On September 6, 2021, the International Chamber of Shipping (ICS) announced that it had proposed a global carbon levy on carbon emissions from ships for consideration by the International Maritime Organization (IMO) to “accelerate the uptake and deployment of zero-carbon fuels.” The International Association of Dry Cargo Shipowners (INTERCARGO) co-sponsored the proposal.
ICS, which represents national shipowner associations and over 80% of the world merchant fleet, explained in its announcement that the carbon levy “would be based on mandatory contributions by ships trading globally, exceeding 5,000 gross tonnage, for each tonne of CO2 emitted.” Funds generated by the levy “would go into an ‘IMO Climate Fund’ which, as well as closing the price gap between zero-carbon and conventional fuels, would be used to deploy the bunkering infrastructure required in ports throughout the world to supply fuels such as hydrogen and ammonia, ensuring consistency in the industry’s green transition for both developed and developing economies.”
In this article, we review the developments leading up to this proposal and its prospects, and consider the implications for the shipping industry and supply chains more generally if a global maritime carbon levy were to be adopted by the IMO.
Background to the September 2021 ICS-INTERCARGO Proposal
The IMO is the United Nations agency responsible for setting global standards for the safety, security and environmental performance of international shipping, including air pollution from ships. Members of the IMO include States as well as non-governmental international organizations that have been granted consultative status (80 total), including major industry associations such ICS, INTERCARGO, the Cruise Lines International Association, and the International Bunker Industry Association. The IMO’s Maritime Environment Protection Committee (MPEC) is the subsidiary body responsible for addressing environmental issues. It is supported by working groups, including the Working Group on Reduction of GHG Emissions from Ships, the working group that received the ICS-INTERCARGO proposal.
For almost two decades, the IMO through the MEPC has explored the issue of GHG emissions in the shipping sector, which today accounts for more than 2% of global emissions. The IMO has sought to reduce emissions by setting targets and issuing various mandatory requirements. Mandatory carbon levies have been proposed, but never adopted.
In December 2003, the IMO adopted a resolution setting out policies and practices related to the reduction of GHG emissions from ships. Among other items, IMO directed the MEPC to prioritize its consideration of market-based measures (MBMs), such as carbon levies and emissions trading systems. Various proposals were submitted and an expert group was formed to evaluate their feasibility, including their impact on international trade, but further debate was postponed and then ultimately abandoned in 2013 by agreement of the MEPC at its 65th session.
The IMO’s focus since has been on technical regulations rather than carbon pricing. In July 2011, the IMO adopted a package of mandatory technical and operational requirements that apply to new ships of 400 gross tons and above, known as the Energy Efficiency Design Index (EEDI). The EEDI sets minimum energy efficiency levels for different ship types and sizes that grow more stringent over time. Under EEDI Phase 3, new ships must be 30% more energy efficient as compared to the base line. EEDI Phase 3 was initially proposed for 1 January 2025 and onwards but was subsequently brought forward to 2022 for several ship types. The reduction rate was also raised to 50% for container ships of 200,000 dead-weight tonnage and above. The IMO also adopted the Ship Energy Efficiency Management Plan (SEEMP), which requires ship operators to have in place a plan to improve energy efficiency through a variety of ship specific measures. These measures were followed in 2016 by mandatory fuel consumption monitoring and reporting requirements.
The groundwork for renewed discussion of MBMs was laid in 2018, when the IMO adopted is Initial Strategy on reducing GHG emissions from ships, along with a follow-up program to develop short-term and mid-term measures. The Initial Strategy, which is due to be revised in 2023, sets a target of cutting emissions by 50% by 2050 from 2008 levels, while taking measures to phase out GHG emissions entirely. Importantly, MBMs are categorized as mid-term measures in the Initial Strategy. Members may submit proposals on candidate short-term and mid-term measures to be finalized and agreed by the MEPC between 2023 and 2030. As the goal of net-zero by 2050 has become widely adopted by States, pressure has grown on the IMO to ensure its targets align with the Paris Agreement (which does not cover the shipping sector) and to seriously consider all tools at its disposal, including MBMs.
