European perspective: Carbon trading in maritime transportation

TRB 92nd Annual Meeting

Workshop 174: Anatomy of a Carbon Credit: How Transportation Agencies Can Engage in Carbon Markets

13th January 2013

Sujith KollamthodiPractice Director – Sustainable TransportRicardo-AEA Limited

Overview

• Global CO2 emissions from shipping are continuing to grow significantly

• Ideally, action to address this should be taken at the global level, but progress has been slow

• European Commission is investigating possibility of EU action in this area

• Ricardo-AEA commissioned to provide technical support in developing policy options and analyzing their impacts

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2010 2015 2020 2025 2030 2035 2040 2045 2050

CO

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Source: IMO (2009)

Source: Ricardo-AEA / IHS Fairplay (2013)

Proposed policy measures

• Four key policy measures investigated

1. Emissions trading scheme

2. Taxation scheme

3. Compensation Fund

4. Mandatory emissions reductions

• Emissions trading and Compensation Fund can both be viewed as schemes involving carbon credits

• Taxation policy options would place a tax on EU shipping emissions or fuel sales

• Mandatory emissions reductions would place targets on individual vessels to reduce their annual GHG emissions

Design elements common to all policy options

• Monitoring, reporting and verification of emissions

• Fuel consumption measurement: could be via log books, fuel flow meters, bunker delivery notes, fuel inventories, or ship movement data

• Frequency of emissions reporting: per journey or on an annual basis

• Competent authority: could be a central European regulator or could be devolved to EU Member States

• Scope of emissions covered

• Ship types and ship sizes covered: could be selected to maximise environmental effectiveness whilst minimising administrative burden

Criteria % vessels % of total CO2

in EU-27 Excluding offshore vessels, service vessels, yachts or fishing vessels

86% 97%

Excluding ships smaller than 5,000 GT 57% 91% Total for combined criteria (accounting for overlaps) 56% 90%

Design elements common to all policy options

• Scope of emissions covered

• Journey types: must include all ships entering and leaving the EU as well as intra-EU voyages

• For ships entering/leaving the EU, must determine start/end points for quantifying the emissions included in scope. Options include: • Time-based• Distance-based• Previous/next port of call• Based on origin of cargo being

transported

• Responsible compliance entity

• Ship owners?• Ship operators?• Fuel suppliers?• Ports?

Design of key policy options – Emissions trading scheme (ETS)

• ETS would operate by setting an overall cap on emissions from a defined group of entities

• Each participant must monitor/report their emissions and submit allowances equal to their emissions

• Allowances can be auctioned and/or allocated free of charge

• Design options for the scheme:

• Closed system (only reductions from within the maritime sector allowed)

• Open system, linked to other ETSs (allows the use of most cost-effective abatement options from multiple sectors)

• Open system linked to out-of-sector project credits

Industry-managed GHG compensation Fund

• Idea modelled on Norway’s NOx Fund

• Fund would need to be set up as legal entity responsible for ensuring emission reductions

• Responsibility for reducing overall emissions would not lie with individual vessel owners/operators

• Two main options for implementation

• Contribution-based Compensation Fund

• Members pay into Fund in line with their emissions performance (fixed value per tonne CO2)

• Revenues would be re-invested by the Fund

• BUT no overall emission reduction target

• Target-based Compensation Fund

• Agreed reduction target

• Fund would be responsible for enrolling members (penalties for non-members)

Use of revenues

• Emissions trading or a Compensation Fund would both generate revenues (e.g. sale of allowances, membership fees, etc)

• Options for the use of revenues include

• Refunding participants

• Funding R&D in maritime emissions abatement measures

• Support the uptake of abatement options (grants, loans)

• Investment in international emission reduction mechanisms (e.g. Clean Development Mechanism, etc)

• However, clear performance metrics are required for allocating revenues to any of these uses

Possible mechanisms for allocating rebates

Allocation mechanism Advantages DisadvantagesImprovement in carbon intensity of operations

• Accurate reflection of performance improvements 

• High administrative burden

• Does not reward early action

• Requires a benchmarking year to measure initial performance

Absolute carbon intensity of operations (e.g. reaching a threshold or through a “league table”)

• Accurate reflection of performance achieved

• Rewards early action

• Could inherently favour larger ships

• Difficult to find an equitable threshold to suit all ship types and operations

Improvement in absolute EU emissions reductions

• Lower administrative burden compared to measuring carbon intensity

• Does not reward early action

• Rewards ships that reduce activity within the EU (e.g. by moving elsewhere)

• Requires comparison between different years of operation – therefore will be affected by ships entering and leaving the scope of the legislation

Equal amount to each operator

• Easy to administer • Does not effectively encourage efficiency

• Penalises ships that are highly active in the EU while disproportionately rewarding those that make small payments under the scheme, even if they are not efficient.

Possible mechanisms for allocating revenues to R&D

Allocation mechanism Advantages Disadvantages

Rebates to participants who can demonstrate a certain level of R&D investment

• Technology neutral

• Allows shipping industry to determine its own needs

• Private research may not lead to knowledge spillovers

• Could lead to duplication of effort

A call for R&D grant applications, without strict specifications on technologies/topics

• Technology neutral • Administrative burden to determine which projects receive funding

• Submissions may not meet stakeholder needs

A predetermined list of technologies/topics eligible for support

• Greater control over spending to ensure that environmental, social and economic gains are maximised

• Topics can be selected in collaboration with various stakeholders

• Risks “picking losers” or limiting the extent of innovation

Possible mechanisms for allocating revenues to support uptake of abatement measuresAllocation mechanism Advantages DisadvantagesA predetermined list of abatement measures eligible for support

• Greater control over spending to ensure that environmental, social and economic gains are maximized

• Risks limiting uptake of innovative measures

• Risks funding measures that are not suitable for the ship’s type/operational profile

• Administrative burden to determine suitable measures and update the list periodically.

Fund measures that meet a certain expected level of abatement in the sector e.g. % reduction or % reduction per Euro

• Allows support for a variety of measures

• No need to pre-commit to certain measures

• High administrative effort

• Approach does not prioritize where to spend funding on measures surpassing the threshold

Fund measures that achieve the highest scores relative to certain criteria (ranking options)

• Allows support for a variety of measures

• No need to pre-commit to certain measures

• High administrative effort

• Could disproportionately benefit certain sectors/ship types

Summary

• Policy options that use carbon credits for addressing EU-international shipping CO2 have been developed and analyzed

• Scope of action needs to be carefully considered, regardless of the policy option

• Emissions trading can be implemented in a number of ways (e.g. open vs closed schemes)

• Compensation Fund offers an industry-managed alternative

• Both options could generate revenues which could be used for multiple purposes

• Care needs to be taken in designing suitable metrics and mechanisms for allocating these revenues to specific purposes

Sujith KollamthodiPractice Director – Sustainable Transport

Ricardo-AEA LimitedThe Gemini BuildingFermi AvenueHarwellOxfordshireOX11 0QRUnited Kingdom

Tel: +44 (0)870 190 6513E: sujith.kollamthodi@ricardo-aea.com W: http://www.ricardo-aea.com

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