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November 24, 2022

Voyager Blogs

Can a carbon tax contribute to a just energy transition?

Just before the COP27 meeting got underway, the International Maritime Organization hosted a symposium, designed to bring together member states, non-profit organizations (NGOs) and the industry to consider decarbonization from a new angle.

This was not just another trundle through the challenges (though plenty of the issues were aired once again) but an attempt to understand what a ‘just and equitable’ energy transition would look like.

The immediate problem this poses, according to Christiaan De Beukelaer of the University of Melbourne is that the industry starts from an environment that is neither just nor equitable.

There are no definitions of for ‘just and equitable’ in shipping. In broader terms, as the COP deliberations have demonstrated, there is a clear narrative in which developing countries, least developed countries and small island states beg for funds to mitigate climate change and the developed world acts with varying degrees of speed.

What is needed is clarity on the issues required for constructive engagement, according to Mr De Beukelaer. Not only do Least Developed Countries (LDCs) and Small Island Developing States (SIDS) lack the funds for adaptation, they suffered more from the effects of COVID and are more exposed to economic downturn.

Since decarbonization will see transport costs rise further, the goods and food these countries need for economic stability will be more expensive and could be harder to obtain.

Shipping alone cannot take the blame for either climate change or poverty and neither can it be expected to solve the world’s problems, but it does have an opportunity to make an improvement to lives around the world, he added.

Put simply, a just transition means it must be environmentally effective, procedurally fair and socially just. Fail to get close enough to these concepts and it is likely that inequalities will be deepened, with obvious consequences for the citizens of DCs, LDCs and SISs.

Mr De Beukelaer went on to point out that it was the role of the developed world to target its interventions carefully and this would involve allocating revenues that can support social justice, share technology and be globally equitable.

Data from the UN Conference on Trade and Development (UNCTAD) showed that high shipping costs are already a concern, with calculations predicting that a further rise in 2023 could see consumer prices rise 1.6% in DCs and up to 8% in SISs.

UNCTAD’s Director of Technology and Logistics Shamika Sirimanne noted that DC government budgets were under intense pressure. “The damage wreaked by COVID on Developing and Least Developed Countries means they are focused on short term survival rather than long term sustainability, with more edging towards debt default.”.

So when would shipping see a global carbon tax imposed she pondered. Sooner rather than later it seems. “One of the key enablers [of the transition] is putting a cost on carbon; it’s inevitable,” she said. “We can’t achieve this without a cost on carbon. Net zero will likely materialise in the long term but to decarbonize we must look at alternatives right now.”

Though the format and formula are to be confirmed, a carbon tax is coming and some of the revenues generated should help fund mitigation measures and reduce shipping costs in DCs, LDCs and SISs, she added.

She also addressed the common industry complaint that well-intentioned regulations have unintended consequences. The importance of collaboration she said cannot be overemphasized and there should be impact assessments of regulatory measures before adoption. “We need good practices in regulation and government, with the insights gained put towards effective implementation and compliance for a just transition.”

Given the IMO’s principles of ‘common but differentiated responsibilities’, it seems likely that in the long run, revenues generated by a proposed carbon tax or levy would indeed be distributed outside the industry, according to World Bank Economist Goran Dominioni.

There are plenty of worthy projects, whether this is climate mitigation or infrastructure improvement. The case to use carbon revenues outside the industry could also help decarbonize shipping, for example by generating renewable electricity that could be used to produce net carbon neutral fuels like Methanol, he said.

But in case anyone doubts that market forces will always meet good intentions, Voytek Chelkowski of Seamind Blue Ocean had a more compelling reason for fast and decisive regulatory action.

The relative slump in fleet growth after the bust of 2008 is storing up risks to supply unless owners feel they can order ships knowing what is coming from lawmakers. They are currently holding back until a carbon tax and further efficiency regulations are agreed.

“Every recession comes to an end [and unless ordering increases] by 2025 or 2026 we won’t have the fleet in place to absorb demand,” he said.

“We need a clear pathway to MBMs in shipping, if not owners will not make investments by the date when fleet renewal is coming due. To not do so would set us up for failure because the [resulting] increase in the cost of ocean transport would be greater than [the disruption] the CO2 tax would create.”

A market based measure to tax carbon is not only right thing to do, it seems it is essential for commercial reasons.

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