In the lead up to the MEPC’s June 2021 meeting, several MBM-related proposals were introduced. In March 2021, the Marshall Islands, a powerful influence at the IMO due to its large shipping registry, and the Solomon Islands, proposed a universal mandatory levy on all GHG emissions from international shipping. (MEPC 76/7/12).
In their proposal, the sponsors explained that the price necessary “to address the price differential between business-as-usual (BAU) emission-based technology options, including fuels, and decarbonized alternatives is unknown, but that “current evidence implies this likely requires a price on all GHG emissions in the range of $250-300 tonne carbon dioxide equivalent on heavy fuel oil by 2030.” Based on this evidence, they proposed a $100 per tonne levy commencing in 2025 with upward ratchets on a 5-yearly review cycle. The revenue generated would be divided into a fund to support climate change mitigation and adaptation efforts in vulnerable countries, administered under the mandate of the UN Framework Convention on Climate Change (UNFCCC), possibly through the Green Climate Fund, and a fund to subsidize R&D of new technologies and fuels administered by the IMO. The sponsors have since followed up with proposed draft amendments to MARPOL Annex VI that would implement their proposal for consideration by the MEPC at its 77th session, scheduled from November 22-26, 2021.
In April 2021, ICS submitted a proposal alongside seven other members, including INTERCARGO, urging the MEPC to expedite its consideration of MBMs and commence discussions “as soon as possible and before 2023, with a view to taking some decisions.” The sponsors explained that recent steps by the MEPC “will not be enough to deliver the level of ambition for 2050 set out in the Initial Strategy” and urged the MEPC to consider the development of MBMs alongside short-term funding measures for R&D into zero-carbon technologies. (MPEC 76/7/39).
Despite this renewed attention, MBMs were not the focus of the MEPC’s June meeting. The MEPC did announce amendments to its existing regulations, which will enter into force in November 2022: a technical requirement to reduce carbon intensity based on a new “Energy Efficiency Ship Index” (EEXI) and operational carbon intensity reduction requirements, based on a new operational carbon intensity indicator (CII). The amendments are wider in scope than the EEDI and the SEEMP as they apply to all ships, not just new builds.
- The EEXI indicates the energy efficiency of the ship compared to a baseline. Ships are required to meet a specific required EEXI, which is based on a required reduction factor (expressed as a percentage relative to the EEDI baseline). The EEXI requirement applies to all new vessels and existing vessels exceeding 400 gross tons.
- The carbon intensity reduction requirements would apply to ships already subject to the fuel oil consumption monitoring and reporting requirements . The carbon intensity reduction requirements would require each ship to report its actual annual operational CII to the administrative authority of the relevant IMO party. These data would be verified and compared to the required annual operational CII to determine the carbon intensity rating of the ship. Highly rated ships could receive benefits, whereas poorly rated ships would have to submit a corrective action plan to show the required CI would be achieved. The required operational CII would be determined annually.
Some members and industry stakeholders have criticized these steps as insufficient to ensure that the maritime sector achieves the targets set in the Paris Agreement. They have argued that the IMO needs to do more to fund R&D into zero-carbon shipping technologies and fuels – e.g., biofuels, green and blue hydrogen, ammonia, and methanol, energy sources that remain considerably more expensive than fuel oil – and utilize MBMs for this purpose.
The September 2021 proposal for a global maritime carbon levy from ICS and INTERCARGO reflects this view. The proposal states that a “global market-based measure (MBM) should be adopted by the Organization to expedite the uptake and deployment of zero-carbon technologies, inter alia, by reducing the price gap between new low- and zero-carbon fuels and conventional fuels” and that a “levy-based MBM, based on tonnes of CO2 emitted,” would be the mechanism “least likely to result in distortion of international shipping markets” and “interfere with efficient maritime trade …”
The proposal does not specify the rate of the levy, stating that a “comprehensive impact assessment will be required to assess the macro-economic impacts on all Member States on proposals concerning the specific rate and value of an IMO climate contribution.” The proposal further states that “given that shipping is recognized as a hard to abate sector, … when the MBM is first established, it will be premature to impose a disproportionately high carbon price on shipping, especially if there are no zero-carbon technologies that can be readily applied to international shipping which are available for ships to transition to at the time when the MBM is implemented.” For this reason, the proposal calls for a review after 5 years to determine whether the rate should be amended in light of technological developments.
