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Debating a carbon tax in global shipping

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Following the climate change summit in Paris, the International Monetary Fund suggested implementing a carbon tax of $30 per tonne of CO₂ emitted from maritime and aviation fuels, which it says could raise around $25bn a year. The International Chamber of Shipping strongly opposes this measure, stating a preference for a fuel levy instead. What is the case for implementing a carbon tax and how could the sector get it right?

The Paris agreement of December 2015 marked a meaningful step towards unity and international cooperation on addressing climate change. More so than before, the focus fell on fiscal, financial and macroeconomic policies and the role they play in advancing mitigation.

Sobering up to the central issue behind the problem - that no single firm or household has a significant effect on climate, yet collectively there is a huge effect - discussions often gravitated around the subject of externality, a situation where polluters are not charged for the environmental consequences of their emissions.

In its After Paris report, the International Monetary Fund (IMF) called for a more definitive approach to the problem, stating: "For reducing carbon emissions, carbon pricing (through taxes or trading systems designed to behave like taxes) should be front and center."

Internationally, about 40 national governments and more than 20 sub-national governments have implemented, or are implementing, some form of carbon pricing as of mid-2015, according to IMF's World Bank Report. Only 15 governments currently have explicit carbon taxes.

The combined value of carbon pricing instruments was estimated at just under $50bn globally in 2015. Of this, 70%, or about $34bn, is attributed to emissions trading schemes (ETSs) and about 30% comes from carbon taxes. However, that huge sum can be deceptive. Only 12% of the annual global greenhouse gas (GHG) emissions, amounting to 7GT of CO2e, are covered by carbon pricing, and specifically 4% of this is attributable to carbon taxes.

Through its combustion of fossil fuels, the shipping sector is a big emitter of GHG, in which the most harmful component is CO2. In 2012, international shipping accounted for 2.4% of GHG, a figure projected to rise up to as much as 20% by 2050 if left unchecked.

Going forward, financial efforts dedicated to mitigation, sustainability and alternative energy sources must increase dramatically if a change is to be seen. Over the next 35 years, approximately $40 trillion of additional investment will be needed to transition to a low-carbon energy system, the IMF warns.

By implementing blanket regulation on carbon taxation, the shipping sector could contribute significantly. A global $30 per ton CO2 charge on fuels from aviation and shipping combined could have raised about $25bn for climate finance in 2014, even after compensation for developing countries is factored in.

The International Chamber of Shipping (ICS), however, does not support a carbon tax to raise revenue for climate change mitigation, a position they made clear in 2015, when they dismissed a $25 per ton CO2 charge proposed by The Organisation for Economic Co-operation and Development (OECD). Instead, ICS would accept a "simple fuel levy", if the International Maritime Organisation deemed it necessary.

The case for carbon taxes

Over time, the implementation of different fiscal or regulatory mechanisms has led to today's world of fragmented carbon pricing instruments, with little co-ordination between states or sectors. Between 1990 and 2005, carbon taxes rose to prominence, with early adopters starting to apply the new method. Since 2012, the number of carbon pricing instruments has expanded by 90%, but taxation has lagged behind in popularity.

"Charges on international aviation and maritime emissions are promising," the IMF says in its report, mainly because "national governments have a weaker claim on these tax bases than they do for domestic fuels, making them appealing as a possible source of climate finance".
As an international sector, the maritime industry does not fall within the jurisdiction of any state regulations, which can be both a blessing and a curse, considering its footprint is that equivalent to the world's sixth largest economy. [...]


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