Is taxing shipping really the best way to net zero?

A PRESS release that arrived from the Global Shippers Forum (GSF) this week had the subject line: “Shippers fear carbon tax will hike freight costs still higher”. Well done the shippers for spotting that. They’ve got it in one.

The GSF statement notes that the “new carbon tax” up for discussion at this week’s Marine Environment Protection Committee (MEPC) meeting at the International Maritime Maritime Organization (IMO) “seems set to raise freight costs to shippers beyond their already record levels”. Actually, well done too the shippers for using words the IMO is careful to avoid: “carbon tax”.

The GSF, which represents cargo owners that export and import across international supply chains, explains that, following the decade-long efforts of the IMO to gain agreement on the so-called IMO 2023, a set of energy efficiency measures for existing ships, which finally take effect next year, its MEPC is now discussing a further proposal put forward by the shipping industry to introduce a carbon tax on bunker fuel. This is intended to incentivise a switch to lower carbon emitting fuel options and could eventually double the current price of traditional bunker fuels.

That is a concise summary in clear English of what is going on. You would find it more difficult to discern what is happening if you were to read an IMO statement on the subject, also issued in the past few days.

It reports on the 12th session of the Intersessional Working Group (ISWG) on Reduction of GHG Emissions from Ships, meeting from May 16 to 20. It says: “Following very constructive discussions, the Working Group agreed to advance towards the further development of a “basket of candidate mid-term measures” – integrating both technical (for example, a GHG fuel standard and/or enhancement of IMO’s carbon intensity measures) and carbon pricing (for example, through a market-based measure) elements.”

IMO adds that the ISWG “also discussed a number of concrete proposals for mid-term measures and associated impact assessments, in the context of IMO’s Work plan on the development mid-term GHG reduction measures”.

The short-term measure to reduce carbon intensity was adopted as amendments to MARPOL Annex VI in June 2021 and includes the Energy Efficiency Existing Ship Index (EEXI); annual operational carbon intensity indicator (CII) rating and an enhanced Ship Energy Efficiency Management Plan (SEEMP).

According to IMO the WSG “supported, in general, the further development of a ‘basket of candidate mid-term measures’, integrating both various technical and carbon pricing elements while recognising the necessary flexibility”. That’s where the carbon tax comes in. In IMO-speak carbon taxes are “market-based measures” (MBM) and they being considered by IMO as “carbon pricing elements”.

Now the GSF is primarily concerned that shippers are going to have to pay more to the shipping lines for carrying their cargo. As it happens I think, for a host of reasons, that would be no bad thing. Until the massive Covid-19 freight rate spike, shippers had been getting a very cheap deal ever since the final abolition of the liner conference system 14 years ago, and actually well before then.

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Whether you agree or not with the shippers’ views about the cost of liner shipping services their analysis is helpful. It says: “In the first instance GSF is urging regulators to make sure that the potential for shipping lines to remove older tonnage from the market, which they deem uneconomic to upgrade to progressively more demanding efficiency levels, is not used as a disguised means for capacity management resulting in higher freight rates.”

The short term measures may have the effect of eventually removing older tonnage. It is more likely shipowners will retire older tonnage simply because it costs more to operate. On the other hand the liner shipping industry has had a long term addiction to building more ships than it needs and there is little indication that has changed.

However it is the potential for a carbon tax that really worries shippers. The GSF says: “Moreover, there is perhaps a more obvious danger to shippers. Given the widespread use of Bunker Adjustment Factors (BAF) and the rash of new surcharges ahead of the introduction of Low Sulphur Fuel in 2020, shippers will be wary of how much of this proposed Carbon Tax will just be passed through to them.”

GSF director James Hookham argues: “Shippers will be forgiven for thinking that the proposal, and its consideration at the IMO will inevitably result in still higher freight rates. That’s because the shipping industry has a very efficient mechanism for passing through higher fuel costs in the form of BAF; a surcharge to cover variations in fuel price. There are few reassurances in the existing proposals that a carbon tax won’t just be passed through as an added cost for shippers.”

Mr Hookham goes on to demand: “If the shipping industry is serious about MBM as a route to decarbonisation then it needs to insulate its customers from their inflationary effects otherwise emissions will be reduced by suppressing demand for world trade rather than by incentivising the step-changes in fuels and propulsion technology, so urgently required.”

Except that this view misses the underlying reality that achieving net zero is going to cost a lot of money that will eventually have to be found by the ultimate consumers of transported goods. That means all parts of the supply chain will have to pay more and pass on their increased costs. Yes, world trade probably will be suppressed to some extent. And yes the price rises will be inflationary. Saving the planet isn’t going to be cost-free. It won’t be painless.

It is interesting the GSF refers to the low sulphur fuel regulations. Of course they did mean extra costs and they were passed on – much to the annoyance of the GSF. But the low sulphur fuel was introduced by IMO regulations. They worked. That is what IMO does. It makes regulations. There were no convoluted MBM to incentivise shipowners to use low sulphur fuel. They were simply told they had to comply with the regulations by a certain date. Of course they had no choice and with very few exceptions they complied.

Nobody has ever convinced me that the regulatory approach would not work just as well for achieving net zero. And they certainly haven’t persuaded me that creating a global carbon taxation administration is going to be anything other than a bureaucratic nightmare. The shipping industry asking for a global carbon tax is a classic “turkeys voting for Christmas” scenario.