Solution - 3rd generation

Our proposed solution comprise a Rebate Mechanism (RM) and the third generation of IMERS (RM integrated).

The solution aims to reduce CO2 emissions from international shipping, and simultaneously raise much needed finance for climate change adaptation in developing countries. Furthermore, it aims to reconcile the principles of the IMO and UNFCCC, be straightforward to implement and deliver proportionality of the shipping effort to combating climate change.

Given that the proposal was shaped over several years, with various features incrementally added we first provide a short description of the three generations of IMERS.

  1. The first generation, created in 2007, introduced the idea of simultaneously addressing shipping emissions and climate financing through a fund. It was based on a charge or levy on shipping emissions, linking the levy to an emission target or cap, and direct collection of the levy from ships. This was referred to as a cap-and-charge or hybrid scheme, in various submissions and reviews (IMO 2007b, IMO 2008b, UNFCCC 2008, Faber and Rensma 2008, Stochniol 2008).
  2. The second generation, created in 2008-2009, implemented differentiation based on final destination of goods aiming to address concerns of developing countries. It also linked the levy to an external carbon price rather than a cap on emissions. Furthermore, it provided options to make the proposal more politically acceptable to some developed countries, including an option of collecting the levy as a pre-payment in a country that may not agree to a global levy collection (Haites 2008, Stochniol 2009a, GLCA 2009, QinetiQ 2009).
  3. The third generation, in 2009-2010, created and integrated the rebate mechanism, thus replacing the complex differentiation based on final destination of goods. It also implemented a price ceiling and floor for the levy, and simplified fuel consumption reporting, among other improvements outlined above (IMO 2010a, IMO 2010b, IMO 2010c, ICTSD 2010).

Please bear with us when the move the description of generation 1 and 2 to the historical repository (May 2011).
Please follow the links currently provided below, or read the recent updates from IMO/UNFCCC negotiations.

Rebate Mechanism (add-on option)

In order to comply with the principles of the UNFCCC, the application of a maritime MBM should be differentiated.
We propose that developing countries could be compensated cost burden of the MBM through an agreed rebate mechanism (RM), thus ensuring a positive net benefit to each developing country. Furthermore, the most vulnerable should benefit most through additional means, such as disbursement of net financing raised.

RM in 30 words

All ships pay for their emissions. A developing country obtains an annual rebate in relation to its share of global imports. Remaining revenue - from developed countries - goes to climate change action.

RM details

The following outlines the proposed rebate mechanism (RM):

  1. Each developing country would be entitled to obtain an unconditional payment (rebate) equal to the burden of its participation in the maritime MBM.
  2. The amount of rebate would be calculated annually in a top-down manner. The global MBM costs and a simple attribution key will be used, country-by-country. The proposed key is a country’s share of global imports by value. Other alternatives are discussed later.
  3. A developing country could decide to forego its rebate, or a part of it, and be internationally recognized for such action. This provides additional flexibility to reflect the differentiated national circumstances of developing countries.
  4. Developed countries are not entitled to any rebates, and are automatically credited for the amount of financing raised through the MBM, based on the same attribution key.
Consequently, net revenue raised, after rebates have been issued, would come from customers in developed countries only, complying with the principles and provisions of the UNFCCC.

The mechanism does not specify how the net revenue raised should be used. Given however that it is generated from international activity, it should be used in its entirety for international purposes rather than to contribute to national budgets. The net revenue could be split between supporting developing countries in implementing climate change action, and assisting the global shipping sector in accelerating reductions of its growing emissions through technological advances.

The disbursement of this net revenue could be managed by the operating entity of the financial mechanism of the UNFCCC, according to relevant rules and provisions (this ultimately will be agreed by the UNFCCC Parties, or similar). Thus, developing countries would be beneficiaries of the MBM, with the most vulnerable countries to benefit most from the net revenue. The shipping sector should also benefit from the net revenue, potentially through a new global Maritime Technology Fund, or similar

RM add-on application

The rebate mechanism (RM) can apply, in principle, to any maritime MBM, which generates revenue, such as a contribution/levy on fuel or an emission trading scheme. We call this option RM integrated.
The mechanism cannot apply to an MBM that does not generate revenue, such as an efficiency-based scheme.

