Carbon Pricing for International Shipping and Border Carbon Adjustment Mechanisms: A Case for Regulatory Cooperation

Abstract

The European Union (EU) has extended the application of the EU emissions trading scheme to international shipping and the International Maritime Organization (IMO), and various countries are working on implementing instruments that put a price on greenhouse gas emissions (GHG) from this sector. Due to these policy developments, GHG emissions from shipping may become subject to multiple pricing instruments in the coming years. In response, stakeholders have voiced concerns over the potential negative impacts that this could have on both the shipping industry and international trade, and called for double pricing to be avoided. Against this background, this article discusses the potential pros and cons of double pricing GHG emissions from shipping and identifies options to reduce its negative impacts. Overall, the article finds that the case to avoid double pricing rests on a balance of competing interests, contextual factors, and instrument design. If policymakers aim to avoid double pricing, regulatory cooperation between policymakers working on shipping decarbonisation and border carbon adjustment mechanisms can provide important lessons on how to do so.

I. Introduction

The International Maritime Organization’s (IMO) Marine Environment Protection Committee (MEPC) has adopted a revised greenhouse gas (GHG) strategy for international shipping in July 2023.¹ To meet the climate change mitigation targets included in this strategy, the IMO is working on the introduction of a greenhouse gas (GHG) price on shipping’s emissions.² Meanwhile, the European Union (EU) has included international shipping in its GHG pricing instrument – namely, the EU emissions trading system (ETS) – by amending the EU ETS Directive.³ This development, together with other policy initiatives by other jurisdictions, create the potential for GHG emissions from shipping to fall under multiple pricing instruments, ie, to be priced twice or more.

GHG pricing mechanisms are an important component of the policy mix to decarbonize maritime transport. However, some IMO member states and shipping industry representatives have started to voice concerns about the potentially negative impacts of double pricing of GHG emissions from shipping, such as a reduction in profits for some shipping companies, and worsened trade opportunities for certain countries.

Academic scholarship has analyzed GHG pricing mechanisms in terms of their potential impact on international shipping on states,⁴ shipping companies,⁵ and GHG emissions.⁶ A related strand of research has investigated how GHG pricing mechanisms for international shipping might be designed to reduce their potentially negative impacts on particular countries.⁷ This article adds to these two strands of research by being the first to: (i) analyze the potential pros and cons of double pricing of GHG emissions from shipping; (ii) discuss options to reduce negative impacts of double pricing of GHG emissions from shipping; (iii) argue that, if policymakers do want to avoid double pricing of GHG emissions from shipping, there are lessons to be learned on how to do so from the implementation of border carbon adjustment (BCA) mechanisms; (iv) identify avenues for regulatory cooperation between policymakers who work on GHG pricing for international shipping and those who work on BCA mechanisms. In doing so, the article contributes also to academic and policy research on regulatory cooperation in climate change and trade.⁸

The remainder of this article is structured as follows: Section II identifies near-future scenarios in which the GHG emissions from shipping become subject to double pricing. Section III discusses the potential pros and cons of double pricing of GHG emissions from shipping and ways to reduce any negative impacts that might arise as a result. Section IV analyzes learning opportunities from the implementation of BCA mechanisms, in order to reach the policy goal of avoiding double pricing in this sector. Section V identifies avenues for regulatory cooperation between policymakers focusing on GHG pricing for international shipping and those focusing on BCA mechanisms. Section VI concludes.

II. Double Pricing of GHG Emissions from Shipping: Scenarios

Recent policy developments indicate that a share of GHG emissions from international shipping may become subject to multiple carbon pricing instruments in the near future. Double pricing can occur in three scenarios. These are: (i) the parallel implementation of GHG pricing instruments at the global and sub-global level that cover downstream emissions from vessels; (ii) the parallel implementation of GHG pricing instruments by sub-global jurisdictions covering downstream emissions from vessels; and (iii) the parallel implementation of GHG pricing instruments covering upstream emissions from the production and distribution of bunker fuels. We address these three scenarios in turn after clarifying an important distinction between downstream and upstream emissions covered by carbon pricing instruments.

