruments
Citation: IMF Working Papers 2018, 203; 10.5089/9781484374559.001.A001
Source. See text.C. Sensitivity Analysis for Carbon Taxes
Table 3 shows the sensitivity of BAU emissions and the emissions, revenue, and welfare impacts of carbon taxes in 2030, to alternative assumptions for GDP growth, income elasticities, autonomous rates of carbon intensity reduction, international crude oil prices, and elasticities affecting carbon intensity.
Sensitivity of (Pure) Carbon Tax Impacts to Alternative Parameters, 2030
Sensitivity of (Pure) Carbon Tax Impacts to Alternative Parameters, 2030
| Parameter | BAU | Carbon tax | ||||
|---|---|---|---|---|---|---|
| CO2 emissions, mn tonnes | CO2 emissions, mn tonnes | % CO2 reduction below BAU | revenue, $billion | welfare cost, $billion | ||
| Central case | 1,008 | 14.0 | 76 | 6.2 | ||
| Annual GDP growth rate beyond 2023 | ||||||
| 3.5 percent | 1,208 | 1,039 | 14.0 | 78 | 6.3 | |
| 2.3 percent | 1,141 | 981 | 14.0 | 74 | 6.0 | |
| Income elasticities | ||||||
| increased 33 percent | 1,277 | 1,099 | 14.0 | 82 | 6.7 | |
| decreased 33 percent | 1,075 | 924 | 14.0 | 69 | 5.6 | |
| Annual rate of auton. carbon intensity reduction | ||||||
| increased to 0.75 percent | 1,132 | 974 | 14.0 | 73 | 5.9 | |
| decreased to 0.25 percent | 1,212 | 1,042 | 14.0 | 78 | 6.4 | |
| 2030 crude oil price (exc. low sulfur costs) | ||||||
| $105 per barrel | 1,202 | 1,076 | 10.5 | 81 | 4.7 | |
| $35 per barrel | 1,093 | 863 | 21.0 | 65 | 8.6 | |
| Carbon intensity elasticities | ||||||
| increased 50 percent | 1,127 | 902 | 19.9 | 68 | 8.4 | |
| decreased 50 percent | 1,218 | 1,125 | 7.7 | 84 | 3.5 | |
Sensitivity of (Pure) Carbon Tax Impacts to Alternative Parameters, 2030
| Parameter | BAU | Carbon tax | ||||
|---|---|---|---|---|---|---|
| CO2 emissions, mn tonnes | CO2 emissions, mn tonnes | % CO2 reduction below BAU | revenue, $billion | welfare cost, $billion | ||
| Central case | 1,008 | 14.0 | 76 | 6.2 | ||
| Annual GDP growth rate beyond 2023 | ||||||
| 3.5 percent | 1,208 | 1,039 | 14.0 | 78 | 6.3 | |
| 2.3 percent | 1,141 | 981 | 14.0 | 74 | 6.0 | |
| Income elasticities | ||||||
| increased 33 percent | 1,277 | 1,099 | 14.0 | 82 | 6.7 | |
| decreased 33 percent | 1,075 | 924 | 14.0 | 69 | 5.6 | |
| Annual rate of auton. carbon intensity reduction | ||||||
| increased to 0.75 percent | 1,132 | 974 | 14.0 | 73 | 5.9 | |
| decreased to 0.25 percent | 1,212 | 1,042 | 14.0 | 78 | 6.4 | |
| 2030 crude oil price (exc. low sulfur costs) | ||||||
| $105 per barrel | 1,202 | 1,076 | 10.5 | 81 | 4.7 | |
| $35 per barrel | 1,093 | 863 | 21.0 | 65 | 8.6 | |
| Carbon intensity elasticities | ||||||
| increased 50 percent | 1,127 | 902 | 19.9 | 68 | 8.4 | |
| decreased 50 percent | 1,218 | 1,125 | 7.7 | 84 | 3.5 | |
BAU emissions are moderately sensitive to different parameter assumptions, for example, under different future oil prices—between $35 and $105 per barrel—BAU emissions are between 14 percent lower and 7 percent higher than when oil prices are $70 per barrel.
The percent reduction in emissions below BAU levels induced by the carbon tax is sensitive to two parameter variations. First, it is 25 percent smaller under the higher oil price and 50 percent greater under the lower oil price, as a given carbon tax has a smaller or larger proportionate effect on fuel prices when BAU oil prices are higher and lower respectively. Second, increasing and decreasing the carbon intensity elasticities by 50 percent increases and decreases the percent reduction in emissions by around 40-45 percent.
Revenues raised by the carbon tax are moderately sensitive to different parameter assumptions, varying between $68 and $84 billion across the different cases in Table 3. And, not surprisingly, welfare losses are most sensitive to the parameter variations that have most effect on the percent emissions reductions—for example, they vary between $3.5 and $8.4 billion under the different elasticity assumptions.
IV. Conclusion
Developing an environmentally effective, low-cost, mitigation strategy for the international maritime sector is important not only for its own sake, but also to enhance the prospects that policy will be sustained and strengthened over time. In this regard, a carbon tax deserves serious scrutiny as a key element of mitigation strategy as it:
Can cost effectively exploit the full range of behavioral responses to reduce emissions within the sector, given available technologies;
Can be designed to raise significant revenues (if there is agreement on productive use of these revenues), or limit revenues (if dispute over revenue use would otherwise hold up introduction of an environmentally effective tax); and
Is straightforward to implement from a technical perspective (given that capacity for reporting of fuel use and emissions by ship trip is being developed), through establishment of an IMO-supervised fund.
Several ingredients might potentially increase the likelihood of successful implementation of the carbon tax.43 Most important is to develop, in consultation with stakeholders, a comprehensive strategy with clear objectives (e.g., for future tax rates) and use of revenues. Another key ingredient is to address the sensitivities, particularly the concerns of small island developing states and LICs, which might require direct or indirect compensation mechanisms (though workable schemes should be practical). Phasing in the tax gradually over time would also give shipping companies time to adjust (e.g., by altering their fleet mix) thereby helping to minimize disruptions. By itself the tax will not be sufficient however, as alternative fuel technologies will ultimately be needed to meet the deep emissions reductions envisioned for the maritime sector by mid-century.