In summary, disbursement of the MBM revenue is proposed to comprise two steps.

  1. In the first step, cost burden on a developing country participating in the MBM is paid (rebated) to it, unconditionally.
  2. In the second step, the remaining revenue (net revenue), is disbursed through the operating entity of the financial mechanism of the UNFCCC.

Based on our extensive research, there is no other practical alternative for a global differentiated scheme.
Rebate Mechanism, as an add-on option, can generally apply to any revenue raising Market-Based Measure to address greenhouse gas (GHG) emissions from international shipping (such as levy or emissions trading).
Furthermore, it may be used to calculate a country's usage of international shipping.

More details

Follow the navigation links below to read about various RM aspects.

Alternatively read about the relevant proposals submitted to the IMO in sections RM & MEPC 60 and RM & MEPC 61 (documents are available in English, French and Spanish).

    You may also read the official proposals directly (in English, French, and Spanish):
  • RM - IMO submissions - 1 & 2 (in English)
  • RM - Mécanisme de remboursement - 1 & 2 (in French)
  • RM - Mecanismo de reembolso - 1 & 2 (in Spanish)

Lack of alternative to RM

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.

Integration conditions

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.

Country's usage of international shipping

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.

IMERS (RM integrated)

This section describes the third generation of IMERS (also known as RM integrated, see Rebate Mechanism and MEPC 61).

IMERS in 30 words

A levy on fuel for international shipping with a rebate mechanism for developing countries. Applied worldwide, collected centrally - bypassing national coffers - raising US$10bn+ annually for climate change action.


Under the proposed scheme a market-based levy is established on fuel bunkered (fuel delivered to a ship), as an alternative for a levy on CO2 emissions. The levy would apply to all ships over a predetermined size, engaged in international maritime transport, irrespective of their flag and nationality of the ship-owner. The liable entity in the scheme is a ship, uniquely identified by its IMO number.

Fuel bunkered in a given quarter must be electronically reported and is subject to payment of the constant levy for that quarter. The levy is obtained centrally, bypassing national coffers, and aggregated providing gross revenue for the scheme.

In order to deliver proportionality of the shipping effort to combating climate change, the levy is linked to a prevailing fee on land transport emissions, or to the rolling average market carbon price, as available. To increase price predictability the levy is set constant for a quarter, at least 30 days in advance of the start of each quarter. Thus the shipping industry would pay the most cost-effective price for its emissions and a fair one, in a simple manner.

In order to increase investment certainty, the levy is bounded by a predetermined price floor and ceiling, established for many years. These may be already defined implicitly through the price floor and ceiling of the carbon price the levy is linked to.

In order to maximize cost-efficiency, reduce the burden on the shipping industry, and guarantee a rapid deployment globally, a computer-based system and simple processes are defined.

The system is based on a central emissions registry (ER), holding an emission account for each ship, and a predetermined global bank (BK), or banks, providing a payment account for each ship, as shown in Fig. 2. The scheme operates through six processes (shown on Figure below):

  1. reporting of fuel bunkered, by ship (manager) to ER;
  2. payment of the levy, by ship (charterer) to BK, directly;
  3. status check of ship's compliance, by port and flag State control (PSC and FSC) with ER;
  4. enforcement of compliance, by PSC and FSC;
  5. certification of ship compliance, by FSC; and
  6. disbursement of revenue raised by BK and/or predetermined funds.

IMERS 6 processes

In order to comply with the UNFCCC principles and provisions, the rebate mechanism as introduced above applies, and is the first step of the disbursement process (6).

In summary, every developing country is entitled to obtain an unconditional payment (rebate). The rebate is calculated annually in proportion to a country’s share of global seaborne imports (attribution key) and the gross revenue raised. A developing country could voluntarily decide to forego the rebate, or a part of it, and record its decision.

More details

Scheme effectiveness, as well as how the scheme secure advantages to shipping and world trade are described below (follow the relevant navigation links).

    You may also read the official proposals directly (in English, French, and Spanish):
  • RM - IMO submissions - 1 & 2 (in English)
  • RM - Mécanisme de remboursement - 1 & 2 (in French)
  • RM - Mecanismo de reembolso - 1 & 2 (in Spanish)

Scheme Effectiveness

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).



