There is no practical alternative to the rebate mechanism for a global and differentiated MBM for international shipping.

In theory, it could be more efficient to exclude developing countries from participation in an MBM altogether, in order to comply with the CBDR and avoid the need for rebates (CBDR stands for the UNFCCC principle of common but differentiated responsibilities and respective capabilities). This would require differentiating the application of an MBM based on final destination of goods.

This option was proposed in the second generation of the IMERS proposal (2009), and was thoroughly studied. Ships transporting goods to developed countries would be covered, while ships transporting goods to developing countries would not. Ships transporting goods to both developed and developing countries would be partially covered. Such an approach would eliminate any impact on imports to the developing countries upfront.

However, the approach based on final destination of goods proved complex, particularly for container ships. It would require obtaining a verifiable share of goods transported to developed countries by each ship or company worldwide. Given the tens of thousands of ships operating worldwide, collecting and validating such information would require significant administrative efforts. This complexity was recognized also by various experts and negotiators from developing countries, paving the way for the next proposal.

In contrast, the rebate approach is much simpler than the above complete exemption of developing countries, and thus can be easily implemented globally. Only approximately a hundred fifty rebates are to be issued, one to each developing country, and the data required to calculate the rebates is readily available. Such rebates could be issued annually, or more frequently. Furthermore, it provides important additional flexibility for a country to forego the rebate or part of it.

In principle the proposed rebate mechanism could apply to any MBM, providing it generates enough gross revenue to cover the rebate needs. Given that developing countries import approximately 30% of goods worldwide, the gross revenue of an MBM that can provide rebates for developing countries must be greater than 30% of the instrument’s global cost burden (assuming a uniform application; before any benefits are taken into account).

Any MBM based on a levy or a GHG contribution can directly use the proposed rebate mechanism, as its cost burden equals the gross revenue raised.

For an MBM based on emissions trading, such as cap-and-trade, the integration depends on its design. For instance, the total economic cost of cap-and-trade is the sum of (1) the cost of emission allowances distributed to the maritime sector and (2) the cost of emission allowances and credits purchased from other sectors. As the revenue in cap-and-trade is typically raised through emission allowance auctioning, only schemes that auction at least 30% of the emission allowances could apply the proposed rebate mechanism.

For any scheme that assumes non-uniform application, for instance applying different charges based on the efficiency of ships, integration of the rebate mechanism would be more difficult. The cost burden on a given country would for such schemes depend on efficiency of ships serving the country, and thus its rebate cannot be calculated easily.

The most equitable key for the rebate mechanism should relate to a country's usage of international shipping. But is calculating such usage feasible at all?

As is often argued, international shipping provides a service to international trade. Each country therefore could be seen as a user of that service - even land-locked countries. As in any shared service environment, the usage of a service by each user can be calculated, and attributed to each user if required.

A country’s usage of international shipping is closely related to its imports. It can be estimated through a country’s share of global seaborne imports. It is not related to the amount of fuel sold to ships, or the number of ships registered or owned in the country. The recent recession has demonstrated clearly this relationship to imports; lower demand for imports has caused a drop in shipping activity.

As an example, seaborne imports to the United States of America (USA) in 2007 were $1,082 billion. This equates to 13.6% of global seaborne imports of $7.7 trillion in that year.

Thus the USA usage of international shipping is estimated as 13.6%, according to this approach. We also estimate the USA usage of international shipping by a share of unloaded goods by weight, which equals 13.4% in that year. These two estimates are very close.

Data on seaborne imports, country-by-country, is not generally available. However, data on share of global imports by value, country by country, is readily available; for instance from the International Monetary Fund (IMF), and UNCTAD. Thus it could be used to proxy a country’s usage of international shipping, and therefore to estimate a country’s share of cost burden, or tax incidence, from a global MBM. For instance, the USA share of imports by value was 14.2% (UNCTAD).

Given that many developing countries trade mostly by sea and air, using share of imports instead of share of seaborne imports is justified, if a very high degree of accuracy is not required.

For islands, especially remote ones, this is even more so as they only trade by air and sea. However, for countries that trade extensively via other modes of transport, for instance land and pipe, such as the European countries, this approach is less accurate. However, for these countries, there may not be a need to calculate their usage of international shipping country-by-country, as they would not be entitled for rebates. Thus this may not be an issue. If needed however, relevant adjustments could be made as data on transport modal split is generally available for developed countries.

Given that the main objective is to create a practical approach to incorporate the CBDR principle into a global MBM, rather than create a theoretical or perfect regime to attribute shipping emissions to countries, using share of imports may be fully justified.

This is further discussed at the end of the next section, including why we propose using imports by value rather than by volume, or by volume-distance, as well as why and when a share of imports by sea and air is the preferred choice.

The above approach could also potentially be used to proxy the share of international shipping emissions of a particular country and could be included in its national emission accounts, if required.

The net revenue raised by the scheme, after the rebates have been issued, is split between assisting developing countries in implementing climate change action, and assisting the global shipping sector in accelerating reductions of its growing emissions through technological advances.

