The Paris agreement of December 2015 marked a meaningful step towards unity and international cooperation on addressing climate change. More so than before, the focus fell on fiscal, financial and macroeconomic policies and the role they play in advancing mitigation.

Sobering up to the central issue behind the problem – that no single firm or household has a significant effect on climate, yet collectively there is a huge effect – discussions often gravitated around the subject of externality, a situation where polluters are not charged for the environmental consequences of their emissions.

In its After Paris report, the International Monetary Fund (IMF) called for a more definitive approach to the problem, stating: “For reducing carbon emissions, carbon pricing (through taxes or trading systems designed to behave like taxes) should be front and center.”

Internationally, about 40 national governments and more than 20 sub-national governments have implemented, or are implementing, some form of carbon pricing as of mid-2015, according to IMF’s World Bank Report. Only 15 governments currently have explicit carbon taxes.

The combined value of carbon pricing instruments was estimated at just under $50bn globally in 2015. Of this, 70%, or about $34bn, is attributed to emissions trading schemes (ETSs) and about 30% comes from carbon taxes. However, that huge sum can be deceptive. Only 12% of the annual global greenhouse gas (GHG) emissions, amounting to 7GT of CO2e, are covered by carbon pricing, and specifically 4% of this is attributable to carbon taxes.

Through its combustion of fossil fuels, the shipping sector is a big emitter of GHG, in which the most harmful component is CO2. In 2012, international shipping accounted for 2.4% of GHG, a figure projected to rise up to as much as 20% by 2050 if left unchecked.

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By GlobalData

Going forward, financial efforts dedicated to mitigation, sustainability and alternative energy sources must increase dramatically if a change is to be seen. Over the next 35 years, approximately $40 trillion of additional investment will be needed to transition to a low-carbon energy system, the IMF warns.

By implementing blanket regulation on carbon taxation, the shipping sector could contribute significantly. A global $30 per ton CO2 charge on fuels from aviation and shipping combined could have raised about $25bn for climate finance in 2014, even after compensation for developing countries is factored in.

The International Chamber of Shipping (ICS), however, does not support a carbon tax to raise revenue for climate change mitigation, a position they made clear in 2015, when they dismissed a $25 per ton CO2 charge proposed by The Organisation for Economic Co-operation and Development (OECD). Instead, ICS would accept a “simple fuel levy”, if the International Maritime Organisation deemed it necessary.

The case for carbon taxes

Over time, the implementation of different fiscal or regulatory mechanisms has led to today’s world of fragmented carbon pricing instruments, with little co-ordination between states or sectors. Between 1990 and 2005, carbon taxes rose to prominence, with early adopters starting to apply the new method. Since 2012, the number of carbon pricing instruments has expanded by 90%, but taxation has lagged behind in popularity.

“Charges on international aviation and maritime emissions are promising,” the IMF says in its report, mainly because “national governments have a weaker claim on these tax bases than they do for domestic fuels, making them appealing as a possible source of climate finance”.
As an international sector, the maritime industry does not fall within the jurisdiction of any state regulations, which can be both a blessing and a curse, considering its footprint is that equivalent to the world’s sixth largest economy.

“For reducing carbon emissions, carbon pricing should be front and center.”

The report identifies two key advantages of applying universal fiscal policies over regulatory approaches. Firstly, they are deemed to be “environmentally effective”, since a price on carbon would increase prices for fossil fuels, thus encouraging a quicker transition to renewable and nuclear power.

Secondly, they could raise significant revenues which could be used towards helping developing countries adopt the mitigation mechanisms they cannot currently afford. The developing economies of sub-Saharan Africa, South East Asia, the Middle East and North Africa are expected to be the most vulnerable to climate change, partly due to their existing warm climate, but also their limited ability to adapt.

“These are potentially the most effective mitigation instruments, are straightforward to administer, raise revenues for lowering debt or other taxes, and establish the price signals that are central for redirecting technological change towards low-emission investments,” the report reads.

