Global News Carbon tax needed to spur real action on maritime emissions

SINGAPORE — Without a sufficiently high price on carbon, the maritime industry will lack the needed incentive to make the transition to zero-carbon fuels, slowing the process of decarbonization. But it’s an open question whether that will ever happen, leaving it as an open question how the industry will progress down the path toward achieving net-zero emissions by or around 2050, the revised goal of global regulators.

Today, there is no carbon pricing mechanism in place on a global level, and despite low carbon fuel products offered to beneficial cargo owners (BCOs) by carriers and forwarders, there has thus far been minimal uptake outside of a few early adopters. As a result, the costs of making such fuels available are being borne largely by carriers who say they can’t fund the energy transition forever.

According to a global forwarder, about 200 BCO tenders that it saw for the 2023–24 contract year contained requirements for CO2 mitigation such as biofuel, but none of the final contracts contained these clauses. As one forwarder explained, using a biofuel formula at current prices doubles the cost of an Asia–Europe transit from $1,000 to $2,000 per container.

In other words, despite public commitments by some 4,000 companies globally to reduce Scope 3 emissions, according to S&P Global Sustainable1, those commitments are not trickling down to ocean shipping given that shippers, at least currently, are unwilling to pay higher-than-market freight rates to achieve those goals. S&P Global is the parent company of the Journal of Commerce.

Many believe the only way to change this scenario is through implementation of a global enforceable tax on carbon. It can’t be just any tax, though; it must be high enough to neutralize the price of traditional bunkers and zero-carbon fuels, or at least close the gap significantly. Otherwise, the playing field will remain uneven, and the market will remain dependent on individual companies to take the first steps.

But that might be out of reach. The regulatory wheels that would potentially result in a carbon tax with sufficient teeth to force adoption at a global scale were put in place in July, when the member states of the International Maritime Organization (IMO) agreed to a more ambitious revised greenhouse gas (GHG) policy. The goal is now for the maritime industry to reach net-zero GHG emissions “by or around” 2050, with checkpoints that call for reducing total GHG emissions 20% relative to 2008 levels — and striving for 30% — by 2030, and 70%, although striving for 80%, by 2040. No perfect solution To ensure that was not simply an idle pledge, the IMO agreed to formulate a GHG emissions pricing mechanism, also called a “market-based measure,” by 2027, as well as a marine fuel standard.

But some believe it will be too difficult politically for the IMO member states to agree to a sufficiently high carbon price due to concerns that transport costs will skyrocket, particularly for remote economies such as the Pacific islands. For example, some believe an ambitious price of $250 to $300 per ton of carbon would be needed to effectively decarbonize, given the cost of producing alternative fuels such as ammonia.

“What I am absolutely sure that is going to happen is that there is not going to be a solution that is going to make everyone happy,” Susana Germino, general manager of sustainability and decarbonization at ocean carrier Swire Shipping, told the recent Project Cargo Conference in Singapore organized by maritime news outlet Heavy Lift and Project Forwarding International.

That is leading some to focus instead on the potential for a fuel standard, similar in theory to the low-sulfur fuel requirement the IMO imposed in 2020, as the most viable path forward.

“The fuel standard, similar to previous IMO rules like the IMO 2020 sulfur cap, has the potential to become the main demand driver for green shipping fuels,” Rico Salgmann, Washington-based transport specialist at the World Bank, told the Journal of Commerce.

But the issue with a fuel standard is that, as with other costs, the ability of ocean carriers to pass the cost of compliance on to their customers depends in part on market conditions. For example, some believe that in the current depressed ocean container freight market, carriers won’t be able to pass on costs related to shipping’s inclusion in the European Union Emissions Trading System (ETS). This is no different to how carriers won’t pass along detention and demurrage costs or will extend credit terms during down markets.

That flies in the face of a point carriers have made all along: they can’t fund the industry’s energy transition alone. If forced to do so, it could lead to further consolidation and less competition among carriers — an outcome that could be even more detrimental to shippers than helping to bear the additional cost burden of decarbonization.