Annual emission growth, 2010-2030


Emissions in 2010; as in 2007 (MtCO2)


Scheme launch date


Carbon price in: 2015; 2020; 2030 (US$/tCO2)

22.5; 25; 40

Phase-in period (from 75% to 100% levy)

5 years

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.


For developing countries, those that have not foregone the rebate. Used according to their sovereign decisions. May be used for national climate change fund, or similar.

Net Revenue

(70% of gross revenue)



Forestry arrangements in developing countries (REDD+); initially



Developing countries (DCs); a significant share for LDCs, SIDS, and Africa, proposed



Long-term; Maritime Technology Fund, or similar

The modelled emissions and financial details are shown below.

IIMERS emissions and climate change financing scenario for 2020-2030

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.


(US$ billion)

Seaborne Trade
(US$ trillion)

Cost/Seaborne Trade





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.

Securing Advantages to Shipping and World Trade

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).

Integrating RM with other MBMs

In this section we analyze the various MBM (Market-based Measure) proposals being considered by the IMO, in the context of possibility integrating the rebate mechanism with these proposals.

Given that the IMO is in the process of developing a potential MBM, all current proposals should be seen as subject to changes and improvements, not as options set in stone. Therefore, the rebate mechanism could be potentially added or integrated with certain proposals that raise revenue.

    The following proposals are currently being considered by the IMO (see IMO 2010c):
  • International Fund for GHG emissions from ships (GHG Fund)
  • Leveraged Incentive Scheme (LIS)
  • Port State Levy (PSL)
  • Ship Efficiency Credit Trading (SECT)
  • Vessel Efficiency System (VES)
  • Emission Trading System (ETS)
  • Rebate Mechanism (RM).

The Rebate Mechanism has been submitted as two options RM add-on, and RM integrated (aka IMERS), as outlined above.

All proposals except SECT anticipate that a MBM will generate revenue, and a Fund to disburse it. All the following proposals GHG Fund, ETS, and PSL would raise revenue from all participating ships, in a uniform manner. Thus RM add-on could apply to each of them, providing sufficient revenue is generated to cover the rebates.

RM add-on cannot apply to SECT, given that this scheme does not raise revenue at all. Applying RM add-on to VES and LIS would be complex, as they differentiate on the basis of individual ships. VES would only raise revenue from the non-compliant, existing ships. LIS would raise revenue from all ships but provide refunds to the most efficient ones. The greater the refund the more questionable the potential integration would be. In both cases it is unknown where the ships that pay in net terms would operate. Thus compensation through the proposed rebate mechanism cannot directly apply without further considerations, as the cost burden for countries would differ based on where the less efficient ships operate.

Applicability of rebate mechanism to the MBMs being considered is illustrated in Figure below. RM add-on could be easily integrated with ETS, GHG Fund, and PSL. It cannot apply to SECT, and applying to VES and LIS would be complex. The only proposal thus far that incorporates the rebate mechanism is the IMERS scheme (RM integrated).

Integrating Rebate Mechanism with other MBMs

To further clarify, MBMs are categorized in Figure above by the dominant characteristic or type of MBM, reflecting their different designs. They are:

  • Quantity;
  • Price;
  • Efficiency.

The quantity proposals require a cap or target for total quantity of GHG emissions from international maritime transport. The price proposals require a levy or a fee on fuel or GHG emissions. The efficiency proposals require efficiency targets for existing ships.

The figure above illustrates only one possible categorization as certain proposals employ features of a different type, or types. For instance, GHG Fund is categorized as a quantity measure, but some may see it as a price measure, given that it is based on GHG contribution per ton of fuel bunkered. However, I categorize it as a quantity measure as it is the cap on emissions that is established first, that subsequently drives the level of GHG contribution. LIS partially belongs to the efficiency type, as it requires a ship energy efficiency score for a refund to be granted to each of the most efficient ships. VES partially belongs to the price category, as the level of penalty on fuel for ships that do not comply with the efficiency standard needs to be set, and penalties need to be collected. The positioning of these proposals between the different types aims to illustrate their hybrid features.

Thus the figure shows that generally the rebate mechanism can apply to quantity and price measures, but not to measures based on efficiency. This relates to the need to (1) generate revenue and (2) the scheme being applied in a uniform manner across the fleet, irrespective of ship efficiency, age, and so on.