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Last update: 01.01.2010

Design and Impacts on the Shipping Sector, Countries and Regions

Study: "A Global Maritime Emissions Trading System, Design and Impacts on the Shipping Sector, Countries and Regions"

The International Maritime Organization is currently discussing the opportunities of market based instruments for maritime transport in order to tackle the challenge of climate change. Germany contributed together with others working papers for these deliberations at the first meeting of the working group on greenhouse gases in Oslo June 2008 (WP GHG 1/5/7) and at the 58th (WP MEPC 58/4/25), the 59th (WP MEPC 59/4/25 und MEPC 59/4/26) and the 60th meeting of the Marine Environment Protection Committee.

As requested by the Committee and based on the Work Plan (MEPC 59/J/10, decided at MEPC 59) Germany wants to provide further information on market based instruments and on a Maritime Emissions Trading System in particular. Germany therefore commissioned a consortium of experts experienced in designing market based instruments and in the shipping industry to further develop an emissions trading system and to analyse the impacts of such a scheme with particular consideration of developing countries. The consortium was led by CE Delft supported by Fearnley Consultants and the Institute of Atmospheric Physics of the German Aerospace Center. The authors could benefit from their participation in the IMO GHG study.

The study showed that the impact of an Maritime Emissions Trading System on the Shipping sector and on different regions and countries is low. Based on a quantitative in-depth analysis the authors concluded various other important results showing that emisisons trading would be a feasible, cost-efficient and effective solution for the maritime sector to reduce its climate impact.

It is feasible to implement a cap-and-trade scheme for greenhouse gas emissions in the maritime transport sector.
Such a scheme requires that the emissions of each ship are monitored and that an equivalent amount of emission allowances is surrendered to the scheme administrator. This obligation can either be imposed on the ship owner, or not assigned to a specific legal entity, in which case onboard documentation would have to demonstrate a ship's compliance status. Allowances can be acquired at an auction, in the marketplace and/or partly for free, if so decided by the international community. An administrative organisation would receive and administer emission reports and allowances, maintain records of the compliance status of all ships and inform Flag States regularly. Flag States would enforce the scheme on ships in their register and Port States have the right to inspect the compliance status of ships in their ports and enforce the scheme on non-compliant vessels.

A cap-and-trade scheme can guarantee a reduction in net maritime emissions.
The cap would ensure that emissions are indeed reduced. Because the allowances are tradable, moreover, the scheme will reduce emissions in the most cost-effective manner. Furthermore, auction of the allowances can provide a funding mechanism. The price of the allowances will incentivise ship owners and operators to increase the efficiency of their vessels.

Shipping can continue to grow despite a cap on the emissions of the shipping sector.
By allowing ships to use credits or allowances from other sectors, emission growth in maritime transport is possible, as long as emissions are offset by reductions in other sectors. Some positive economic aspects would result for ship builders, the engine manufacturers and classification societies due to a stimulation of demand of emission reduction technologies.

A cap-and-trade scheme can generate funds for climate change finance.
The revenues of the auction of allowances can be used to mitigate undesired impacts and to finance climate change.

The costs of allowances would constitute a small fraction of total vessel operating costs.
The size of the impact depends on vessel type and size, fuel price, allowance price and the proportion of allowances auctioned. Assuming full auctioning and using 2007 cost figures and an allowance price of USD 15 per tonne of CO2 the cost increase for six different vessel types ranges from 4 to 8% of total operating costs. The share in overall costs is proportional to the allowance price, so that higher allowance prices increase the share in total costs. Conversely, higher fuel prices lower the share in total operating costs.A fuel price of USD 500 per tonne of fuel lowers the relative cost increase to 3 to 7%.

Under most market conditions, a major share of the cost increase can be passed on to consumers.
When demand for maritime transport is lower than supply, prices are set by marginal costs and costs are passed on to the shipper and ultimately to the consumer. On the other hand, when demand is higher than supply, prices are not cost-related but are set by marginal demand and the profit margins are high. In that case, the introduction of additional costs will not affect the price; the costs will be borne partly by the ship owner, reducing his profit margins. Ship owners in developed countries own over 60%of the world fleet in terms of deadweight tonnage. About two-thirds of imports (by value) are to developed countries. Since both consumers and ship ownersare located mainly in developed countries, these countries will bear the majorshare of the costs.

If costs are passed on, higher transport costs result in a small increase in import values.
On aggregate, maritime transport costs represent less than 10% of import value for some developed countries and 5-15% for some developing countries. These costs include items that would not be affected by a maritime emissions trading scheme, such as port handling charges. These transport costs suggest that the value of imports would increase by less than 2% on aggregate. Disaggregating cargo types, we find that the value of imports of crude oil and manufactured products is least affected, increasing by less than 1%. Ores and coal are most affected, and their import value could increase by a little under 3%.

The overall impact on regions and groups of states is low, but differences can be observed.
Assuming that costs are passed on to consumers, these costs will be related to emissions en route to the countries concerned. While emissions on routes to developing countries are lower than those on routes to developed countries, they are higher relative to GDP. As a result, developing countries face higher costs relative to GDP than developed counties. Because of improvements in vessel fuel efficiency, actual cost increases are likely to be lower than this. For many developing countries, moreover, costs are likely to be lower, as shipping companies will allocate costs to shipping routes where demand is highest, and these are typically routes to developed countries.

The revenues from the auctioning of allowances can be used to compensate for undesired impacts on developing countries and accelerate emissionabatement in the maritime sector.
There are several ways to mitigate the impact of the cost increase on developing countries. Some ways, such as exempting certain routes, ship types, ship sizes and cargo types, have the disadvantage that they could distort markets and potentially lead to higher emissions. However, a size threshold might be implemented in order to lowerthe administrative costs. Using part of the auction revenue to offset cost increases has the advantage that it would not distort markets. At a price rangeof USD 15-30, and assuming that all allowances are auctioned, revenues could amount to USD 15-30 billion annually. Tab 1 provides a quantitative synopsis of how compensation might work if developing countries were compensated on the basis of their share in global imports. There are also other options for compensating certain (groups of) countries, including those taking into account the need for climate-related funding.

In summary, it is feasible to implement a cap-and-trade scheme for greenhouse gas emissions in the maritime transport sector.
Such a scheme ensures that the environmental target is met, while allowing the sector to grow and ensuring that the target is met in the most cost-effective way. Anemissions trading scheme would result in an increase in the costs of shipping of less than 10%, depending on the price of allowances. As this increase wouldimpact similar ships in the same way, markets would not be distorted. The increase in import values is likely to be less than 1% for most commoditygroups, the impact on consumer prices even lower. The additional costs for most regions and country groups are estimated to be less than 0.2% of GDP,with a few exceptions. Undesired impacts can be mitigated by using the auction revenue to compensate countries.

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