Outline

We propose that CO2 emissions from international maritime transport are treated on international level rather than being allocated to countries. An emission reduction goal (cap) is established and applies to all destinations with emission reduction commitments (currently Annex I countries). An emission charge is established. It is linked to the goal and the prevailing forward carbon price. Aggregated funds from the emission charges are used to both stimulate innovations and cost-effectively mitigate growth of maritime emissions. Furthermore, $billions of gains generated through the aggregated approach are directed to climate change adaptation in developing countries.

Global but Differentiated

The scheme is therefore both global (as per the IMO) and differentiated (as per the UNFCCC). It applies to all ships irrespective of flag and nationality, and fulfils the principle of common but differentiated responsibilities and respective capabilities. See the proposed Global but Differentiated principle.

Implementation

IMERS would implement a charge on the CO2 emissions from international shipping based on fuel use and cargo destination. Fuel data will be extracted from obligatory fuel receipts (called Bunker Delivery Notes). Alternatively, ship managers could report fuel use for voyages ended during the previous month. The emission charge (fee) would be announced at least one year in advance to allow passing on the charges to end customers. The fees would be paid by the fuel payers, typically charterers, typically monthly. The emission charges are differentiated as per the climate change regime in force, based on destination of cargo. Under the current regime, ships transporting goods to:

• Annex I countries pay 100% of emission charges
  
• Non-Annex I countries pay zero;
  
• Both types of countries pay on average 60% of emission charges (variable multiplier).

The variable multiplier is the ship’s share of goods unloaded in Annex I countries, in a year or similar. The average value for the multiplier has been derived from the developed countries’ share of world freight costs, as well as share of unloaded goods, both of which are approximately 60%.
The liable entity is ship, and the scheme is enforced through port state control in Annex I countries.

Distribution of Funds

The charges raised would go to a supra-national fund established under the UN (under the IMO or the UNFCCC) and be used to:

• Invest in maritime technology transfer and stimulate longer term technology transformation;
  
• Purchase CO2 credits equal to the actual emissions in excess of the established emissions cap; and
  
• Contribute to climate change adaptation in developing countries.

Costs

A fee of US$9 per tonne of CO2 would bring about $6 billion annually from 2012 and raise shipping costs by circa 3% (to Annex I countries). This is equivalent to an extra $1 for every $1,000 of imported goods to Annex I countries. There is no impact on imports to non-Annex I countries.
The fee (a unit emission charge) is calculated in advance based on the prevailing forward carbon market price and a negotiated emission goal. This makes the proposed cap-and-charge an alternative to cap-and-trade, avoiding the barriers of emission trading (such as emission allocation and distribution of emission allowances).

Hybrid scheme: cap-and-charge

The scheme therefore is a hybrid one, both from the economics and goals points of view. It combines in a single scheme:

• a quantitative goal (cap) with a price instrument (charges): a “cap-and-charge”;
  
• emission mitigation, adaptation to climate change and technology action;
  
• differentiated responsibilities and capabilities, of countries and individuals.

Economically, it is an efficient alternative to emissions trading. Some called it called charge-and-cap as it combines a price mechanism with a quantity mechanism. We prefer to signify the quantitative cap that the scheme will deliver and use a name cap-and charge (some also call it cap-charge-and-trade).
The name does not really matter as long as the scheme can efficiently deliver the notional emission target (cap) at an affordable price ...

Not tax

The fee is not a levy or a tax set at some arbitrary level. The goal (cap) together with the market (via the market price for carbon) dictates the level of the fee, rather than a single body that may be subject to outside influence. The example $9 fee was calculated for 2012 assuming 2.1% rate of emission growth, emission goal of reducing emissions by fifth by 2020 from 2005 level, and a carbon market price of $30/tCO2.