The EU’s carbon market for shipping brings order to an outlaw sector

Faig Abbasov — December 16, 2022

International shipping emissions will now be regulated

Imagine asking random people on the street what is the most obscure, corrupt and yet profitable industry in the world? Most would probably say the banking sector profiteering from taxpayer bailouts; or perhaps the oil and gas industry destroying the planet. What would likely be missing on the list is the shipping industry. And that’s why 2022 was so notable for shipping in marking a watershed moment between outlaw and disorder on the one hand and environmental justice. 

The shipping industry is responsible for about 1 gigatonne of greenhouse gas emissions globally, more than twice as much CO2 than Europe’s 280 million passenger cars emit every year, and its impact on marine wildlife and air quality is unimaginable. While an amateur could point fingers at the dirty fuel (residual fuel oil) that the industry almost exclusively relies on, the real reasons are much deeper. 

A famous New-York Times journalist Ian Urbina once explained that “[t]here is a sort of cultural line that runs through the sea as a place where people have always gone to escape the law, to escape governments. It is truly the last frontier“. It is impossible to disagree with this. Whether it is slavery in the modern day fishing industry, dumping waste from luxury cruise ships overboard, or helping the worlds most oppressive regimes to avoid international oil sanctions, shipping’s role has been undeniable in many injustices of the 21st century. And they get away with it because ships largely operate on the high seas – territories that don’t belong to anyone. They fly the flag of countries that they will likely never visit in order to benefit from lax environmental and labour standards.

As if this were not enough, they pay little to no corporate tax on their revenues due to obscure tonnage taxes – a system where shipping companies pay taxes as a function of the size of their fleet, as opposed to their actual earnings. In such a context, it’s not surprising that the industry was adamantly opposed to any notion of the polluter pays principle for the sector; worse still if it was mandated by EU bureaucrats.

So, when the EU eventually announced in 2019 that it would extend its emission trading system (ETS) to cover maritime transport, the industry found itself in disarray. Inspired by the aviation lobbyists, wealthy container-ship owners dedicated all their energy lobbying to limit the scope of the carbon market to voyages between EU countries, and exempting the majority of their climate pollution linked to seaborn EU trade.

Fast forward to 2022 and a time traveller might wonder how on earth the EU managed to achieve the exact opposite. With the preliminary deal on ETS reached, the EU managed to cross the bridge on shipping. The same can’t be said for the aviation sector, whose CO2 emissions will continue to fly under the radar. Starting in 2024, shipping companies will be required to pay for emissions from both domestic and international voyages to and from the EU. While the system will initially cover only CO2, methane emissions will quickly be introduced into the system in the following years. Unlike any other sector, shipping companies will be given no free pollution permits.

While pollution charges under ETS are unlikely to bridge the price gap between fossil marine fuels and green alternatives, the system will still generate substantial amounts of revenues that the EU and member states can reinvest in the technological transition. About €1.6 billion will be available at the EU level alone, while member states will earn about €7-8 billion each year, part of which they can decide to reinvest in the sector.

The ETS will not sort out modern slavery and other illegal and inhuman activities that take place on the “outlaw ocean”, or even sufficiently incentivise the switch to sustainable maritime fuels. But the legislation has broken two seemingly eternal taboos.

First, it did away with the “global sector, global rules” mantra that the shipping industry has been pedalling in order to avoid national jurisdictions. It is the first time that countries acting outside the IMO regulatory space will require the abatement of emissions that take place on the high seas, parts of the world oceans that don’t belong to anyone. Second, shipping companies will directly contribute significant amounts of money to national budgets, parts of which will be spent on climate action.

The EU maritime ETS is no silver bullet, but it does set a groundbreaking precedent and a good template for other countries and regions to adopt. The days of the wild west high seas are over.

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