While it argues that ETSs can be “as efficient as carbon taxes”, the IMF highlights that so far, ETSs have lacked full coverage and omitted small-scale polluters and require accompanying price stability provisions.

Shipping industry shoots back in opposition

Shortly after the report’s publication, the ICS rejected the idea of imposing a tax on carbon, also referred to as a bunker fuel levy in the shipping sector.

“[The] ICS questions why international shipping should accept a carbon price of $30 per tonne of CO2, as proposed by the IMF,” said ICS director of policy and external relations Simon Bennett. “This would be almost three times higher than the carbon price paid by shore-based industries in developed nations.”

Bennet further argued that the maritime sector shouldn’t be treated like a developed economy since “the majority of the world’s merchant fleet are registered in developing countries and maritime trade mostly benefits those economies.”

It is not the first time the ICS has stood up against carbon tax. In October 2015, the ICS rejected a call from OECD think tank the International Transport Forum to impose a $25 levy on carbon.
Instead, Bennet made it clear the ICS would be inclined to accept a different kind of fuel levy, which would “limit administrative burdens for the shipping sector”.

“The majority of the world’s merchant fleet are registered in developing countries and maritime trade mostly benefits those economies.”

Making the distinction clear, he said: “There is a difference between a simple fuel levy administered by the IMO, and a carbon tax whereby money collected would disappear into government coffers. It would probably have to be collected directly by the IMO using fuel consumption data provided by the ship’s flag state under the soon to be adopted IMO CO2 data collection system.”

Joining in on the debate, the Global Shippers Forum (GSF) came out with its own set of “fundamental objections” to the proposed bunker levy.

“[The] GSF is sceptical that the levy would incentivize the adoption of either technical or operational measures to reduce fuel consumption,” a GSF release read.

It quotes a 2009 study by the University of Southern Denmark which linked taxes on bunker fuel to rising freight rates, stating: “Rate increases of this magnitude are likely to create significant market distortions and have negative impacts on the global maritime trade.”

Furthermore, it argued that it was “unfair” to subject shippers to even more taxes and cautioned that funds raised by a global bunker levy may not be used to reduce CO2 emissions from the maritime sector.

“Finally, we remain opposed to a global bunker fuel levy approach which risks passing through costs to shippers and distorting trade without reducing maritime CO2 emissions,” the organisation concluded.

Getting it right: challenges and implementation

The IMF recognises there are some challenges in implementing a functioning carbon tax. The main difficulty lies in gauging an appropriate price.

However, not all countries should be expected to implement the same fixed price on carbon, with developing economies taxing smaller sums. Furthermore, prices per ton of CO2 could be adjusted to achieve the mitigation goals set in each country’s intended nationally determined contributions submitted before the Paris meeting.

Another common worry, particularly widespread among the opposition, is that such a tax would inevitable raise consumer prices for energy, putting vulnerable, low-income households at risk.

The IMF suggests that these impacts could be less regressive than commonly believed, adding: “Compensating low-income households may require only a fraction of carbon pricing revenues and should be practical for advanced economies through adjustments to existing tax and benefit systems.”

“Without mitigation, emissions are projected to approximately triple from current levels by 2100. “

According to its calculations, a $30 a metric ton charge on carbon dioxide would increase the price of a barrel of oil by roughly $10. At present, 85% of emissions covered are priced at less than $10 per ton of CO2e.

Regarding implementation, the IMF suggests applying the charge on domestic fuel supply either at the extraction stage, such as mine mouth or wellhead, or after processing, at coal washing plants, the refinery gate, or fuel distributors.

Alternatively, carbon charges could be imposed downstream, on emissions from power plants and other large industrial sources, although this approach would omit mall-scale emission sources, such as homes and vehicles.

There is no doubt that a consensus must be reached fairly soon. Without mitigation, emissions are projected to approximately triple from current levels by 2100.

Currently economic models quoted by the World Bank and Ecofys estimate that various carbon pricing mechanisms, together with future “innovative hybrid instruments” could raise between $100 and $400bn annually by 2030, possibly increasing to over $2 trillion by 2050.