IMO Agrees To First Tax On Shipping Emissions

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You probably didn’t read about it, but the International Maritime Organization, an instrumentality of the United Nations, agreed last week to impose a fee on every ton of shipping emissions from oceangoing cargo vessels. “I’m very confident that there is going to be an economic pricing mechanism by this time next year,” Arsenio Dominguez, the Secretary General of the maritime organization, told the New York Times. “What form it is going to have and what the name is going to be, I don’t know.”

The fee could raise a significant amount of money and lead to sweeping changes in the shipping industry, the Times reports. It would also be a first step toward imposing a tax on emissions that is not limited to a particular country. Many activists and economists argue that putting a price on carbon is crucial to addressing the collective threat of climate change, because it can both deter pollution and fund a cleaner, more resilient economy. More than 70 nations already have individual carbon taxes or carbon credit trading programs in effect.

There are more than 50,000 cargo ships plying the world’s oceans, many of which have engines that burn what is known as “bunker oil.” It is so thick, it is like the crud that comes from the tar sands in Alberta, Canada, and needs to be heated to make it flow. It is by far the dirtiest fuel on Earth and consequently emits clouds of toxic junk and carbon dioxide when it is burned.

Cleaning up those emissions involves more than just switching to cleaner fuels. The bunker oil actually provides the internal lubrication needed by the ships’ engines, so many of them would need to be replaced before significant improvements in emissions could take place. Swapping out old engines for new could cost ship operators millions of dollars per ship.

Shipping Emissions Exceed Those From Air Travel

Ocean shipping is responsible for about 3% of all greenhouse gas emissions, which is slightly more than aviation. Virtually all consumer goods travel across an ocean or two on their way from manufacturers to consumers. Taxing shipping emissions would likely raise tens of billions of dollars a year for climate policy. In comparison, developed nations have donated $9 billion to the Green Climate Fund, a U.N. program meant to help developing countries tackle climate change, but activist groups say that amount is far less than what is needed.

“We are talking about something that can really improve the landscape of climate finance,” said Dominik Englert, an economist who researches green shipping at the World Bank. “Given the volumes that we see and given the needs that we see, we think that it can go beyond shipping.” There is still a lot to work out, but moving forward may be easier than with global climate negotiations that require unanimous support. Decisions at the IMO are made by a simple majority of the member countries.

Last week, in a consensus vote, IMO member nations detailed the decisions that still need to be made about pricing the carbon in shipping. How would a price be calculated? Would it be a flat fee or part of a trading mechanism between companies? Who would collect the money and distribute it? And which fuels are considered low carbon? Countries are looking at seven different proposals in which prices range from $20 to $250 per ton of carbon emissions, according to the IMO. They hope to decide on all that by next year.

The IMO said it was simply living up to the pledge it made last year to decarbonize the entire shipping industry by 2050. Its member countries have agreed that they need to start charging the shipping industry for emissions of heat-trapping gases in 2027. “It has been an extremely hard process to get where we are now,” said Albon Ishoda, the Marshall Islands’ negotiator, who has proposed a tax of $150 per ton of carbon emitted.

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The Devil & The Details

How would the proceeds from a tax on shipping emissions be distributed? Englert and his colleagues from the World Bank suggested in a study that countries should use the money to decarbonize the shipping industry, invest in efficiency measures that could reduce shipping costs for poorer countries, and deployed for broader climate action.

Roel Hoenders, the IMO’s head of climate action, warned that small countries could end up paying steeper prices for basic goods. Countries that built their economies around shipping commodities could lose significant revenue, because shipping accounts for such a large share of the price of their exports. Assessing the impact each measure would have “is quite an important part of the work, particularly for developing countries. An increase in carbon price may have an impact on their competitiveness at a global scale.”

Some of the shipping industry’s biggest players have come around to the need for cleaner fuels and are looking for ways to develop them more quickly. Maersk, the second largest container shipping company, has already invested billions in its decarbonization efforts. Our own Michael Barnard has examined some of those efforts and found them wanting.

“Surprisingly for me, the industry has been perhaps more progressive in trying to put forward a target,” Ishoda said. “Many in the industry know that fossil fuels are finite. We have seen a lot more — I wouldn’t say progress, I wouldn’t call it that — but an openness to the idea of ways to raise revenues to decarbonize the shipping sector.” Ideally, shipping companies want to avoid paying carbon taxes in multiple jurisdictions, which would result in a lot of complex and expensive accounting.

Englert said he hoped the shipping industry’s experience with pricing shipping emissions would send a signal to the world about how powerful such a policy can be. When done right, carbon pricing “is the most cost effective and the most straightforward policy that provides the widest range of flexibility to all economic stakeholders,” he said. “You can basically help the planet, help the climate and at the same time use the revenue to foster development.”

The Takeaway

The IMO proposal directly addresses the single biggest failure in current capitalist theory, the problem of what economists call “untaxed externalities.” Capitalism is supposed to manage the use of economic resources in the most efficient way possible. And yet, it should be intuitively obvious to the most casual observer that the system cannot function as intended if it considers some inputs but not others. Ignoring the costs imposed on human society by a warming climate — wildfires, more powerful storms, and drought, for example — simply confers an unfair advantage on some while placing an extra burden on others.

Pricing shipping emissions properly will help correct that imbalance and make the system function as intended. But those who enjoy an advantage currently because they do not have to pay the costs of the harm they do are bitterly opposed to giving up their advantage. In other words, they want to privatize the profits from their commercial activities while passing off the costs associated with their activities onto the shoulders of others. Of course, they extol the virtues of capitalism while benefiting from a distorted system that favors them. Reduced to its essence, that is nothing more than hypocrisy.

Many nations are considering border taxes that would require imported goods to bear the same climate costs as domestically produced goods. There is merit to that idea. But a fractured system in which every country has its own scheme for levelizing climate costs will be an administrative nightmare, one that will increase the cost of doing business across borders considerably.

If, as the IMO proposes, every ship pays equally for its emissions, the need for such Byzantine schemes could be eliminated. It becomes what the New York Times calls a de facto universal carbon tax. It’s neat, simple, and relatively easy to administer. Best of all, it avoids fractious political battles in individual national legislatures.  The central tenet of capitalism is to minimize costs to maximize profits. If this idea of taxing shipping emissions is implemented, there is no telling what improvements in controlling emissions from cargo ships may result.

Not to put too fine a point on it, this idea is brilliant. What it does is say, “Include all the economic inputs that affect your economic enterprise and Adam Smith’s unseen hand will do the rest.” It explodes the idea so popular today that businesses must be excused from shouldering all the costs of their commercial activities because that’s the way it has always been.

Perhaps we didn’t know 100 years ago what harm would flow from extracting and burning fossil fuels, but that is no longer true today. The business community has been getting a free ride for decades. There is no possible reason why such a distortion should be maintained.

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