International shipping: memo on the size of the levy

July 1, 2009

Memo on "The required size of a levy to make international shipping meet its CO2 cap"

Within the International Maritime Organization (IMO) two different policy instruments for curbing CO2 emissions from international shipping are currently being discussed; emissions trading (METS) and a levy that would finance a Greenhouse Gas Fund. The two have many elements in common. The perhaps most significant among them is to offset emissions above a cap or baseline by purchasing emission credits from CO2 abatement projects in developing countries.

The major difference between the two options under discussion is that while emission trading establishes a binding cap on emissions from international shipping, the levy may or may not be set at a level that allows the sector to offset all emissions above the baseline. Thus, in emissions trading the outcome is certain while the price will not be known in advance. With a fixed levy, the price is known but not the effect on emissions.

The purpose of this small paper is to contribute to the analysis of the levy. The focus is on the difficulties involved in setting the level of the charge when not knowing the future price of emission credits. The levy should ideally allow the scheme to raise the money needed to buy emission credits in the open market that offset any emissions above the baseline, thus making the baseline equivalent to a cap.

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