Shipping’s decarbonization and developing countries should be the beneficiaries of carbon costs imposed on bunker fuel, according to political and diplomatic transport experts.

The International Maritime Organization has proposals before it to impose a flat rate levy on carbon in marine fuel but some feel a carbon market similar to the EU’s Emissions Trading Scheme, but with greater transparency, would be better.

One of the two, or possibly both, seem likely to happen on an international level but how the proceeds are treated will be important, Chris Grayling, a British MP and former minister for transport, said earlier in the week during a discussion hosted by the IMO in Glasgow on the fringes of the UN Climate Change Conference. “The political pressures are going to grow and grow and grow,” he said.

Revenue from what are collectively being termed market-based measures should go into research and development for new technologies to decarbonize shipping, he said. “One thing they must not do is go into general taxation because otherwise it will not deliver the benefits that are necessary,” he said.

On a regional level, the European Commission has proposed that shipping be included in the EU ETS but one criticism of the European scheme is that the revenue collected would not go into research and development for the sector but into a general tax pot.

Whichever form of carbon pricing is chosen, the costs should not be too high or shipping companies will simply redirect their research budgets into market-based measures, Grayling said.

Revenues garnered from international carbon pricing imposed by the IMO should go to researching new technologies to decarbonize the sector and to supporting developing nations, Fernanda Mallicay, alternate permanent representative of Argentina to the IMO, said.

This was echoed by Yap Ong Heng, senior adviser to the ministry of transport for Singapore. Earmarking funds for helping developing nations in the decarbonization process “would ensure that we can all move on this decarbonization journey on an inclusive approach, where no countries are left behind,” Yap said.

Levy or carbon market?
Opinion within the shipping industry is divided over whether a levy involving a flat rate or a traded price that rises and falls in line with market variations, such as EU ETS, is the best financial instrument to use in cutting emissions from the sector.

A proposal to the IMO by the Marshall Islands and Solomon Islands to introduce a levy of $100/mt of CO2 equivalent on oil used as a bunkering fuel has not yet been adopted, but the proposal’s supporters hope it may make progress at the IMO’s MEPC77 later in November.

IMO secretary-general Kitack Lim has hinted that this is to some extent justified.

Member states have initiated discussions on proposals to set a maximum carbon-content for marine fuels and carbon pricing mechanisms, to progress shipping’s course to decarbonization, he said. “In just two weeks, at MEPC 77, we will have the opportunity to make significant progress on these proposals,” he said.

One metric tonne of fuel oil means approximately 3.1 mt of CO2 equivalent is emitted, according to classification society DNV, meaning a $100/mtCO2e levy would add $300/mt onto bunker fuel bills when fuel oil is burnt.

Carbon allowance prices under the EU ETS have surged in 2021, as EU lawmakers worked on legislation to tighten the market to help deliver the bloc’s stronger emissions reduction goals for 2030. EU Allowance futures contracts for December 2021 delivery on the ICE Endex exchange closed at Eur63.16/mt CO2e Nov. 10, having reached an all-time high of Eur65.77/mt Sept. 28. That compares with an average price of just under Eur25/mt in 2020.

S&P Global Platts assessed CORSIA-eligible carbon offset credit at $8.35/mtCO2e Nov. 10.

A levy would be simpler to implement than a traded carbon price, Yap said. “I know when you talk about levies and taxes some countries have concerns over it because taxes are under national jurisdictions. But if we don’t call it a tax or we don’t call it a levy, let’s call it a contribution, would that actually address the concern?”

Source: Platts