In principle, a carbon pricing instrument for international shipping can be designed to have different levels of GHG coverage. Firstly, the instrument could cover only emissions released downstream when fuels are used on vessels (referred to as “tank-to-wake” emissions, hereafter TTW). Secondly, the carbon pricing instrument could extend to emissions released upstream both in the production and distribution of the bunker fuels (ie, “well-to-wake,” hereafter WTW). For instance, a GHG pricing mechanism for international shipping could also cover emissions released in the extraction of natural gas used for Liquified Natural Gas (LNG) propulsion on vessels. The latter WTW approach is preferable from a climate change mitigation perspective because it provides greater certainty that the decarbonisation of the sector will not result in greater GHG emissions from land-based sources.⁹ However, opting for WTW may result in GHG emissions released in the production and distribution of bunker fuels being subject to multiple GHG pricing instruments, as discussed in the third scenario below.

In the first scenario, GHG emissions from shipping become subject to double pricing due to overlaps between GHG pricing instruments that cover TTW emissions implemented by the IMO as an international organisation active at global level, and those adopted within sub-global jurisdictions – supranational (eg, the EU) or national (eg, the US) jurisdictions. In July 2023, the IMO’s MEPC adopted a revised GHG strategy for international shipping.¹⁰ This 2023 IMO GHG Strategy mentions a “maritime GHG emissions pricing mechanism”¹¹ among the candidate measures to be developed and adopted by the IMO by Autumn 2025.¹² It is expected that the IMO GHG pricing mechanism will be adopted in 2025 and enter into force in 2027. In the meantime, the EU has extended the application of the EU ETS to international shipping (following the Amending EU ETS Directive).¹³ Starting in 2024, the EU ETS covers 50 percent of GHG emissions from vessels calling at EU ports before or after calling a non-EU port and 100 percent of the GHG released in voyages between EU ports.¹⁴ There is, therefore, a possibility that GHG emissions released by vessels traveling to or from an EU port will be subject to both the EU ETS and the potential forthcoming GHG pricing mechanism adopted by the IMO.

In the second scenario, GHG emissions from shipping become subject to double pricing due to an overlap between sub-global instruments. As mentioned above, the revised EU ETS Directive will apply a GHG price to 50 percent of GHG emissions emitted on voyages between an EU and non-EU port.¹⁵ If other carbon pricing instruments are adopted at the national level by some third countries willing to cover more than 50 percent of GHG emissions released by vessels traveling between one of their ports and an EU port, the two carbon pricing instruments will overlap. Let us illustrate with a case between the EU and a third country. For instance, in the US, the proposed US International Maritime Pollution Accountability Act of 2023 applies a fee on GHG emissions released in burning fuels in transporting cargo to the US.¹⁶ If the US Congress enacts this act, there will be an overlap between the US fee and the EU ETS with regards to cargoes transported from an EU port to a US port.

A third scenario is one in which GHG emissions released in the production and distribution of bunker fuels – that is, upstream emissions – are subject to a GHG price. Let us imagine that a country has implemented a GHG pricing instrument that applies to fugitive GHG emissions from the extraction of natural gas. If this gas is used as a bunker fuel (eg, as LNG) and the GHG price adopted by the IMO also covers these upstream emissions, these emissions will be subject to two pricing mechanisms: one that covers land-based extraction and distribution facilities, and one that applies to international shipping. In fact, the 2023 IMO GHG Strategy sets climate mitigation targets for the sector on a WTW basis and states that the development of the GHG pricing instrument and other climate mitigation measures “should take into account the well-to-wake GHG emissions of marine fuels.”¹⁷ It is, therefore, possible that a GHG pricing instrument implemented by the IMO will also cover upstream GHG emissions. Thus, a scenario in which upstream emissions from bunker fuels are subject to both an IMO and a domestic carbon price is likely.

With these scenarios in mind, in which GHG emissions from international shipping could become subject to multiple GHG pricing instruments, the next section discusses whether GHG double pricing should be avoided at all.

III. The pros and cons of double pricing

This section discusses first the potential impacts of pricing GHG emissions from shipping twice, both positive and negative. It then analyzes the ways in which these negative impacts could be reduced.

