The study, first published in June 2020, finds that the growth in annual CO2 emissions is two percentage points lower in countries with a carbon price than those without. It also found that emissions fall by 0.3% for each Euro per tonne of carbon pricing.
The authors, Rohan Best, Department of Economics, Macquarie University New South Wales, Paul J Burke, Crawford School of Public Policy, Australian National University, Canberra and Frank Jotzo, Crawford School of Public Policy, Australian National University, Canberra, set out to test the hypothesis that pricing carbon reduces carbon emissions.
They analysed more than two decades of data from 142 countries of which some 43 had a carbon price in some form by 2007. The data showed that a carbon price does indeed encourage emission-abatement practice. Moreover, the study established that carbon emissions rise and fall in line with carbon prices.
As the authors note, carbon pricing is typically considered to be a less invasive policy intervention than direct regulation as pricing leaves decisions on how to achieve emission abatement to markets. Participants adopt abatement systems that are cheaper than the alternative carbon cost.
The first carbon tax was introduced by Finland in 1990. Now, some 47 countries have carbon pricing or emissions trading schemes, covering emissions equal to about 20% of world GHG emissions.
(Source: Best, Burke & Jotzo 2020)
The chart summarises the study findings. Black triangles mark the relationship between 2007 carbon dioxide emissions and the growth in those emissions from 2007 to 2017, for countries with carbon pricing introduced by 2007. Green circles mark the same relationship for countries with no carbon price in 2007. The circles are higher than the triangles, indicating higher growth in emissions from countries with no carbon pricing regime in place by 2007. The data was controlled for a long list of other factors including population size and the use of other policy instruments.
Could carbon pricing therefore work for shipping? An October 2019 paper co-produced by BHP, BW Group, DNB and DNV-GL acknowledged the efficacy of carbon pricing and emission trading schemes. But it also noted cost and scalability issues when applying these to the maritime sector. A further challenge would be agreeing the price to be set for carbon, and maintaining that price for long enough to allow market-based solutions to evolve and be adopted.
The study noted that: ‘The carbon price should send a clear signal to industry stakeholders to start investing in decarbonisation, but it should also not disrupt trade or have a disproportionate impact on states.’ For example, a levy of $10 per tonne of CO2 could raise $8 billion to invest in decarbonisation technology. The study’s authors suggest however that ‘the levy may have to be more than $400 / tonne CO2 to cover the true transition costs from LSFO / MGO to for instance ammonia.’
Bringing the debate up to date, the class society ABS hosted a webinar on 3rd September 2020 entitled Trade Evolution and Partnership: Impact on Decarbonisation. During the debate, George Wells, head of assets and structuring at Cargill Ocean Transportation, remarked on the vital role of charterers, while Lindsey Keeble, maritime sector head at law firm Watson Farley & Williams, noted that financiers need assurance that the entire supply chain supports the IMO’s decarbonisation agenda.
Speaking in our own ship.energy podcast, Eddie Valentis, CEO of Pyxis Maritime (NASDAQ: PXS) agreed this week that independent ship owners cannot by themselves shoulder the burden of decarbonisation policies or of investing in new technologies without some form of financial support, ‘mainly because of the market being so uncertain.’
Valentis described the independent ship owners’ dilemma: ‘It’s remarkable that the companies are doing a tremendous effort…but also we need a clear picture and understanding of what is coming and how we will be able to face it….Our industry is very capital intensive as you know…although we have the best of intentions to become more environmentally friendly, unfortunately, we do not have the help and we do not have the funding. Would the banks and financiers be willing to incentivise us [to decarbonise]?’
Carbon pricing then may be theoretically robust but there remains much work to be done to identify a method of applying it to shipping, and of helping independent ship owners to move to a new low-carbon regime.