Frequently Asked Questions and Answers about the differentiated IMERS
Please note that some of the FAQs have not been updated to reflect the "refund" version submitted to the UNFCCC, yet.
In the refund version the levy is uniform, applies to all ships, on all routes. Instead of the more complex differentiation by final destination of goods, the same effect is obtained through a refund to developing countries. The refund is calculated in relation to a country's share of worldwide imports.
A cap on emissions is an integral part of the scheme and applies to total CO2 emissions subject to the regime. Achievement of the cap is the key objective of the scheme. This cap is not further divided into individual country obligations, or caps.
The volume of projected emissions above the agreed cap together with the prevailing market carbon price dictates the level of the levy (emission charge). Collected at this level, the levy would generate enough money to offset the emissions above the cap.
Emission reductions are therefore guaranteed, albeit not necessarily in the shipping sector. The collected money is spent on reducing emissions elsewhere. These reductions are most likely to be outside the shipping sector due to lower abatement costs in the power generation sector, and similar. If a deficit appeared in a given year for whatever reason, the levy is adjusted upwards the following year to cover it.
The employed mechanism is a hybrid quantity-price instrument, not just a tax, pure price instrument. The level of the levy is not set arbitrarily as in a tax but it is determined by the quantity goal (cap on emissions) and the prevailing market carbon price. The carbon price, created by the EU ETS and other mechanisms, in fact enables this hybrid mechanism. Without it the scheme could not exist. Secondly, the revenue raised is directed to reduce emissions as per the cap.
Furthermore, the scheme provides an option to go some way in correcting the market failure relating to the lack of adequate investments in shipping R&D for the significant emission reductions required. Additional revenue for technology research and transfer can be raised, but only if the levy is set higher than the level dictated by the emission cap and carbon price.
Some emission reductions would inevitably occur within the shipping sector driven by underlying economics. Only the remainder of reductions needed would be purchased from other sectors. How much is purchased from other sectors is driven by what is most cost efficient.
It is anticipated that the impact of the scheme would only be approximately 0.1% increase in prices of imported goods to Annex I countries, despite the ambitious goal of a 20% reduction in emissions by 2020. This is equivalent to an extra $1 for every $1,000 of imported goods. There will be no cost impact on imports to developing countries.
100% of raised financing would go to climate change. Projected funds are expected to be in excess of $6bn annually from 2013 onwards, as shown in the table below.
FUNDS (in $billions per annum) 2013 2020
Adaptation 2.5 10
Mitigation 2.5 10
Technology 1 3
TOTAL: $6bn+
The adaptation and REDD+ resources would be contributed to the funds under the UNFCCC, such as the Adaptation Fund and the anticipated Forestry Fund. The technology resources would be managed through a dedicated Maritime Technology Fund (established with the shipping industry under the International Maritime Organization; or similar).
Other mitigation resources, if any, would be used to acquire emission credits through professionally managed carbon funds. This will be a part of the of the post-2012 climate change agreement.
Least Developed Countries (LDCs) and Small Island Developing States (SIDS) would benefit most from the scheme due to the significant adaptation financing that would become available to them. The shipping itself would also benefit significantly due to technology funding (in $billions annually), further leveraged by private and public investments. How the funds will be split would be agreed by parties to the UNFCCC.
One potential distribution is dividing the funds into three parts: adaptation to climate change in developing countries, REDD+ (forestry), and technology in the shipping (R&D, incentives, etc.). Adaptation and forestry funding would be under the UNFCCC convention, the technology funding is proposed to be governed by the IMO & the shipping industry.
The centralized approach aggregates demand for emission credits from the entire shipping sector. This would provide access to cheaper emission credits on primary emission markets (including CDM/JI) and access to government forestry schemes (REDD) at prices much lower than on the retail market. This would generate gains which are utilized to address adaptation issues, without any costs to shipping.
The simplest option is a direct payment to an emission account administered centrally. Each ship would have an account and would be liable for the levy being settled for the previous period. The account would be with the World Bank (or a selected commercial bank operating the accounts). The levy will be paid by charterers, ship-owners, ship-operators or other entities as specified in the commercial terms of the ship charter/use, in a similar way as the terms which specify who pays for fuel.
Compliance would be enforced through Port State Controls in Annex I countries only. They would have access to a central system for shipping emissions based on IMO ship numbers. There is no need to enforce the scheme in non-Annex I countries, which is an important co-benefit of the scheme as it accelerates implementation and avoids lack of capacity in some developing countries.
