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Could a levy on air and shipping fuel sink emissions?

Steve Cordory / shutterstock.com

Could a levy on air and shipping fuel sink emissions?

Global agreements to aim for “well below” 2℃ warming are nice enough, but now it’s time to develop some detailed policies to help us get there. Ships and planes are significant sources of greenhouse gases, and their emissions are projected to rise. Currently, both sectors exist outside national level frameworks and are not explicitly referred to in the international Paris deal. So what changes can we expect?

A recent IMF paper on the global economic implications of the Paris agreement suggested that international shipping and aviation fuels should have a levy applied to them to create both revenue and encourage reduced emissions. The IMF proposes US$30 per tonne of CO2 emitted.

A scheme already exists in Europe, where every flight from one EU country to another is included in the Emissions Trading Scheme and CO2 emissions must be accounted for and “paid for” using permits – in essence applying a price to the flight’s emissions.

The primary difference between the IMF’s proposed levy and a global ETS is over how the carbon price is set. In a levy, the price is chosen by policymakers and reviewed periodically, in an ETS a carbon market and an emissions target (or cap) is used to set the price.

Where would the money go?

The IMF suggests putting a little over half of the revenue aside for developing countries as compensation for trade losses. The remainder (around US$25 billion) would contribute to the US$100 billion Green Climate Fund, which helps poorer nations cope with the effects of global warming.

This is unpopular with many in shipping and aviation who understandably question why their sectors should provide such a large share. After all, they still only represent a combined 4% of global greenhouse gas emissions, so why contribute to 25% of the fund?

The money could be used in other ways, of course, such as to purchase offsets from other industries or to fund investment in research and development on cleaner ships and planes. But it’s not clear whether offsetting would genuinely help reduce emissions, whereas the latter would be hard to administer and ensure that all countries benefited equally.

Consumers might not even notice

What would a carbon tax mean for the price of international air travel or the cost of the food, fuel and goods that arrive by sea?

Ships refuelling in the South China Sea. Marc Rockwell-Pate / US Navy

Burning a tonne of either ship or jet fuel creates about three tonnes of CO2, so the IMF’s proposed levy would create a surcharge of about US$90 per tonne of fuel consumed. Fuel costs around US$300 per tonne at today’s low oil prices, so a levy would increase a company’s fuel costs by about 10-30%.

But fuel is just one component of a ship or plane’s total costs and therefore the prices that customers pay for flights and goods. In practice, markets that determine overall prices can and do vary by more than the probable effects of a levy (at least at the level IMF propose). Oil prices have fallen dramatically in recent years, for instance, but that hasn’t produced substantially cheaper transatlantic flights or consumer goods from China.

Keep the focus on reducing emissions

The focus on levies and revenues like that proposed by the IMF risks missing the point. Keeping warming at well below 2℃ needs absolute emission reductions – fast.

Unfortunately, current evidence is that US$30 a tonne for CO2 would not deliver the absolute emission reductions required over coming decades. This is partly because demand for shipping and aviation doesn’t closely match price fluctuations – there are often few alternatives, and both industries are key to keeping the modern world up and running.

So if higher costs passed on to consumers still don’t reduce demand then we must reduce the emissions per ship. However eco-friendly vessels won’t pop up overnight. Making progress requires new technologies, either those that improve the efficiency of existing ships' hulls and propulsion machinery, or those that create entirely new ships powered by renewable or alternative fuels.

Developing these technologies will take some time. But to create these technologies there also needs to be a clear signal that this is the direction shipping is going. Otherwise investors won’t have confidence in the R&D, infrastructure and start-ups necessary to help shipping transition.

None of this rules out carbon pricing – this in itself can be part of a “clear signal”. But the extent emissions are actually reduced really needs to be considered, as without this we just end up moving money around the world while remaining on a course for climate catastrophe.

The global agencies responsible for regulating shipping and aviation both meet later this year, with greenhouse gases and climate-change issues high on the agenda. These meetings will be crucial because transforming both into low-carbon industries will only become harder the later we start.