A levy-based MBM is not the only approach on the table that would charge shippers a mandatory fee. In another proposal submitted in March 2021, Denmark, Georgia, Greece, Japan, Liberia, Malta, Nigeria, Palau, Singapore, Switzerland, and nine NGOs, including ICS and INTERCARGO, called for a levy of $2/mt on fuel oil to create an approximately $5 billion “IMO Maritime Research Fund” (IMRF) to accelerate the introduction of low-carbon and zero-carbon technologies and fuels. (The proposal elaborates on a 2019 proposal submitted by ICS, INTERCARGO, and six other NGOs.) (MEPC 76/7/7). In August 2021, ICS submitted a “prototype” of how this mechanism would operate. Shipping companies would set up IMRF accounts for each of their ships (identified by the ship’s IMO number) and report verified fuel oil consumption data to the IMRF. Contributions due from each ship would vary depending on the type of fuel consumed. (MEPC 77/7).
As the March 2021 proposal explains, the IMRF is not a proposal for an MBM, as it would provide direct funding for R&D rather than seek to change behaviour through a carbon pricing mechanism. The sponsors do not see these two approaches as mutually exclusive, however. In their September 2021 proposal for an MBM, ICS and INTERCARGO encourage the MEPC to approve this option and note that the architecture used for the IMRF could also form the basis for a levy-based MBM.
Prospects for a global maritime carbon levy
Concern that the IMO is not doing enough to reduce emissions is not the only factor driving these proposals. The EU’s proposed expansion of its emissions trading scheme (ETS) to maritime transport is also incentivizing consideration of a global maritime carbon levy.
In November 2020, ICS provided comments on the inception impact assessment for the amendment of the EU ETS and its extension to maritime transport (i.e., to emissions from ships sailing within the EU and berthed at EU ports, as well as 50% of emissions from voyages between an EU and non-EU port). In its comments, ICS stated that “as the industry’s global regulator, IMO is the only appropriate forum for the development of a market-based measure (MBM) applicable to international shipping” and that “[w]hen the Member States of IMO commence the development of an MBM, the preference of the global shipping industry is for a levy based system linked to fuel consumption/CO2 emissions, as this is the form of MBM which the global industry has determined will be least likely to create unfair competition or distortion of global shipping markets.”
The September 2021 ICS-INTERCARGO proposal similarly states that “[t]he rapid development of an MBM is now a vital necessity if the Organization is to demonstrate continuing leadership for the decarbonisation of shipping via its global regulatory framework, and to discourage the unilateral application of MBMs to international shipping,” and that a “piecemeal approach to the introduction of MBMs will result in barriers to trade and ultimately would most likely fail to achieve the overriding policy objective of reducing global GHG emissions from international shipping, whilst significantly increasing the cost of maritime trade and the negative impacts on the economies of Member States.” The proposal from the Marshall Islands and the Solomon Islands’ likewise refers to the expansion of the EU ETS and the need to avoid a “patchwork” of regional and national measures.
Importantly, other key stakeholders have endorsed a mandatory global carbon levy. On June 2, 2021, just prior to the MEPC’s June meeting, the CEO of the world’s largest shipping firm Maersk, called for the IMO to prepare to implement a carbon tax as of 2025 on ship fuel of at least $150 per ton (or $450 per ton of fuel). Although Maersk does not have consultative status at the IMO and therefore cannot submit proposals to the MEPC, its endorsement of a carbon levy adds weight to those that have been submitted.