The governance of the funds, including a supra-national body and how the revenue would be distributed, is to be agreed within the climate change negotiations. This would be part of the overall framework for financing climate change action to be governed under the UNFCCC convention. The supra-national body is not prejudged but proposed at this stage. One reason is to assure that the funding generated is treated as additional in the meaning of the Bali Action Plan for climate change (i.e. it should be governed under the UNFCCC convention).
All ships transporting goods to any destination are treated the same, irrespective of flag they carry and the ship-owner nationality, and so on. For instance all ships delivering goods to Hamburg are treated the same and are subject to the levy. All ships delivering goods to Shanghai are treated the same (and currently would not be subject to the levy).
The level of the levy would be announced one year in advance, thus providing cost predictability and enough time for the shipping industry to incorporate the levy in their prices.
Please note that this Question is not relevant for the latest, refund version of IMERS.
In the refund version emissions from all ships are subject to the scheme (i.e. 100% of emissions from international shipping).
Approximately 60% of shipping emissions are attributable to Annex I countries, based on volume of unloaded cargo. Therefore 60% of emissions will be addressed on day 1 of the scheme with an ambitious emission reduction goal – such as 20% emissions reductions by 2020 – as it would apply to Annex I countries only. The current regime does not guarantee any reductions whatsoever in the sector.
The scheme scope and cap are not independent. Expanding the scope to developing countries in a uniform manner is likely to lead to a significantly less ambitious, diluted cap. The end result might actually be the same or even worse than a scheme applied only to Annex I, not to mention being less likely to be accepted in the first place.
Objections for such a uniform scheme would stem from both sides. For instance to achieve similar total reductions as for the Annex I scheme, it would be enough for the uniform scheme to use a simple stabilization goal at the 2005 level. However simple, this goal for shipping emissions would be in our view: 1) difficult to accept in Annex I countries as not ambitious enough for the public and at odds with national targets, 2) impossible to accept in non-Annex I countries due to the principle of common but differentiated responsibilities and respective capabilities (CBDR), and the reality that greater reduction commitments and costs would be imposed on them than on developed countries.
Furthermore, IMERS can easily accommodate an important additional goal: to deviate below business-as-usual emission trajectory. This could enable some developing countries to enter the scheme. However for them the differentiated levy would be determined from the committed emission deviation and market carbon price, rather than the cap and carbon price used for developed countries. This would increase the ambition of the scheme further. Inclusion of such a deviation commitment in any cap-and-trade scheme seems rather complex, if not impossible.
The levy would be established at the rolling average of the carbon market price, adjusted for any prevailing free allowances. In short, shipping industry would be subject to the same carbon price as other industries; no more, no less.
Until a global carbon price emerges, the rolling average of the largest economy-wide emission reduction scheme, adjusted for any free allowances existing in the scheme, is proposed (likely to be the USA market).
The above price linkage is preferred since 2009.
The old version of deriving the levy from an emission cap is described below (for historical reasons).
The level of the levy, in this older version, was derived from the projected gap between emissions and the cap, as shown below. E is the projected emissions, and C is the cap for the total emissions. R is the ratio equal to the percentage of emissions that are above the cap, calculated as R = (E – C ) / E. In the simplest case R defines the level of levy in terms of the carbon price. The levy can be adjusted upwards for an extra charge for technology R&D.
Furthermore, both E and C can be expressed in reference to emissions in any given year – such as 2005 – through an appropriate growth rate. R can therefore be calculated from an emission growth rate for E and an emission reduction rate for C. This allows the scheme to start operating without the a priori knowledge of total emissions, in contrast to cap-and-trade for which reliable emission data is required to allocate emissions.
Example calculations for 2013. Emissions (E) and cap (C) are projected to be 116% and 89% of emissions in 2005, respectively. The ratio (R) is calculated as 23%. An adjustment of +7% for technology and scheme costs brings the levy to 30% of carbon price (wherein the carbon price is not adjusted for any free allowances).
NOTE: Please note that in a "USA linked" version of IMERS the levy could be set through a different mechanism. This is a subject of consultations starting in early 2009 (in the context of the recent proposal for an economy-wide cap-and-trade scheme in the USA). Please contact us if you require further details.
