Navigating the Seas of Carbon Taxing: Balancing the Scales in Global Shipping

The recent expansion of the European Union Emissions Trading Scheme (EU ETS) to include the shipping sector1 highlights both the potential for progress and the intricate challenges involved in reducing carbon emissions. Originally designed to reduce emissions in the aviation and industrial domains, the EU ETS has recently broadened its scope to include shipping operations. This expansion acknowledges the substantial contribution of maritime transport to global carbon emissions and emphasises the importance of integrating it into broader emissions reduction strategies. Under this scheme, shipping companies operating within European waters are obligated to purchase emissions allowances corresponding to their vessels' carbon output (100% of emissions on voyages and port calls within the EU and 50% of emissions on voyages into or out of the EU).2

However, the concern of carbon leakage arises, whereby regulatory interventions intended to alleviate emissions inadvertently incentivise the relocation of polluting activities to regions with less stringent environmental regulations. Indeed, preliminary observations suggest a pattern wherein shipping lines opt to deploy their least emitting vessels in European waters while directing more carbon-intensive operations to regions lacking or with lax carbon pricing mechanisms.3 While the EU's endeavours to internalise the external costs of carbon emissions are commendable, the risk of carbon leakage poses a significant challenge to achieving substantive emissions reductions on a global scale. Indeed, the phenomenon of “flag hopping”, whereby ships register under flags of convenience in countries with lenient regulations, further complicates efforts to enforce emission standards and effectively combat climate change.

This presents further challenges for Australia, due to the voluntary nature of the national Australian Carbon Credit Unit (ACCU) scheme.4 While these initiatives provide incentives for emissions reductions and carbon sequestration, their voluntary nature constrains their efficacy in mitigating emissions from sectors like shipping. Australia can draw inspiration from the European Union's effective policy framework and consider making the ACCU scheme mandatory for all ships visiting Australia, extending its coverage to include shipping emissions. By aligning with the EU's approach, Australia can enhance the comprehensiveness and enforceability of its emissions reduction efforts.

Additionally, Australia could explore the establishment of more green shipping corridors, akin to the one being established between Australia and Singapore.5 These corridors could incentivise the adoption of cleaner technologies and practices, facilitating the transition towards sustainable shipping operations while bolstering international cooperation in mitigating maritime emissions. Such initiatives not only align with global decarbonisation objectives but also offer economic and environmental benefits by reducing fuel consumption and enhancing air quality in port cities.

Overall, the current fragmented approach risks perpetuating inefficiencies and inequities while falling short of achieving the requisite emissions reductions to effectively mitigate climate change on a global scale. Instead, a coordinated strategy, underpinned by multilateral agreements and cooperation, is imperative for harmonising carbon pricing mechanisms, enforcing global emission standards, and fostering technological innovation across borders.

One promising avenue for such cooperation lies within the International Maritime Organization (IMO). The IMO’s mandate to set global standards for shipping emissions and facilitate dialogue among member states provides a platform for fostering consensus and driving collective action on climate change mitigation.6 By collaboratively establishing binding emission targets, implementing effective monitoring and reporting mechanisms, and incentivising investment in low-carbon technologies, the international community can ensure that the shipping industry contributes to achieving the objectives of the Paris Agreement.

In conclusion, the inclusion of shipping in the EU ETS marks a significant advancement in addressing carbon emissions in the transport and logistics sector. However, the strategic behaviour of shipping lines and the risk of carbon leakage underscore the imperative for coordinated global action to ensure the effectiveness and equity of emissions reduction endeavours. Australia has an important role to play here.

References

1. Reducing emissions from the shipping sector European Commission
2. EU ETS – Emissions Trading System DNV
3. ETA: EU ETS should regulate cargo diversion and carbon leakage SAFETY4SEA
4. Australian carbon credit units Clean Energy Regulator, Australian Government
5. Singapore and Australia Green and Digital Shipping Corridor Department of Foreign Affairs and Trade, Australian Government
6. 2023 IMO Strategy on Reduction of GHG Emissions from Ships International Maritime Organization (IMO)