Throwing Down the Gauntlet: The European Challenge to IMO on Carbon Pricing

By Sam Yarrow-Wright

The International Maritime Organization knows that the shipping industry needs to change course to address the climate crisis. By committing to the Initial Greenhouse Gas Strategy in 2018, which requires the shipping industry to reduce emissions by 50% by 2050, it formally recognized this. Such a declaration, despite being forged through difficult negotiations and missing the level of ambitions of many member states and NGOs, was broadly welcomed. Since then, there have been several agreements on the short-term measures. These measures have attracted their own share of criticism for lack of ambition or through lack of effective enforcement or implementation mechanisms. The EU countries have been an engaged and active part of this process, but that has not stopped them from considering action under their regional banner, in particular the recent inclusion of shipping within their Emissions Trading System.

These considerations and subsequent actions are understandable as IMO has, at times, struggled to agree on specific actions regarding greenhouse gas emissions, partly due to a concern about increasing costs to consumers. This is not a position which aligns with the evidence, at least in the medium to long term. While economic challenges to decarbonize the industry do exist, failure to act swiftly will result in significantly greater costs in the longer term. These costs of inaction should not be underestimated, and have been highlighted in our recent report, which estimates that the cost of climate inaction would reach US$ 25 billion every year by 2100. Ensuring that high ambitions translate to concrete action remains key. A levy on emissions should be established, which can be used to supply the infrastructure and capacity that will underpin confidence in future fuels, as well as help close the price gap with zero-emission fuels.

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Carbon Pricing

Carbon pricing comes in two principal forms. The first is through a cap-and-trade system, where a maximum ceiling on emissions is agreed and the rights to emit these is traded between operators. This ceiling can gradually be lowered to ensure that emissions decrease over time. The cap also encourages efficiency measures, which would allow more vessels to sail under the same level of emissions. However, there have been concerns within some communities around the efficacy and impact of its use. The second system is through a direct levy on fuel based on its carbon content. This directly encourages operators to lower their emissions to avoid additional fuel costs.  The details of each mechanism’s design are critical to ensure its effectiveness. A carbon levy must be set an appropriate level to support high ambition objectives without overly damaging the global economy. In the case of an Emission Trading Scheme, ETS, the setting of an appropriate cap is likewise essential to ensure that emissions are reduced in line with the Paris Agreement, while considering the projected growth of the industry upon which the global economy depends.

So far, much of the focus being on the short-term measures, such as the Energy Efficiency Design Index, EEDI, The Energy Efficiency Existing Ship Index, EEXI, and Carbon Intensity Indicator, CII, As such, it was only in May of this year that the 12th session of the Intersessional Working Group on Reduction of Greenhouse Gas Emissions from Ships, ISWG-GHG, agreed to recommend that IMO include carbon pricing in a “basket of mid-term measures,” without providing details on what form carbon pricing would take nor at what level any measures would be set. As such, it can be seen as the broadest agreement in principle.

The EU’s Action

 It is at this stage that we can move on from IMO’s activity in London, and instead step across the Dover Straight to the European Union. The EU has been operating its Emissions Trading System since 2005, and it is now the largest carbon pricing system in the world. It is a cap-and-trade system covering around 45% of the EU’s total emissions. In 2021 it received a boost as part of the ‘Fit for 55’ program which aimed to reduce the bloc’s emissions by 55% by 2030. Fit for 55 also included the FuelEU Maritime Regulation, which once finalised, will begin an industry shift towards alternative marine fuels starting in 2025.

Perhaps more eye-catchingly, shipping has now been included in the EU ETS for the first time. This will apply regardless of flag and will be judged by verifiable emissions from both intra-EU travel and those arriving from a non-EU port, albeit at a 50% scope. The application of the ETS will be gradually phased in from 2024, when it will apply to 40% of verifiable emissions, until 2026 from which point 100% of verifiable emissions will be under the scheme. Starting with carbon dioxide, the scheme will soon extend to harmful methane and nitrous oxide emissions, while its revenues will create roughly €1.6 billion of shipping subsidies through the Innovation Fund, the EU funding programme that draws on ETS revenues to support low-carbon technologies. This will, in part, be used to finance decarbonization efforts for the industry.

The IMO’s Time to React

Despite significant disagreements within member states, the inclusion of shipping within the ETS proves two significant points to the international community. Firstly, that the EU is determined to tackle the climate crisis across all sectors. Secondly, that carbon pricing is a feasible means of addressing the specific challenges associated with regulating international shipping. It sends a clear message: if IMO does not act on climate measures in shipping, the EU will not wait any longer.

Of course, the EU measures were not designed merely to antagonise IMO into action. The EU has its own targets and goals that it wishes to achieve, Fit for 55 among them, which are driven by the desire of its own citizens and policy makers aside from international action. Regional decision-making in its own right is not a dirty word. Regional groups have not only the right but the obligation to act if they feel it is appropriate or needed, and the mere existence and action of a regional block does not undermine multilateralism. However, not all IMO states will view it that way. Some of IMO’s 148 member states who are not EU members might view unilateral EU action on areas within IMO’s remit as damaging the organization’s position as the regulator for international shipping.  This would not be fair on the EU. It would not be the EU’s action that undermines IMO’s authority, but IMO’s own inaction. Indeed, within the EU ETS there would exist the capacity for the bloc to overhaul its approach to shipping should IMO ramp up its own ambition.

It is difficult to imagine a greater cause for which the EU should take this step into uncertainty. IMO has already recognised the key role that carbon pricing has to play in not only reducing emissions, but equipping Small Island Developing States, SIDS, and Least Developed Countries, LDCs, with the tools needed to embrace the longer-term measures and close the competitiveness gap. Effective funding of infrastructure and knowledge transfer is essential to allow the world to not merely reach the objectives set in the Initial Strategy, but to also exceed them in the drive to limit warming to 1.5 degrees Celsius.

For its part, EDF will use its newly granted consultative status with IMO to provide expert advice and analysis of existing carbon pricing for the benefit of all member states. We recognise that ambition alone will not help address the climate crisis. Only through effective engagement with all decision makers can this issue be effectively addressed. We resolutely believe that only with the best information can IMO make bold and ambitious decisions that can help tackle perhaps the greatest challenge of this century.

By including shipping within the ETS, the EU has set the level of ambition for the IMO abundantly clear. The gauntlet has been thrown down. It only remains to see whether IMO can rise to the challenge, or if it will cede not only the regulatory high ground but global leadership in the battle to reduce emissions from shipping.

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