The United States has not made its views on a global maritime carbon levy public. But it has committed to work with other countries in the IMO to adopt the goal of achieving net zero emissions from international shipping by no later than 2050, a goal that could require the IMO to adopt some form of MBM. A levy on maritime emissions has not yet been proposed by US industry, although legislation has been reintroduced in Congress that aims to reduce GHG emissions using a range of measures, including mandatory monitoring, reporting and verification requirements for all vessels over 5,000 gross tons. US industry groups and port authorities are also pushing for the inclusion of funds for investment to support the decarbonization of the shipping industry in the pending reconciliation bill.
With further action needed to achieve its target of cutting emissions by 50% by 2050 from 2008 levels, industry pushing for consideration of a carbon levy, and the pending expansion of the EU ETS, it seems likely that the MEPC will now seriously consider an MBM. In addition, the MEPC’s November 2021 meeting will follow closely behind COP26, where the reduction of GHG emissions from ships is on the agenda. Convening in the wake of COP26 is likely to place additional pressure on the IMO to ensure it keeps pace with any new GHG-reduction commitments. MBMs remain controversial. Concerns have been raised with respect to related legal, administrative and governance issues, as well as the potential impacts on Small Island Developing States and Least Developed Countries, which could face difficulties with financing the retrofitting of old ships and investing in new, more energy-efficient ships. Nevertheless, the prospect of reaching agreement appears much more likely now than in the past. The primary reason for this is the strong support from key industry stakeholders looking for a clear price signal from the IMO to help incentivize the shift to zero-carbon fuels.
Supply Chain Implications of a global maritime carbon levy
A global maritime carbon levy would pose challenges and opportunities to companies within and outside the shipping sector. Most ships use heavy fuel oil, which is highly emissions-intensive. A GHG levy would raise fuel oil costs for shippers and/or require transitioning to more expensive low and zero-carbon fuels where available. Some shippers are still struggling to recover from the COVID-19 pandemic, so even a minor increase in fuel costs could prove challenging. Faced with a higher cost of fuel, companies would seek to pass on that cost to their customers. Although in some cases that cost may be marginal and companies may easily pass it on to consumers, in others companies may find themselves confronted with difficult choices that require restructuring their supply chains. Maersk has stated that to switch entirely to carbon-free fuel would require it to raise the prices charged to its own customers by 20%.
Some companies could gain a competitive advantage from the imposition of a global maritime carbon levy. Many of the larger shipping companies have already invested successfully in reducing their GHG emissions, so even with a levy, they would sustain or even grow their competitive advantage. Maersk, for example, has been exploring alternative fuels such as methanol and ammonia, is planning to operate the world’s first carbon-neutral vessel by 2023 (powered by carbon-neutral methanol) and aims to have a carbon-neutral fleet by 2050. Cargill, a major charterer, has reportedly cut approximately 1.5 million tonnes of gross carbon emissions from its fleet since 2017. Maersk, Cargill, AN Energy Solutions, Mitsubishi Heavy Industries, NYK Lines and Siemens are all members of the Maersk Mc-Kinney Moller Center for Zero Carbon Shipping, an R&D centre established in 2020 focused on decarbonizing the sector.
By contrast, smaller and medium-sized companies that have less capacity to invest in decarbonization-related R&D and build/retrofit with new technologies, and/or have limited or no access to the bunkering infrastructure necessary to supply ships with alternative fuels would find themselves at a relative disadvantage.
The IMO decision-making process is slow-moving and any global levy that is adopted would not be implemented immediately. Nevertheless, the shipping sector is facing strong and increasing incentives to decarbonize from multiple sources, and it is looking to the IMO for action. Customers and consumers are increasingly concerned with reducing the life cycle emissions of products, including transport emissions. Thanks to the EU, the IMO cannot afford to postpone meaningful debate on this issue for much longer without risking serious disruption to the shipping sector in the form of multiple, overlapping levies on carbon emissions. A mandatory carbon levy may not be implemented by the IMO in the near term, but it is on the horizon, and its effects would be felt throughout global supply chains.