Opinion | International Transport, Climate Change, and Trade

24 September 2010

International transport, both aviation and maritime shipping, is a critical element of the global economy and trade: more than 90 percent of world trade is transported by sea and aviation supports eight percent of global economic activity, transporting 40 percent the total freight value. However, international transport is also one of the main drivers of human-induced climate change. Maritime shipping emissions accounts for three percent of global anthropogenic carbon emissions while four to nine percent of the climate change impact of human activities is caused by aviation.

Regulation of greenhouse gas emissions from the international transport sector is needed to reduce global emissions; however, regulation often translates to higher costs of moving people, resources and goods around the globe. Developing countries situated in remote locations and with a large trade exposure, such as some Small Island Developing States (SIDS), would be particularly affected by higher transport costs. On the other hand, regulating emissions from maritime and air transport could potentially generate resources to finance climate change adaptation and mitigation measures in developing countries. A global climate policy that includes international maritime and air transport could thus offer opportunities for developing countries.

Despite these potential benefits, inclusion of international transport emissions in a global climate policy framework has proven to be difficult primarily because the responsibility for reducing emissions does not fall directly within the jurisdiction of any single country. Due to the global nature of the industry, sectoral approaches may be more appropriate for tackling emissions reduction in international transport. While maritime shipping and aviation are often lumped into the umbrella sector of international transport, they are distinct industries and should be considered separately. For example, the aviation industry is concentrated into a handful of major companies, has the greatest climate impact of any transport mode (on a per kilometre basis), and has limited potential for fuel efficiency gains. In contrast, the maritime shipping industry has more competition, transports a larger proportion of goods, and has greater potential for improving fuel efficiency.

Given that aviation or maritime emissions reductions are not addressed in the Copenhagen Accord, there is uncertainty regarding how to proceed and under which forum. The Kyoto Protocol calls on Annex I Parties (developed countries) to work on international transport through the International Civil Aviation Organization (ICAO) and the International Maritime Organization (IMO). However, while there are many proposals on the table, there is no clear mandate from either ICAO or IMO regarding an emissions reduction strategy. Instead, the industry faces the encroaching risk that a patchwork of domestic policies will emerge as individual countries or regions implement their own measures to deal with emissions.

Of the many challenges facing the industry in regards to emission reductions is reconciling the IMO's specific principle of "no favourable treatment" (i.e., all ships are regulated equally regardless of where the ship is owned or registered) and the fundamental ICAO principle of non-discrimination with the UNFCCC's principle of "common but differentiated responsibilities" (CBDR). Developing countries are reluctant to agree to reduce emissions under the IMO or ICAO for fear that the precedent would apply to climate negotiations in other fields. Additionally, agreeing to a sectoral approach to reducing international transport emissions, does not ensure that the  CBDR principle is upheld under the IMO or ICAO, despite the UNFCCC's stipulation that sectoral approaches meet the incremental costs incurred by developing country Parties participating in such schemes.

Despite the climate change governance challenges that maritime shipping and aviation face, many regulatory options have been proposed, each with distinct economic impacts. For aviation, the regulatory options are straightforward: either technology standards or emissions trading schemes. In 2012, the EU's Emission Trading Scheme's (ETS) measures will be applied to all airlines regardless of the country of origin. This will provide the foundations for a potentially wider, global emissions trading scheme for airlines.

For maritime shipping there are currently two main types of policy for GHG reduction considered by the IMO: market-based instruments (MBIs) and efficiency requirements. MBIs include emissions trading schemes, fuel levies, energy efficiency credit trading schemes, and "cap-levy-and-trade" or "hybrid" schemes. The EU is in favour of a global sectoral cap-and-trade scheme - the proposed Maritime Emissions Trading Scheme (METS). Others suggest that a fuel levy, or carbon charge, on bunker fuels would incentivise energy efficiency improvements.

The US has proposed an energy efficiency credit trading scheme that would encourage application of certified technologies and/or operational measures. A hybrid scheme that incorporates both a levy and a cap-and-trade approach, the International Maritime Emission Reduction Scheme (IMERS) would differentiate responsibilities between developed and developing countries and incorporate the UNFCCC's CBDR principle. Efficiency requirements, the other type of GHG reduction policy discussed under the IMO, would utilise two potential indicators for a ship's efficiency: the Energy Efficiency Operation Indicator and the Energy Efficiency Design Index.

Market-based instruments to regulate emissions will impact international trade because they impose an additional financial burden on transport, which could result in reduced imports and exports. For developing countries, specifically, this could increase the cost of food imports and lower demand for domestic products. Small island developing states, least-developed countries and land-locked developing countries stand to be most affected by higher bunker fuel costs due to their often remote locations, as well as their size and economic potential.

There are two main options to reduce the undesired economic impacts of a climate mitigation policy on developing countries: (1) limiting the scope of the policy; and (2) using the revenues from economic instruments to offset the costs of the climate mitigation measures for developing countries. The strategy of limiting the scope of climate mitigation policy suggests that MBIs would be applied to carriers from or ships registered in Annex I countries only, which could lead to unequal competition and/or problems with carbon leakage. Alternatively, a series of interlocking thresholds could be applied strategically to ensure exemptions that allow shipping to and from LDCs and SIDS.

The second "equity safeguard" would allow revenues from policy options to transfer to climate change mitigation or adaptation in developing or climate-sensitive areas. There are three strategies that could be employed: direct compensation, compensation based on import shares and compensation based on need for climate finance.  Independent of the specific strategy chosen, revenues from market-based instruments could be collected and managed by an international body with equitable representation.

At this point, policymakers addressing regulation of emissions from international transport could consider three potential institutional arrangements: (1) Treat the IMO/ICAO fora separately from the international climate change negotiations and assume that, while the CBDR principle applies under the UNFCCC, it does not necessarily apply under the IMO/ICAO. At the same time, commitments made by developing countries under IMO/ICAO do not apply generally to the broader climate change negotiations. (2) IMO and ICAO hold off on initiating a sectoral approach until countries agree on binding target reductions under the broader climate change negotiations. (3) IMO and ICAO promote voluntary reductions in the sector and avoid the lengthy process of seeking binding commitments from developing countries.

Based on a thorough examination of the regulatory options for GHG reductions in the international transport sector, a series of recommendations can be made. First of all, the role of the IMO and ICAO in relation to the broader framework of global climate change should be clarified. Due to the urgency of the climate change threat, action should be taken in the most promising forum, which is most likely the IMO because it does not require consensus among states to reach a decision. Alternatively, implementation of unilateral approaches is most promising, but could create a patchwork of differing policies. Developing nations, in order to meet development targets, should get an exclusive standing in all fora and the importance of CBDR should be incorporated into any reduction strategy, independent of the forum within which it is applied. Lastly, in order to achieve emissions reduction targets in the international transport sector, greater cooperation among the IMO, IATA, ICAO, UNFCCC and the WTO is needed.

This article is drawn from a background paper and an information note by Joachim Monkelbaan, which can be accessed here.

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