The pros and cons of pulling the shipping industry into the EU’s emissions trading scheme

Andrew Warren, former special advisor to the House of Commons environment select committee, explores the EU Commission’s ambition to include European shipping in its emissions trading scheme in an article first published on the Business Green website.

 

Tax or trade: Is the EU’s emissions trading scheme the best way to tackle CO2 from shipping?

Launched in 2005, the European Union’s Emissions Trading Scheme (ETS) has become one of the world’s most influential carbon saving schemes. And now, as part of its ‘Fit for 55’ programme, the European Commission intends to expand its reach considerably into several new sectors.

One of these is the maritime industry. Already estimated to be responsible for around 2.5 per cent of global greenhouse gas emissions, under a ‘business-as-usual’ trajectory its emissions have been forecast to grow by between another 50 and 250 per cent over the next 40 years. Right now, it is already responsible for 13 per cent of European transport-related emissions.

Initially, participation in the EU’s ETS was restricted to larger sites occupied and operated by energy intensive companies and electricity companies. A decade later it was expanded to cover aviation for travel within the EU, covering both passengers and freight. And last July the Commission set out plans to expand the reach of the ETS to cover three other major carbon emitting sectors: surface transport, buildings, and maritime.

There are substantial differences in the way in which each of these ‘new’ sectors currently operate, and indeed their inclusion in many other greenhouse gas abatement programmes.

As well as a plethora of pertinent directives and spending programmes run on a Europe-wide basis, every single one of the 31 participating countries has national, regional and local government programmes designed – frequently amongst other objectives – to cut back on emissions from cars, vans, lorries, and public transport, as well as 430 million homes, commercial properties, and public sector buildings. Bringing these sectors into the EU’s ETS should essentially just be the ‘icing on the cake’ regarding policy effectiveness .

In contrast, along with most of the aviation sector, shipping’s international scope has effectively led to its exclusion from any substantive commitments under the 2015 Paris Agreement and the national climate plans – or Nationally-Determined Contributions (NDCs), in UN jargon – that emerged from it.

Acknowledging this, and only after overcoming years of internal obfuscation, the global shipping sector’s governing body, the International Maritime Organisation (IMO), has been creating a consensus amongst its members designed to reverse the size of its carbon footprint. It has even set a formal goal to cut current emissions by half by 2050.

Free allowances and auctions

The EU Commission intends to include within the scope of its ETS maritime emissions from intra-EU voyages, half of the emissions from extra-EU voyages, and emissions occurring at berth in an EU port. Under the present timetable and after detailed approval by both the European Parliament and national governments, inclusion should start in 2023 with auctions for 20 per cent of CO2 emissions, and gradually increase to 100 per cent of CO2 emissions in 2026.

Just as smaller industrial sites are currently outwith the system, so the de minimis arrangements proposed excludes any shipping with loaded or unloaded tonnage below 5,000 gross. Excluded are warships, icebreakers, salvage and safety vessels. So far, so relatively similar to existing ETS arrangements.

But whereas companies are expected to detail emissions per site, there remain questions as to whether individual ships can really be “individual accounting mechanisms”. Or whether the administrative onus should fall upon fuel suppliers – which may frequently be sited outside Europe. This latter route is currently the one favoured both for the surface transport and the buildings sector, where actual opportunities to buy fuel beyond the EU’s boundaries will remain scarce. In a related initiative, the EU Commission is also proposing a new Carbon Border Adjustment Mechanism to ensure no European-based participant is seriously undercut from importers.

Swift turnover times

Like the maritime sector, surface transport has relatively short average lifetimes. Even across 40 years, average redundancy turnover in vehicles would be approaching two, even three, times in both sectors. In contrast, in the construction sector the considerable majority of the buildings currently in use are likely to still be functioning in 2050. Thus requiring a concentration upon the far more complex job of retrofitting rather than building anew that is possible for all other participating sectors. Relying upon buildings’ fuel suppliers to oversee participation in the EU’s ETS is likely to end up simply in crude price rises being imposed upon building occupiers, rather than the more sophisticated market interventions created by more established energy efficiency policies.

But there are a number of key factors where the maritime sector really is different from all the other participants in the EU ETS. Shipping does seem to have some higher abatement costs. That is pertinent as to whether it is a closed sector, or like European aviation, has an overall cap that is calculated separately, but allows for trading of allowances with other sectors. Much of the auction money could be returned to shipping, to help fund investments in more carbon-friendly measures.

It also has absolute tonnage amounts that vary far more year on year than happens in the industrial or electricity sectors, even in non-pandemic times. Given the enormous, and mostly upward, fluctuations in trading prices for carbon during 2021, voices within the shipping industry have been calling for some kind of price stabilisation mechanism.

Tax or trade?

This cri de coeur can understandably be heard right now from many participants. But stabilised prices are precisely what carbon taxes offer. It is worth recalling that it was very much the fervent opposition from anti-tax, free market-oriented European industry – led by BusinessEurope – that destroyed the Commission’s original plan for a $10 per barrel energy tax, and pushed successfully for the creation of an emissions trading market instead.

Today’s price for carbon is €69 per tonne. A year ago, it was half that. This month a new report concludes that an average carbon price of $191/tonne would be needed to reduce shipping emissions fully by 2050. This should be compared with $173/tonne in a scenario when a 50 per cent emissions reduction (the current IMO goal) is envisaged. The report is by shipping consultancy UMAS for the cross-stakeholder Getting to Zero Coalition. In both cases, the model proposed starts at just $11/tonne in 2025, increasing to around $100/tonne early next decade.

Those in the maritime sector who agitate against involvement in the EU ETS must look at the bigger picture. There is sizeable support for a compulsory greenhouse gas levy on international shipping, proposed by a coalition of countries that are highly vulnerable to the effects of global heating.

In the interim, they may have to comfort themselves that, as of now, UK Prime Minister Boris Johnson’s mini-emissions trading scheme – the UK ETS – is only six months old and has yet to formally consider expanding its categories of membership. It is, I am sure, entirely coincidental that the International Maritime Organisation’s headquarters have historically been in London.

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