Assessing the Market-Based Measures Expert Group`s Report

Assessing the MBM EG’s report
Dr Per Kågeson
29 September 2010
The Expert Group’s feasibility study and
impact assessment of the MBAs
• A valuable summary and assessment of the
• 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
Negative side-effects of flexible and costeffective 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
2. Cap on total emissions
- Norway/France/UK (auctioning + trade) and GHG Fund
3. Reducing specific emissions
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
• Show the burden on industry (abatement cost + any
charges or any costs of allowances that are not
• 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
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
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