Shipping tax could yield $100 bln climate windfall

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The shipping industry emits 2.9% of the world’s greenhouse gases. It has also largely escaped taxation because what happens on the high seas is not in the jurisdiction of any single government.

These two facts represent an opportunity. If the International Maritime Organisation (IMO) – the United Nations body which regulates shipping – taxed carbon emissions, it would encourage shippers to go green faster. The body could then channel the money raised, perhaps $100 billion a year, to poorer countries to help them cope with climate change.

The shipping industry’s tax-free status is already facing challenges. The European Union has agreed that from next year all ships will have to buy permits for their emissions within the EU, and half of what they spew out while travelling between the bloc and other countries.

The time is ripe to push for a global levy. This will be one of the ideas on the agenda at French President Emmanuel Macron’s summit on a “new global financial pact” in Paris later this month. The IMO, which has the power to impose a tax, will then meet in early July. Although it’s unlikely to agree to a levy, it could set a timetable to introduce one.

POLLUTER PAYS

The shipping industry uses fossil fuels to power its boats. Although there are alternatives, mostly based on green hydrogen, these are two to three times the price of hydrocarbon-based fuels, so many shipowners don’t see the point in using them.

That said, industry leaders such as container giant Maersk (MAERSKb.CO) are moving into green shipping. The Danish company’s first vessel capable of running on clean fuels will arrive next month. Part of Maersk’s motivation is that many customers, particularly in the fast-moving consumer goods sector, want to cut emissions in their supply chains and are prepared to pay a premium for greener transport.

A tax on the industry’s fossil fuels would bring the cost of clean and dirty combustibles into line, accelerating the energy transition. Though this would push up the cost of traded goods around the world, Maersk estimates it would only add a few cents to the price of a pair of sneakers.

It’s true that countries which send their products long distances would be at a disadvantage to those which are closer to their customers, says Tristan Smith, a shipping and energy expert at University College London. But the proceeds from the tax could be used to manage this issue.

$100 BILLION ANNUAL POT

Shipping emits about 1 billion tonnes in greenhouse gases (GHGs) each year. So a levy of $100 a tonne, which would make dirty fuels roughly as expensive as cleaner ones, would raise $100 billion a year – although the sum would eventually fall if the tax was successful in getting shippers to switch away from hydrocarbons.

This potentially large sum is attracting the attention of people outside the shipping industry, especially those focused on climate change. Rich countries have made various promises to help poor nations meet the costs of transitioning to a zero-carbon economy, but have so far struggled to find enough money to do the job.

An annual pot of up to $100 billion from shipping is one of the few practical large new sources of funding. That’s why it’s on the agenda for Macron’s summit. Although this meeting will not have the power to impose a tax, it could build momentum for one.

A group of Pacific nations led by the Marshall Islands is proposing that the majority of the funds from a shipping tax should go to countries especially vulnerable to climate change. They could invest the cash in areas such as rolling out green energy and building flood defences.

The Marshall Islands wants another chunk of money to go to developing countries to help them build green shipping industries so they can keep up with rich countries which would otherwise decarbonise their fleets faster. The cash could help poorer countries invest in innovations such as clean-fuel ships and green hydrogen. The IMO could channel the proceeds of a tax through existing institutions, such as the UN’s Green Climate Fund and the World Bank.

Not everybody agrees. For example, the International Chamber of Shipping, a trade body, is proposing the bulk of the money raised from a levy should go back to shippers to subsidise their green transition. Given the industry’s success in evading taxes for decades, it may yet find a way to hang onto a big chunk of the money from a levy. But it would be better if revenue went to those who suffer from pollution than those who are responsible for it.

NO TIME TO WASTE

The IMO’s environment committee is expected to introduce a more ambitious strategy for curbing GHG emissions in July, according to a spokesperson. This is likely to set tougher targets and a rule to cut the GHG intensity of the fuel ships use. There will also be a discussion on economic incentives to curb emissions.

The Marshall Islands and its allies want the IMO to agree to a levy that will take effect from 2025. UCL’s Smith, a close observer of IMO negotiations, says this is unlikely because there’s not yet sufficient consensus. However, he believes the environment committee might set a later timetable for introducing a tax. Other observers think it could settle on the EU’s proposal for a start date of 2027.

The IMO normally moves slowly, because it likes agreement among the governments which are its members. But it doesn’t have to. It can take decisions on the basis of a majority vote. It can also enforce its will. If a country refused to apply an agreed tax, the international shipping industry would effectively be unable to operate from its ports.

The IMO has shown that it can move fast when there’s an emergency. For example, it mandated improvements in maritime security barely a year after Al Qaeda flew planes into New York’s World Trade Center in 2001, because of fears that the group could use ships to mount similar attacks.

Climate change is also an emergency. The sooner the IMO gets cracking, the better.

Source: Reuters

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