Carbon Revenue Distribution in International Shipping
28 February 2025
The 2023 IMO Greenhouse Gas Strategy includes the development of an economic element based on a maritime greenhouse gas (GHG) emissions pricing mechanism. Implementing such a mechanism in international shipping will generate carbon revenue that can be used for different purposes. The revenue can be substantial, and its distribution deserves further study.
Issues in carbon revenue distribution are closely linked to the revenue available for distribution. IMO member states have put forward many proposals on revenue generation and revenue distribution, but there has been no general agreement on a specific form or modality they should take. For example, the estimated carbon revenue varies by a factor of ten, from slightly more than USD 10 billion to more than USD 100 billion a year. Such divergence extends to revenue use. The diverse views stem from the complex shipping value chain and the multiple stakeholders and players involved.
A comprehensive and objective study of revenue distribution must account for such variations. Ideally, the key components relating to the flow of funds can be identified and consolidated in a coherent framework to help problem analysis and exposition and to stimulate further debates and discussions. We attempt to develop such a framework. The proposed framework is built on four distinct fund disbursement baskets. We demonstrate that it can be meaningful and practically applied, and discuss the guiding principles and key issues on fund disbursement.
Based on the proposed framework, we present several funding models and cases to illustrate the range of carbon revenues that can be expected and the options for revenue distribution. The cases include two low-revenue scenarios, a moderate-revenue scenario and a high-revenue scenario. Reasonable assumptions are made on the important determining factors and possible future developments. Some numerical estimates are presented for illustration purposes. Implications for the four disbursement baskets are discussed.
The high-revenue case allows more funds for disbursement, but there will be high pass-through costs. As a result, a significant portion of the revenue generated can be expected to be channelled to address the impacts of increased maritime logistics costs on developing economies. Conversely, low-carbon revenue cases will have low pass-through costs, and the scale of support to address these impacts will correspondingly be lower. Low revenue cases will have fewer options and limited flexibility in revenue use. This has implications on the role of international shipping in global climate change financing.
Funding models with flexible compliance mechanisms introduce flexibility, dynamism and transparency to a market-based mechanism. Embracing these features, however, can add complexity, volatility and uncertainty to the revenue-generating system. As is often the case in large-scale systems implementation, there are trade-offs between systems that are “rigid but simple” and those that are “comprehensive but complex”. A balanced approach is needed to assess the strengths and weaknesses of the various frameworks and models and to decide the best course of action.
The discussions on decarbonising the international shipping sector thus far have focused on rewarding eligible fuels and have focused minimally on research, development and deployment. The conventional approach to this in-sector decarbonisation revolves around improving vessel energy efficiency and promoting the use of clean fuels. We believe more can be done on deployment, leveraging a systems-level strategy to optimise the shipping value chain from an emission reduction perspective. In this regard, we propose a systems approach through route-based funding to augment the revenue deployment.
For a more in-depth understanding, you can access the discussion paper here.
Authors:
| Kah-Hin CHAI, Szu Hui NG, Beng Wah ANG, Andrew Guan Yen THAM | |