The total carbon footprint of a globally traded product includes all of the carbon emissions associated with its production, consumption, and distribution—including international maritime shipping. The world’s carbon emission reduction efforts have largely focused on domestic production and consumption. Countries are beginning to consider carbon traded across their borders. International shipping emissions, a core component of global trade, have escaped scrutiny.
The greenhouse gas emissions of total maritime shipping (international, domestic, and fishing) were 1,076 million tonnes in 2018–accounting for only 2.89 percent of global anthropogenic GHG emissions. Currently, the international maritime shipping industry’s carbon reduction strategy relies on energy efficiency standards that were added to the International Convention for the Prevention of Pollution from Ships (MARPOL). The new standards require all new ships to meet specified energy efficiency targets.
Tatiana Falcão, an international tax law consultant and policy adviser, is currently a member of the United Nations Subcommittee on Environmental Taxation. Falcão proposes taxing the emissions from international shipping based on distance and the destination of a product. Under her proposal, the tax liability of each good would be a product of distance traveled to the destination and carbon tax rate in the country of destination. The shipping company would pay the proposed tax to the country of destination.
As countries are recovering from the economic downturn caused by COVID-19, Falcão explains, they need to explore new types of taxes, or expand the tax base of current taxes. Countries with domestic carbon taxes are likely looking to apply carbon taxes on new tax bases, such as air or maritime transport.
Falcão argues that the proposal would incentivize emission reduction through a lower volume of international trade. By taxing emissions released during the international journey, Falcão believes that shipping companies would pass on the additional cost to merchants–which would likely make internationally traded goods less competitive than locally produced goods.
However, Falcão’s proposal might not incentivize shipping lines to reduce emissions on a marginal basis, as the tax liability is equal to distance traveled multiplied by the carbon tax rate in a country destination. If a shipping company improves its fuel efficiency, it will incur the same tax liability as before–with the same distance traveled and carbon tax rate. This proposal does not discriminate between a fuel-efficient and a non-fuel-efficient ship–running counter to carbon pricing logic.
Falcão’s proposal is actually a Vehicle Miles Traveled (VMT) tax—a tax that charges road users based on how many miles they have traveled. Her proposal is more of a transportation tax framed as a carbon tax. When policymakers consider taxing emissions from international shipping, they need to tax pollution level directly, not distance travelled.
It may not be a top priority to tax the carbon emissions from international maritime shipping compared to other more pressing areas, but it’s still helpful to start a discussion now about what could be a good and practical policy tool to incentivize carbon reduction in this sector.
Photo credit: iStock