The taxing problem of carbon

The COVID-19 pandemic and its impacts continue to dominate our lives, but there are some maintaining a necessary focus on reducing the impacts of climate change through emissions reduction. There are reported increases in extreme weather events linked to climate change and challenges to forecasting which we have touched on in other blogs. The application of technology to achieve operational reductions in emissions is a key part of StratumFive’s objectives. Here we discuss the reduction targets for shipping and some different approaches to driving the transition to a zero carbon future.

The International Maritime Organisation (IMO) has recognised shipping should reduce its carbon contribution and shipping must peak emissions as soon as possible and reduce its total annual emissions by at least 50% by 2050 compared with 2008. A further ambition involves trying to phase emissions out as soon as possible in this century “as a point on a pathway of emissions reduction consistent with the Paris Agreement temperature goals”. Aside from the absolute reduction in emissions, the strategy prescribes a 40% energy efficiency improvement by 2030 compared with 2008. The European Union (EU) has supported the IMO’s objectives and has also adopted its own measures.

To facilitate carbon reduction efforts both the EU and IMO have set up emissions monitoring systems. The EU’s Monitoring Reporting and Verification (MRV) regime is not identical to the IMO’s Data Collection System (DCS), but what is already clear is the long term targets for reductions cannot be met with the fuel mix used today. Research into alternative fuel sources needs to be progressed urgently. Of the top ten sources of emissions in the EU eight are associated with national power generation, one is an international shipping company and one is an international airline (ranked seven and eight respectively).

What differentiates the 8 EU energy generators from aviation and shipping is they have been part of the world’s first and so far only, Emissions Trading System (ETS) established in 2005. By 2030 emissions from sectors covered by the EU ETS will be cut by 43% from 2005 levels. The gradual reduction in available emissions drives price and investment in alternatives (cap and trade). So far the shipping industry and the EU are endorsing very different approaches to funding the required emissions transition.

Shipping associations have proposed a $2/ tonne tax on fuel which would over 10 years generate around $5bn for research. They also propose the establishment of an International Maritime Research and Development Board, supervised by IMO member states. This solution is relatively straight forward to adopt, but, unlike the EU ETS, has some administrative complexity as the necessary infrastructure does not yet exist . Applied internationally the tax at pipe does not alter the competitive landscape and the additional cost, modest as it is, will often be passed on to the consumer and not the industry.

The EU by contrast, in line with the European Green Deal and the climate emergency, now sees including shipping in its ETS in 2023 as a driver of research in solutions. The EU Parliament is due to endorse this view in mid-September. The International Monetary Fund (IMF) estimated that a shipping carbon tax of $75 per tonne of CO2 in 2030, and $150 in 2040 would reduce shipping CO2 emissions by nearly 15% in 2030 and 25% in 2040. This new tax would raise revenues of about $75bn in 2030 and $150bn in 2040 while increasing shipping costs by just 0.075% of global gross domestic product in 2030. These are impressive numbers and will certainly achieve a step change in the scope and pace of research if accurate.

Shipping invariably advocates global standards to facilitate its role in trade and compliance with regulation over national or regional measures, so this move will not be welcomed in that respect. In recent years there have been occasions when national self-interest has trumped adopting measures facilitating global trade and its benefits. A fragmented adoption of emissions taxation schemes by other countries or regions would make the business of international trade and shipping more complex still. A volatile CO2 price added to a volatile fuel price would make voyage economics and cost allocation more unpredictable.

Additionally, a regime based on CO2 emitted rather than fuel loaded may result in some technical challenges. The current widespread use of Bunker Delivery Notes as evidence of quantity is unlikely to provide the accuracy required or meet the needs of the ETS when emissions are monetised at the levels anticipated above. It is possible a much more sophisticated and certificated fuel flow and emissions sensor system will be necessary. In a future post we’ll discuss what that might look like. The costs of installing maintaining and calibrating such a system may be part of the reason the industry favours a tax on fuel.

Service providers also appreciate standards and consistency of regulation for solution development. The much advocated, but less often seen, “single window” concept is favoured. A proliferation of differing standards and benchmarks can be a challenge to accommodate in development. Maintaining a single window look and feel at the front end whilst accommodating variability in output demands will be a key feature in environments where standards are absent or which become fragmented by accident or design.

In the medium to to long term there are transition fuels and technology which will generate improvements either in new builds or as retrofits. A number of equipment manufacturers are already investing in developing zero carbon alternatives to power shipping, but an accelerated time frame for development requires funding to match and significant investment in research into alternative energy sources. This situation applies whichever carbon taxing or trading regime is adopted.

These are the challenges for the future, but there are significant operational efficiencies, through enhanced monitoring, voyage and arrival optimisation which can make a contribution right now. There is encouraging work in standardising data flows and applications that will facilitate efficiency efforts across the industry. Companies such as StratumFive with advanced data solutions assist in delivering these benefits daily; are you using them?

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