In the refund version, the calculations are based on the USA estimated carbon price of circa $15 per ton of CO2. Therefore they implicitly include the impact of the current recession.
No discount for free emission allowances has been applied.
Historical calculations
For the previous version with a global cap, the following sample costs and benefits calculations for 2013 took account the impact of the recession. The annual net emissions growth rate has been discounted to 2% per annum due to the current global slowdown (this is equivalent to skipping one year of growth and using the most conservative previous growth scenarios). An illustrative cap is set at an ambitious 20% reduction in emissions by 2020 from its 2005 level. It applies only to emissions attributable to Annex I countries (current climate change regime). Total baseline emissions in 2005 are rounded to 1 GtCO2, as per the higher estimates and for ease of scaling. Based on the emission growth rate and the emission cap, the levy is calculated as 30% of the carbon price in 2013, translating to approximately 5% of the fuel price.
The scheme is economically efficient; trading occurs between different sectors: those which can make emission reductions cheaply and those which can’t. The shipping sector would be the net buyer of emission allowances/credits from other sectors for the foreseeable future. These purchases would cover the reductions they cannot make cost-effectively themselves and would be purchased centrally from the funds aggregated in the scheme (purchased from the power sector, REDD, CDM/JI, etc.). The shipping industry will also have an increased incentive to become more fuel-efficient, as the total levy paid is directly linked to the amount of fuel used. The trading aspects of IMERS, its links to emissions trading schemes have been independently analyzed and endorsed.
The incentive for selling unused allowances depends on the cost of their acquisition, and may not exist in reality. The only cap-and-trade scheme with relevant details in this area is METS, introduced by Germany for furthering discussions on the topic. In METS, emission allowances are auctioned and none are allocated for free (see IMO GHG-WG 1/5/7). Therefore the incentive from selling unused allowances does not exist as the price of selling would equal the acquisition price (either at auction or from the carbon market).
The fuel data is available from the already obligatory fuel receipts (so called Bunker Delivery Notes).
That's enough.
In the new refund version, no extra data is required.
The following description is shown for historical reasons. It also demonstrates the simplicity and advantages of the currently preferred, refund version.
In the previous version, the levy was only to be paid at lower than 100% level once the ship demonstrated that it was entitled to the reduced rate through the selected responsibility measure (such as the ship’s ratio of delivered cargo to Annex I countries). We understand that this single number can be extracted from the cargo data available for the ship charterers without much effort.
This additional measure will not even be required for many ships. The majority of oil tankers and cargo ships would pay either 100% or 0% in a given period, as they are typically bound for a single destination, either to an Annex I or non Annex I country/countries (for instance a tanker chartered to transport crude oil from the Gulf to the USA).
For container ships, the responsibility measure could be the share of full containers destined to Annex I countries (expressed in TEUs). This information is available from the systems operated by the liners, as the destination of container is practically always known. For the very limited number of “ghost containers”, this loophole is expected to be fixed in the near future, mainly for supply chain security reasons. Implementation for liners would be made easier thanks to the high use of ICT systems and very high concentration in the sector (16 companies comprise 80% of the sector).
Given that any market-based scheme for shipping would need to be applied globally in order to be effective, its design viability and flexibility should be the key evaluation criteria. The design should accommodate the highly complex and dynamic nature of the shipping industry. The following graph illustrates a comparison of IMERS with a potential cap-and-trade. The hybrid cap-and-levy scheme employed in IMERS:
Given that international emissions occur mostly outside of national jurisdictions, the Law of the Sea (UNCLOS) is seen as a firm legal framework for the supra-national approach proposed (derived from articles 89, 136, 137, and 140, among others).
The supra-national approach has also an important decision making benefit. It does not raise questions regarding ear-marking (hypothecation) of a national revenue for specific causes in several countries. Supra-national revenue would always be off national books.
Furthermore, the International Oil Pollution Compensation Funds (IOPC Funds) provide a precedent of direct collection of a levy that bypasses national systems in the maritime sector. The IOPC levy is based on a formula, which is also important from a legal standpoint.
Finally, as the levy would be driven by a market-based formula, and ultimately paid by the importers without discriminating against any exporting countries, it would be compliant with both WTO and GATT rules.
The risk of inaction is twofold: repeat Kyoto’s failure to address maritime emissions, and fail to provide additional financing for adaptation to climate change crucially needed for the most vulnerable.