1. Possible positive and negative impacts of double pricing

As the prospect of the application of double GHG pricing instruments in international shipping becomes more likely, various stakeholders have expressed concerns regarding the negative impacts that double pricing could have on their profits and trade opportunities.

The shipping industry, or at least part of it, is one such stakeholder. If GHG emissions were to become subject to double pricing, it could experience negative impacts in the form of reduced profits and competitiveness. Pricing GHG emissions from international shipping may reduce profits for the shipping industry, as shipping companies may end up bearing a part of the price or – if the price is shared with other entities along the supply chain – see a reduction in demand for shipping services.¹⁸ Relatedly, pricing GHG emissions from shipping multiple times could further reduce the profits of shipping companies insofar as they become subject to multiple pricing instruments. Moreover, the reduction in profits may be unevenly distributed among shipping companies as some may be more affected by the multiple pricing mechanisms than others (eg, depending on whether they operate on routes where multiple prices apply). These are some of the reasons why various organisations representing industry interests have called for the double pricing of GHG emissions from shipping to be avoided.¹⁹ Furthermore, shipping stakeholders have voiced concerns related to the additional compliance costs – including the multiple reporting of GHG emissions – represented by multiple pricing instruments, which could further affect their competitiveness.²⁰

Some countries have also expressed concerns about the multiple pricing of GHG emissions from international shipping,²¹ and its impact on trade opportunities. A carbon price implemented in international shipping can translate into an increase in the prices of transported goods or lower availability of transport services on certain routes.²² Existing research suggests that impacts on the price of transported goods are not necessarily high in general, but they are likely higher for low-value high-weight goods and for goods transported from more remote exporting countries.²³ Of course, this may also depend on the carbon price level applied. These issues are prominent topics of discussion in IMO debates on the development of carbon pricing in international shipping.²⁴ Pricing GHG emissions from shipping twice or more has the potential to exacerbate the negative impacts of reduced trade on states. However, it is not necessarily the case that all countries will be negatively impacted by a GHG price in shipping, as some may see their exports becoming more competitive or an increase in consumption of domestic products.²⁵

In a nutshell, implementing double GHG pricing instruments for international shipping could have a negative effect on profits within the shipping industry (or at least a share of this industry) as well as affect trade opportunities of some countries.

Against this background, should double pricing be avoided? It is no less important to note the potential benefits of such a situation. From a Pigouvian perspective,²⁶ pricing GHG emissions from shipping could help to internalise the climate externality and thereby align private welfare with social welfare. To the extent that single GHG pricing instruments apply a price on GHG emissions from shipping that is lower than the social cost of carbon²⁷ – that is, the cost to society of emitting an additional tonne of GHGs into the atmosphere – double pricing is not necessarily a problem from a Pigouvian perspective. In particular, it is not a problem if it allows to internalise the social cost of carbon more fully without imposing too high a price on GHG emissions.

From a climate change mitigation perspective, putting a price on the GHG emissions produced by shipping may help to close the price gap between fossil-based bunker fuels and zero-carbon ones – thereby supporting the uptake of zero-carbon technologies.²⁸ It can also incentivise the uptake of low-carbon operational strategies by shipping companies (such as slow steaming) and greener consumption choices among consumers of transported products.²⁹ Existing research indicates that a sufficiently ambitious and well-designed price on GHGs from shipping can be an effective way to reduce emissions³⁰ and can, therefore, be a useful instrument in the GHG policy mix to decarbonise the sector. From this perspective, double pricing of GHG emissions from shipping is not necessarily a problem as it can in turn induce greater abatements. If individual GHG pricing mechanisms put in place are not sufficiently ambitious to decarbonise international shipping in line with climate targets,³¹ double pricing mechanisms may help to meet them. Indeed, under a GHG pricing mechanism, emission reductions are supposed to occur when marginal abatement costs are lower than the price applied per tonne of GHGs. Therefore, applying double pricing to GHG emissions should result in greater abatements.

