Source: GTR, 2021-07-21
Industry bodies have decried the European Commission’s plan to levy a charge on greenhouse gas emissions generated by shipping companies, calling it a “tax on trade” and a “pure money grab,” amid warnings the move could see firms seek to evade major ports on the continent.
The European Commission announced that it would look to bring the shipping industry under the purview of the Emissions Trading System (ETS) as part of a wide-ranging new climate plan.
For years, the maritime transport sector had escaped the clutches of the ETS, which was launched in 2005 and requires power plants, factories and airlines flying in Europe to acquire carbon allowances covering their emissions – or else face a heavy penalty.
But in its bid to slash greenhouse gas emissions in the EU by 55% from 1990 levels before 2030, the EU is now proposing that large ships be included in the scheme regardless of the flag they fly.
Operators of vessels will have to ensure they buy sufficient carbon credits to cover each tonne of carbon generated on journeys within the EU, and will also have to account for 50% of emissions generated on voyages between an EU and non-EU port.
With shipping causing roughly 2.5% of annual global greenhouse gas emissions, the EU says the move is needed to bring the maritime transport sector in line with the bloc’s climate ambitions.
The change could come into effect as early as 2023, though the European Parliament and member states will first have to hash out a final version of the proposal.
As ship operators weigh the implications of the policy proposal, industry associations have voiced concern that the decision could drive up trade tensions with major markets.
Guy Platten, secretary general of the International Chamber of Shipping (ICS), says the move is a “pure money grab” and questions whether the EU’s intention is wholly driven by a desire to decarbonise shipping.
“Other than as an ideological revenue raising exercise, which will greatly upset the EU’s trading partners, it’s difficult to see what extending the EU ETS to shipping will achieve towards reducing CO2, particularly as the proposal only covers about 7.5% of shipping’s global emissions,” he says.
Maritime transport is a vast industry responsible for ferrying around 80% of goods traded internationally; as such the majority of shipping pollution won’t be captured by the EU’s regional carbon market.
“We know that non-EU States like Japan have already expressed concern over this diplomatic overreach and imposition of a unilateral and extra-territorial tax on trade. It cannot be equitable for non-EU shipping companies to be forced to pay billions of euros to support EU economic recovery plans,” Platten adds.
In a letter addressed to the EU in February, the Japanese government questioned the impact of the ETS decision on trade and warned of a “market distortion due to additional costs in EU-related shipping”.
“EU-ETS in international shipping will increase transport costs for European commodities exported from the EU region, which would deteriorate cost-competitiveness, and also raise prices for imported goods to the region, ultimately imposing burdens on European consumers,” the Japanese government said.
“Besides, such additional costs will also be transferred to worldwide consumers who are depending on international trade,” it added.
According to VDR, the German shipowners association, the financial burden of the proposals on shipping companies is “expected to be quite severe”.
“The cost implications on shipping will be quite a challenge. However, we do share the same goal as the European Commission: shipping needs to decarbonise, the sooner the better,” says VDR president Alfred Hartmann.
Carbon leakage unlikely
With the ICS suggesting that non-EU shipping companies could be on the hook to the tune of billions of euros, some suggest that vessel operators may be tempted to divert journeys to ports on the outskirts of the bloc.
According to analysts, the EU’s regional approach to implementing the new system is vulnerable to the threat of so-called carbon leakage, which could see major ports in Europe stung by shipping firms taking evasive action to sidestep the carbon market.
In its February letter, the Japanese government argued that the new system would lead to negative impacts on EU ports, which could “suffer from negative competitive advantage due to the evasions of import/export cargos from the EU area. Additionally, such additional costs will cause shifts to other more carbon intense transport modes.”
In an April report, the Centre for European Politics, a German think tank, argued that there’s a risk of foreign ships calling into nearby ports in third countries such as the United Kingdom, Morocco or Turkey rather than those in the bloc.
“There, cargo would be transferred onto other ships which would then serve the ports of destination in the EU, in short-sea shipping, on the short residual routes – which require allowances for intra-EU shipping. Container ports in the EU specialising in ship-to-ship transfer, such as Algeciras in Spain, would lose out significantly as a result of such relocations,” it read.
Joanna Konings, a senior economist specialising in international trade at ING, tells GTR that while there is a risk ships may use alternative ports, such a shift in operations is not a given and will depend on the price of carbon on the ETS market.
Konings points to a study from environmental NGO Transport and Environment which shows the risk of evasion disappeared at a carbon price of €30 per tonne of CO2.
That particular report found that there would be a “negligible risk” of shipping companies evading the EU carbon market by making pitstops at ports just outside of the bloc. “At most, 7% of ships calling at EU ports would benefit from avoidance at today’s carbon price,” the paper said.
Nevertheless, carbon prices are expected to ramp up in the coming years as the EU whittles down the number of free allowances it hands out each year in a bid to reduce emissions.
A survey released last month by the International Emissions Trading Association found members expect carbon prices in the EU ETS to grow to €47.25 per tonne between 2021 and 2025, and €58.62 per tonne between 2026 and 2030.
Carbon costs in Europe have surged to these sorts of levels in recent months due to a confluence of factors, analysts at Fitch Ratings say, with prices doubling to around €50 per tonne in May from an average of €25 registered from 2019-2020.
In a study on the ETS commissioned last year by the ICS and the European Community Shipowners’ Association (ECSA), the organisations flagged concerns that the new arrangement could “create a patchwork quilt of regulations globally”.
The pair argued that by casting the carbon market net over the shipping sector, the EU could derail discussions at UN agency the International Maritime Organization (IMO) over the best path for decarbonisation.
“Some non-EU governments may reasonably ask why they should continue to work on an internationally negotiated instrument if EU member states are actively pursuing their own unilateral measure,” the paper said.
It suggested that other non-EU governments may decide to develop their own unilateral schemes in tandem, which would introduce “barriers to smooth operation of ships on international voyages and so to international trade”.
Last week, ICS’s Platten made the case for a “simpler and more effective” policy such as a global fuel levy, though the effectiveness and motives of this suggestion have been questioned by environmental groups.
The view from experts is that more regional and national schemes will follow, with ING’s Konings noting that other major trading partners such as the US, UK and China are now also laying the groundwork for their individual carbon pricing for the shipping industry.
Nonetheless, the EU argues that widening the scope of the carbon market is necessary given the IMO’s current levels of ambition and inaction in curbing shipping emissions worldwide.
Brussels has set its sights on eliminating emissions from shipping by 2050, while the IMO has set a goal of halving maritime pollution by that point from 2008 levels, and to date has yet to put in place any concrete ideas on ringing in such changes.