An average carbon price of just under $200 is required for shipping’s full decarbonisation, but the carbon price could be lowered if revenues are recycled within the sector

A new report by UMAS for the Getting to Zero Coalition, a partnership between the Global Maritime Forum the Friends of Ocean Action, and the World Economic Forum analyses policy measures for closing the competitiveness gap between fossil fuels and zero-emission alternatives in shipping and how they could enable an equitable transition.

The Initial IMO GHG Strategy places emphasis on fairness and equity considerations, which means that the viability of any IMO climate policy instrument depends to a large extent on how these considerations are taken into account and operationalised. On this subject, Isabelle Rojon, Principal Consultant at UMAS said “Decarbonisation policy for shipping needs to be as much about equity and fairness as it is about climate change mitigation. Vast inequalities exist globally, many of which are worsening in the face of climate change. With careful policy design and use of carbon pricing revenues, we can ensure that maritime climate policies do not exacerbate these inequalities. Furthermore, embedding equity into policy measures will help secure the multilateral agreement that is urgently needed.”

The report explains which policy options could help close the competitiveness gap and enable an equitable transition and considers the policy options such as economic instruments, direct regulatory approaches, information programmes, voluntary action and national/regional measures. Economic instruments, or market-based measures (MBMs), are widely used by regulators to internalise the costs of pollution caused by economic activities, address market inefficiencies and decrease price differences between fossil fuels and alternatives.

The report suggests a potential route forward as a policy package:

  1. Adopt a global MBM capable of generating significant revenue. This mechanism needs to create a carbon price that incentivises emissions reductions and investments into readily available GHG mitigation options in the near term, and fuel switching once alternative zero-emission fuels are widely available.
  2. Combine an MBM with an effective and fair use of revenue recycling and other revenue use options to drive both demand and supply of zero-emission fuels whilst also supporting an equitable transition and addressing disproportionately negative impacts on States.
  3. Use a direct command-and-control measure such as a fuel mandate in the long term to send an unequivocable signal to the market that a fuel transition will take place.
  4. Develop national and regional policy that can ensure the transition of domestic fleets at least at the same rate or sooner than international fleets and that work in synergy with global IMO-driven policy.
  5. Promote voluntary initiatives and information programmes to stimulate supply-side investments in RD&D and infrastructure, encourage knowledge sharing and support capacity development.

On the need for action at IMO and the need for a policy package, Dr Aly Shaw, Principal Consultant at UMAS, commented “This year will be critical for decisions on climate policy in the IMO. Our report shows that there is no single perfect policy and that a successful transition will likely hinge on developing and deploying a mix of policies which can address different aspects of the transition. The imposition of market-based measures on the shipping industry is relatively uncharted, so the sooner policy-makers can surmount this challenge together, the better for the transition, the industry, and the environment.

The report shows there isn’t a significant difference between the carbon prices required to achieve IMO’s lowest ambition levels of the Initial IMO GHG Strategy – i.e., reduce ships’ GHG emissions by at least 50% by 2050 compared to 2008 (-50% scenario) relative to full decarbonisation by 2050. To achieve the lowest ambition level the carbon price level averages US$173/tonne CO2 whereas for a 2050 target of full decarbonisation the average carbon price would only need to be slightly higher: around US$191/tonne CO2.

In both scenarios, the price level begins at US$11/tonne CO2 when introduced in 2025 and is ramped up to around US$100/tonne CO2 in the early 2030s at which point emissions start to decline. The carbon price then further increases to US$264 /tonne CO2 in the -50% scenario, and to US$360 /tonne CO2 in the -100% scenario.

A key advantage of market-based measures is the potential to generate significant revenues which could be used in different ways to help close the competitiveness gap and/or enable an equitable transition. Revenues can be used to address disproportionately negative impacts on States of GHG reduction measures, support capacity development, technology transfer, funding climate projects in developing countries, SIDS and LDCs.

Carbon prices could be lowered by ‘recycling’ revenues generated by the MBM to further support decarbonisation of shipping, for example by subsidising the deployment of zero-emission fuels and technologies. If all MBM revenue was recycled to support shipping decarbonisation, in theory, this could lower the carbon price level by up to half (but this would mean no revenue use for enabling an equitable transition and addressing disproportionately negative impacts on States). Depending on the level of revenue recycling, an MBM with global scope in the -100% scenario could be designed to have a carbon price level averaging between US$96-191/tonne CO2 and reaching a maximum of between US$179-358/tonne CO2. In reality, the carbon price would likely be somewhere in this range, so that more revenue can be used to enable an equitable transition. The carbon price trajectories and their associated emissions trajectories are shown in the figure below.

The report also discusses the role of direct regulatory approaches, often called command-and-control measures, which includes product, technology and performance standards. These could also be employed to close the competitiveness gap as they have in other sectors but a potential shortcoming of standards is they do not generate revenues, meaning that in isolation they cannot enable an equitable transition and address disproportionately negative impacts on States. Similarly, information and disclosure programmes, on their own, are unlikely to have a significant role in closing the competitiveness gap and voluntary initiatives are most successful when tied to future regulations.

Dr Nishatabbas Rehmatulla, Principal Consultant at UMAS said, “The study shows that any one policy in isolation is not sufficient to overcome known market failures and a package of policies and private action is required for the transition to zero emission shipping”.”

Finally, the report shows that action at the international level, whilst ideal and necessary, shouldn’t stop immediate action at national and regional level. Around 30% of GHG emissions from shipping stems from domestic shipping and therefore, national, and regional policy measures have the potential to contribute significantly to the reduction of ship emissions. Engagement at a national and regional level could help create enabling environments for first movers, stimulate innovation and shield it from open market pressures initially before scaling it up over time.

Dr Domagoj Baresic, Principal Consultant at UMAS said, “The study shows that the right policy mix can go a long way in facilitating the transition to zero carbon shipping. Revenues collected from carbon pricing could be used to create ‘protective spaces’, that is market and innovation niches for zero carbon marine fuels, supported via a range of possible subsidy measures. Under these conditions these new technologies could be fostered to grow, develop and be deployed until they become more widely competitive under free market conditions.”

The full report can be download here