Implications of International Maritime Organisation (IMO) Resolution MEPC.377(80) (Adopted on 7 July 2023)

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2023 IMO Strategy on the Reduction of GHG Emissions from Ships

Opposition from Emerging Economies

“A handful of emerging market economies opposed the levy. Countries like Brazil and China, both of which have large shipping industries, argued that a carbon tax would shift the responsibility of historical emissions from wealthy nations onto shipping companies.

China called for any revenues generated by IMO regulations to be invested “in-sector”, arguing that wider use of these funds would transfer “the climate change financing responsibility from developed countries to . . . international shipping”.

Developing nations, however, were not united in their opposition. A group of Pacific nations led by the Marshall Islands backed a shipping levy of $100 per tonne of emissions. According to Reuters news agency, the proposal would have raised up to $100bn per year.”

China warned that “an overly ambitious emission reduction target will seriously impede the sustainable development of international shipping, significantly increase the cost of the supply chain and will adversely impede the recovery of the global economy”, according to a document seen by the Financial Times.

It added: “Developed countries are pushing the IMO to reach unrealistic visions and levels of ambition. [They are advocating] a flat [levy that] will lead to a significant increase in maritime transport costs.” Wealthy nations have not agreed on a price for the emissions levy.

Who can gain?

1. Green fuels  (India ? How much India is selling its bunkers – very less). Bunkering hubs such as Fujairah, Singapore, Balboa, Gibraltar will gain. 
2. Shipping and Maritime equipment manufacturers – Possible none in India
3. Exporters will face challenges as their costs to exported markets will increase – may loose competitive advantage. CII may throw more light
4. Consumers will see increase in costs likely 

Proposed tax of 100 USD per ton of emission. 

• Container vessels freight will go up by 2.6 paise per ton-km
• Oil Tankers freight will go up by 5 paise per ton-km (This is about 2.57 crores INR on a shipment of Russian crude by Aframax Tanker to Bhavnagar)
• Coal freight will increase by INR 478 per tonne of coal from Australia to Chennai.

Environmental taxation proposed by the resolution 

Levy Mechanism Description:

• Market Based Measures (MBMs): The economic Market Based Measures under consideration include a levy, feebate, and flexibility mechanism .
• Revenue Collection: The levy mechanism consists of two elements. 
  • The first element is the levy, which is a predetermined price, set by the IMO or by criteria in the regulation, on annual GHG emissions (USD/tCO2eq) from a ship, collected by a Revenue body. 
  • The second element is a reward, which is a predetermined rebate to ships per energy unit of eligible fuel used (USD/GJ). The total reward is distributed from the Revenue body to the ships using eligible fuels at the end of the year based on the reported annual consumption
    

Implications and Spending of Environmental Tax:

The funds collected from the levy or environmental tax can be spent in various ways to ensure that the burden on shipowners is balanced with initiatives to improve environmental performance. The key points are:

1. Collection: The levy may be collected by a designated Revenue body (Possibly the IMO GHG TC-Trust Fund ? No clarity), which manages the funds. ------- (NOT Govt. Of India --- Important)
2. Spending:
   1. Sustainable Development: Prioritise sustainable development, capacity-building initiatives, and technology transfer in the maritime sector .
   2. Rebates and Incentives: Provide rebates and incentives for ships using eligible fuels to promote the adoption of cleaner technologies .
   3. Research and Development: Fund R&D initiatives focused on advancing sustainable fuels and technologies for the maritime sector .
   4. Infrastructure and Training: Support the development of necessary infrastructure and training programs for the maritime industry to handle new fuels and technologies effectively .

Guidance on Using the Funds

To ensure the effective use of the funds and promote the maritime sector, the following guidance can be offered:

1. Equitable Distribution: Develop mechanisms for the equitable distribution of revenue, ensuring that the interests of developing countries, including India, are adequately represented and safeguarded .
2. Technology Transfer: Invest in technology transfer to help shipowners and cargo owners adopt new technologies without disproportionately bearing the costs.
3. Capacity Building: Focus on capacity-building initiatives to enhance the skills and capabilities of the maritime workforce, enabling them to adapt to new technologies and practices .
4. Public-Private Partnerships: Encourage public-private partnerships to facilitate knowledge sharing, resource pooling, and joint funding for projects aimed at promoting sustainable shipping practices .
5. Financial Assistance: Provide financial assistance and incentives to shipowners for retrofitting existing vessels or constructing new ones that comply with the latest emission control standards .

People (Consumers of Goods)

Benefits:

1. Environmental Improvement: Consumers benefit from reduced pollution and environmental degradation, contributing to better public health and quality of life.
2. Sustainable Choices: The measures encourage the adoption of more sustainable practices, aligning with the growing consumer preference for eco-friendly products.

Implications:

1. Cost Impact: There might be a slight increase in the cost of goods due to the initial investment required for cleaner technologies and compliance with new regulations.
2. Awareness and Demand: Consumers might demand more transparency and sustainable practices from companies, influencing market trends.

Shipowners

Benefits:

1. Operational Efficiency: Adoption of energy-efficient technologies can lead to long-term cost savings.
2. Market Advantage: Early adopters of sustainable practices may gain a competitive edge and a positive reputation.

Implications

1. Compliance Costs: Significant upfront investment required for retrofitting ships and adopting new technologies.
2. Operational Changes: Need to adapt to new operational standards and possibly training crew for new technologies.

Cargo Owners

Benefits:

1. Reduced Carbon Footprint: Aligns with corporate sustainability goals, potentially improving brand image.
2. Market Differentiation: Companies can market their products as being transported in an environmentally friendly manner.

Implications:

1. Cost Sharing: Potential increase in shipping costs, which might be shared between cargo owners and consumers.
2. Supply Chain Adjustments: Need to ensure supply chains are compliant with new regulations, which might require adjustments and increased coordination.

Governments

Benefits:

1. Environmental Goals: Helps in achieving national and international environmental targets.
2. Public Health: Reduction in pollution leads to better public health outcomes and lower healthcare costs.

Implications:

1. Regulatory Burden: Need to develop, implement, and monitor compliance with new regulations.
2. Economic Adjustments: Potential short-term economic impacts on the maritime sector, requiring measures to mitigate adverse effects on trade and employment.

Case Studies to Illustrate the Implications

Maersk Line (Shipowners)

Scenario: Maersk Line, one of the largest shipping companies, invested heavily in energy-efficient technologies and alternative fuels.

Outcome: Despite the high initial costs, Maersk gained a significant market advantage, attracting eco-conscious clients and reducing long-term operational costs.

Report - https://www.maersk.com/~/media_sc9/maersk/corporate/sustainability/files/resources/2024/2023-maersk-sustainability-report.pdf

Walmart (Cargo Owners)

Scenario: Walmart committed to using greener shipping practices for its imports and exports.

Outcome: This move improved Walmart's sustainability ratings and appealed to environmentally aware consumers, even though it resulted in a slight increase in logistics costs.

The following report will detail how the costs will increase and how it will help the Walmart to meet climate targets.

Report - https://corporate.walmart.com/purpose/esgreport/environmental/product-supply-chain-sustainability

Consumers in the European Union (People)

Scenario: The EU imposed stricter emissions regulations on maritime transport.

Outcome: Consumers experienced improved air quality and public health benefits, though they faced an increase in the prices of imported goods.

Important Articles:

1. https://www.reedsmith.com/en/perspectives/2016/03/maritime-ghg-emissions-the-paris-agreement-an-imo
2. https://www.ft.com/content/f36fc4ac-9e5f-4750-9982-263595a523f7
   

Thank you for reading!