Time for a carbon levy on shipping fuel

In 2018, the International Maritime Organisation (IMO) received widespread support when it announced a landmark strategy to reduce shipping emissions.

It outlined a plan to reduce carbon emissions intensity by at least 40 per cent compared with 2008 levels by 2030, and by at least 70 per cent by 2050, as well as reducing total emissions by 50 per cent by 2050, thereby ensuring that the international shipping industry plays its part in helping to achieve the objectives of the Paris Agreement.

Reducing shipping emissions is a vital component of the fight against global climate change, yet greenhouse gas emissions from the maritime sector are increasing. According to an IMO study published last month, emissions are projected to increase by as much as 130 per cent by 2050 compared with 2008 levels if mitigation measures are not urgently put in place. This is an important issue for the global commodities trade, which is a major user of the shipping fleet.

It is time to consider radical measures to close the competitiveness gap between carbon-intensive fuels and low or zero-carbon alternatives.

The IMO has immense influence, for instance new rules brought in by the IMO since the beginning of the year have forced the use of shipping fuels with stricter sulphur standards, and further ship efficiency improvements are in the pipeline. We propose the IMO now use its influence to incentivise greater use of low- or zero-carbon maritime fuels. The ships in use, the fuels that power them and the related infrastructure all need to change.

Trafigura believes the best way of promoting such change is through the adoption of a market-based measure that would charge a levy on carbon-intensive shipping fuels and subsidise low- and zero-carbon fuels.

To this end, we have just submitted a proposal to the IMO for a partial “feebate” system to decarbonise global shipping. We propose a self-financing system where a levy is charged on the use of fuels with a CO2-equivalent intensity above an agreed benchmark level, and a subsidy is provided for fuels with a CO2-equivalent profile below that level.

It is now time to put a price on carbon emissions in the shipping industry. Our own in-depth analysis and commissioned independent research indicates that the levy should be between $250-$300 per tonne of CO2-equivalent. While primarily bridging the cost gap between carbon intensive and low or zero carbon fuels, this partial “feebate” would also raise billions of dollars for research into alternative fuels and could help assist small island developing states and other developing countries mitigate the impact of climate change.

The idea of taxing carbon in shipping is not new. Indeed, the European Commission has just put forward a proposal to include shipping in its emission trading system as part of updated climate goals.

But our approach builds on a number of proposals from the shipping industry including that the IMO establish a research and development programme financed by a global tax of $2 per metric tonne of bunker fuel.

Our proposal is different in that it would create a genuine market-based measure — a partial “feebate” system — to reduce emissions, together with funding for R&D and for climate change-affected small island developing states. The carbon levy would need to be adjusted as economies of scale are found in the production of lower-carbon fuels and the cost competitiveness gap narrows.

The initial levy of between $250-$300 per tonne of CO2 equivalent may sound high, but we believe it is necessary. As one of the world’s largest charterers of vessels, responsible for more than 4,000 voyages each year, we recognise that a carbon levy will have an immediate effect on shipping costs which companies — including ours — would bear. This increase in operational costs will spur charterers to change behaviour to reduce emissions, charter more efficient ships and switch to lower carbon fuels.

Great efforts have been made in recent years through the Global Maritime Forum, the Getting to Zero Coalition and through other initiatives to create awareness, develop solutions and catalyse a modern maritime sector to take responsibility for its climate impact.

It is now time to put a price on carbon emissions in the shipping industry in the form of a global, mandatory industry levy.

This article was originally published in The Financial Times.