Consequently, the net revenue would come from consumers in developed countries only, complying with the principles of the UNFCCC. Furthermore, developing countries would be beneficiaries of such a scheme, with the most vulnerable countries to benefit most through the relevant rules and provisions applied to the disbursement of net revenue. The shipping sector should also benefit from the net revenue, potentially through a new global Maritime Technology Fund, or similar.

In order to maximize environmental effectiveness and cost-efficiency, the entire net revenue raised is to be disbursed through existing institutions for: (a) Adaptation to climate change in developing countries, (b) Mitigation programs, such as reduction of emissions from deforestation and forest degradation (REDD+), and (c) Technology R&D, transfer, and transformation to low carbon shipping.

Although not discussed in detail, it is proposed to reserve a significant pool of adaptation funding to the most vulnerable Small Island Developing States (SIDS), Least Developed Countries (LDCs) and Africa.

To illustrate the benefits and costs of such proposal, we model an average scenario for shipping emission growth, and assume carbon price scenario, as summarized in Table below (identical to the medium carbon price scenario used in IMO 2010c).

We assume that circa 30% of gross revenue would be spent on rebates for developing countries. We further assume that the net revenue, the remaining 70% of gross revenue, is spent on climate change mitigation, adaptation, and technology, balancing different needs. How the net revenue is allocated would be a decision by Parties. For modelling purposes we use illustrative financing assumptions as shown in Table below.

The modelled emissions and financial details are shown below.

The left graph shows three types of emissions: BAU (business as usual), MBM (sector), and Net emissions (in MtCO2). The right graph illustrates the financial details for the four target spent areas: rebates, mitigation (REDD+), adaptation, and technology for 2020 and 2030 (in US$ billions)

BAU refers to emissions without applying MBM. It already incorporates any reductions achieved through technical and operational measures. MBM (sector) refers to emissions after applying the MBM. Net Emissions shows the effect of mitigating shipping emissions from REDD+ arrangements, and similar. This line in the period 2015-2020 is nearly horizontal due to the phase-in of the scheme over the period of 5 years. From 2020, it generally follows the trend of MBM (sector) equivalent to 72% of the total, given that 28% of shipping emissions are mitigated (from the 40% of net revenue spent on mitigation).

It is anticipated that the significant technology financing proposed, for R&D and similar, would reduce shipping emissions in later years. However such benefits are not reflected in the modelling. Potential capture and sequestration of CO2 emissions are also not included.

The total cost burden of the scheme, ignoring any benefits, are circa US$26 billions in 2020 and US$50 billions in 2030, as shown in Financial figure. However, these numbers are very small when compared with the value of seaborne trade measured in US$ trillions.

We estimate the maximum potential increase in the total value of seaborne trade, due to the above cost burden, to be under 0.2% in 2020, as shown in Table below. It could be argued that at this level, the potential impact (cost impost) of the MBM on the value of seaborne trade is marginal.

In conclusion, owing to the high energy efficiency of seaborne transport, the scheme would be easily affordable. Assuming that all costs are passed on to the end customers, the potential impact on them would be very small at circa 0.2% increase in final price of imported goods (this is equivalent to only $2 for every $1,000 value of imported goods). Yet, the scheme would bring significant environmental benefits as calculated above, as well as various supplemental benefits.

The shipping industry demands that a maritime MBM should be proportional to similar measures taken in other industries, including other modes of transport. One approach to delivery proportionality would be to ensure that shipping is subject to the same carbon price as other industries, on average. This could be achieved by linking the maritime MBM to an economy-wide reduction scheme or schemes. The additional benefit of such price linkage would be that a global emission reduction target for international shipping (cap) would not be required, eliminating the contentious issue of setting such a cap.

Providing that shipping is subject to the same carbon price as other sectors, the negative impact on the volume of seaborne trade would be marginal, if any (before any improvements are considered). Even though shipping is the most cost and energy efficient mode of transport, it has a significant potential to increase its energy efficiency further (IMO 2009). Furthermore, the greatest scope for efficiency improvements is in the supply chain to and from developing countries, including trade facilitation. Due to incentives from the MBM, and additional investments, the cost of transport for developing countries would be reduced most, contributing positively to their increased trade and development.

To further increase benefits to the most vulnerable developing countries, including the Small Island Developing States (SIDS), the application threshold for an MBM could be set at a level higher than 400 gross tonnage (GT), for instance at 4,000 GT, at least initially. This would practically exclude the majority of all ships serving the remote SIDS, as their ports typically can receive only smaller ships (Faber and Rensma 2008).

Increasing the application threshold from for instance 400GT to 4,000GT would accelerate the MBM implementation, by significantly reducing the number of ships subject to the instrument without necessarily having a major effect on emissions – it is estimated that the total emission coverage would only reduce by 9%. Therefore, the initial coverage of emissions from international shipping would remain relatively high at 91%, when compared with the emissions coverage for ships of 400 GT and above. The number of ships subject to MBM would be nearly halved in this initial period, given that the total number of ships over 400 GT and 4,000GT in 2010 was approximately 43 and 24 thousand, respectively (for other thresholds see IMO 2010c).