Assessing the MBM EG’s report

Dr Per Kågeson

MEPC 61

29 September 2010

The Expert Group’s feasibility study and impact assessment of the MBAs

• A valuable summary and assessment of the proposals

• Relevant information on abatement measures

• Interesting but unconventional calculations

• Good work!

Need for two different instruments?

• To cut maritime emissions substantially over the next few decades policy instruments must affect:

- Specific emissions from new buildings

- Retrofitting of existing ships

- Operation of all ships

• This may be difficult to achieve by just one instrument

Negative side-effects of flexible and cost-effective policy instruments

• Flexibility would allow maritime transport to contribute to inexpensive emission reductions in other sectors

• Focusing only on low-hanging fruit may make the shipping sector ill-prepared for challenges to come

• Science may have underestimated climate change and the need to reduce emissions rapidly

Requirements on new tonnage

• Important to improve the resiliance of the shipping sector and prepare for future mitigation efforts

• Turnover of the fleet is 30-40 years

• Accepting sub-standard new builds means taking a risk of having to undertake unnecessarily expensive future CO2 abatement measures

• The EEDI should be a mandatory supplement to any market-based instrument

Comparing with road transport

• The life of ships is longer than for cars

• USA, EU, Japan and China enforce mandatory fuel efficiency standards on new cars, supplementary to using MBMs (i.e. fuel taxes)

• Significant non-financial barriers in both cases

Three main options

1. Taxing/charging- GHG Fund, LIS, PSL, IUCN

2. Cap on total emissions- Norway/France/UK (auctioning + trade) and GHG Fund

3. Reducing specific emissions- SECT, LIS and VSL

Unconventional methods for calculating

• Unclear whether EEDI is mandatory in all cases

• Confuses abatement cost with proceeds

• Does neither distinguish between private and social cost nor between true abatement costs and transfer of revenues

Making calculations transparent

• Show average and marginal abatement cost, including administration and other transaction costs

• Show the burden on industry (abatement cost + any charges or any costs of allowances that are not refunded)

• Calculate net-revenue + discuss how to use it

A few remarks on the likely results

• The ETS is most cost-effective

• Less burden on industry with the GHG Fund

• Large in-sector reductions with US SECT and LES, smallest with GHG Fund

• Possibility for large transfers to LDCs and adaptation/mitigation with ETS and PSL

Problems with offsetting by credits

• Sufficient short- and long-term supply of credits from projects in developing countries?

• Will other sectors accept market dominance by the GHG Fund ?

• Long-term dependence on credits smaller when supplemented by a mandatory EEDI

A biased conclusion?

• The Expert Group says ETS administrative costs would be 3 times those of the GHG Fund

• Most elements are common

• ETS trading likely to have transaction costs somewhat above similar costs for GHG Fund levy + the fund’s purchase of credits

• Fuel suppliers may buy allowances on behalf of customers

How to arrive at a market price?

• LIS and PSL, and IUCN (partly) want to rely on the market price of carbon

• But there can only be a price if some sectors and countries use emissions trading or uniform taxes

• Currently only the EU ETS

• Do the IMO Parties want to leave it to Europe to decide the future price of carbon?

Why make it so complicated?

• The UK wants to distribute all allowances below a global cap to individual countries

• This implies that shipping companies should buy allowances on 190 different national auctions?

• Provides no revenue that can be transferred to developing countries

Emissions from domestic shipping

• Domestic shipping emissions are currently part of national inventories

• Same ships are used both domestically and for international voyages

• To avoid red tape and reduce the risk of fraud, states should be allowed to include emissions from domestic shipping in the global scheme

The size of the burden

• Non of the proposed schemes would increase fuel cost by more than 6% in 2020 and 9% in 2030

• High bunker prices will depress demand for fuel oil and cut emissions and simultaneously reduce the price on CO2.

Conflicting principles

• The UNFCCC is based on the principle of common but differentiated responsibility

• An important principle of the UN Convention on the Law of the Sea (UNCLOS) is no more favourable treatment of ships.

• The expert group could not agree on this matter

Equal treatment necessary

• The principle of no more favourable treatment of ships must apply to the EEDI (for ships in international traffic) and to all MBMs.

• Two thirds of all ships above 400 GT are registered in non-Annex 1 Flag States, but about three quarters of this tonnage belongs to firms in Annex 1 countries.

All countries must contribute

• Common but differentiated responsibility means industrialized nations are expected to do more than could be expected from developing countries.

• But it does not mean developing countries should not contribute.

• As countries develop they need to raise their contribution.

Temporary relief or compensation

• LDCs may be temporarily exempt (possible with ETS, more difficult with PSL and GHG Fund)

• Certain goods may be exempt (e.g. grain)

• Funds created by ETS or PSL can be used for compensating developing countries

• Any decision on a MBM must be long-term

Need for a formula on contributions from non-annex 1 countries (example

of a key)

• States with a per capita income 50% below the poorest quartile of the 1997 Annex 1 countries (in constant 1997 US$) could receive 100% of their share of the revenues, based on the IUCN formula.

• States with a per capita income 25% below the poorest 1997 quartile could receive 50% back.

• States with a per capita income equal to or higher than the poorest 1997 quartile would get nothing.

Spending the remaining net-revenue

• ETS (Norway/France) X% of US$ 17-35 bn

• Should be compared with the $100 bn promised by rich countries for 2020

• An equal amount from aviation might be possible

• This is money with no obvious owner

• Risk of free-riders if all contributions must be made from national budgets – many large deficits

Political issues to be addressed

• Mandatory EEDI

• International tax/charge/levy or cap and trade?

• Ship size (400 GT or larger)?

• A practical definition of the principle of Common but differentiated responsibility

• How to spend the net-revenue and how to finance a US$ 100 billion fund by 2020