Figures have been recently published to estimate the costs of such abatements, which we compare with the EU ETS allowance prices as this is the only GHG pricing instrument for international shipping currently in place. Recent estimates of marginal abatement costs to reduce CO₂ emissions from shipping by 20–30 percent by 2030 are between 50 and 100 USD per tonne of CO₂, while in the longer term, these costs are higher together with an increased CO₂ emissions reduction target. Indeed, these marginal abatement costs are between 230 and 240 USD per tonne of CO₂ to reduce emissions by 70–80 percent by 2040, and, 300 USD per tonne of CO₂ to reach net-zero emissions in 2050.³² In comparison, in the first half of 2024, EU ETS allowance prices were between 54 and 81 Euros per tonne of GHGs,³³ which is aligned with the 2030 marginal abatement cost estimates indicated above. While EU ETS allowance prices are expected to increase in the coming years,³⁴ and GHG abatements in shipping will be driven also by other policies,³⁵ at the moment, it is unclear whether global incentives will be sufficiently stringent to decarbonise the sector by 2050. In a scenario where the IMO implements weak GHG policies, sub-global action that leads to double pricing can help to fill the policy stringency gap.

2. Mitigating potential negative impacts of double pricing

The previous section highlighted that although double pricing of GHG emissions from shipping may represent a concern for some shipping companies and some countries, it could also have positive impacts in terms of social welfare and climate protection. Thus, there are, in principle, some reasons to allow double pricing to occur, despite the negative effects that might result. Starting from this premise, this section argues that some strategies to design GHG pricing instrument for international shipping could help to mitigate potential negative impacts of double pricing.

Regarding potential negative impacts on trade exchanges and development opportunities for developing countries, especially Small Islands Developing States (SIDS) and Least Developed Countries (LDCs), research is ongoing in the context of IMO negotiations on how to assess³⁶ and address them. Various stakeholders are proposing potential solutions to address and mitigate such disproportionately negative impacts. Indeed, some stakeholders have called for exemptions for routes to/from selected countries,³⁷ while others have called for the carbon revenues raised through the GHG pricing instrument to be put towards addressing these negative impacts.³⁸ For instance, World Bank research suggests that using carbon revenues from shipping to enhance port efficiency can reduce transport costs and offset (at least some of) the increase in transport costs related to introducing a GHG price.³⁹ Similar strategies could be adopted to reduce negative impacts from double pricing of GHG emissions from shipping. For instance, a share of carbon revenues raised by the extension of the EU ETS could be reallocated to reduce negative impacts in developing countries that trade with the EU.⁴⁰

Regarding the additional compliance costs for the industry potentially facing double GHG pricing instruments, these could be alleviated by harmonising, or at least aligning, reporting requirements across systems/jurisdictions. Regulatory alignment is known to reduce business compliance costs and is a key effort undertaken in market integration efforts worldwide.⁴¹ In light of this, the EU colegislators had started discussing regulatory measures, with the amendment of Regulation (EU) 2015/757, to partially align monitoring, reporting, and verification (MRV) requirements of GHG emissions from shipping for the EU with IMO standards.⁴² However, the discussions did not progress as the European Commission’s legislative proposal from 2019 seemingly stalled at the stage of trilogue negotiations.⁴³ It remains to be seen if this legislative file will be restarted under the new 10^th European Parliament’s Assembly that started in July 2024.

It is also worth noting that the double pricing of GHG emissions is already common place in many other sectors such as road transport and energy, as carbon taxes and ETSs are often complemented by other policy instruments – such as energy taxes or levies – that increase the marginal cost of emitting GHGs without targeting the carbon content or GHGs released in burning fuels.⁴⁴ The Organisation for Economic Cooperation and Development (OECD)⁴⁵ and the International Monetary Fund (IMF)⁴⁶ have sought to integrate this into their analyses by estimating the effective carbon prices in place in a number of countries. Effective carbon prices consist of the sum of carbon prices applied directly (through a carbon tax or ETS) and those applied indirectly (through other instruments that increase the costs of emitting GHGs without targeting the GHG content of fuels directly).⁴⁷ These analyses indicated that in many countries pricing instruments overlap and, often, precisely this overlap allows countries to have overall GHG pricing levels that are closer to benchmark levels,⁴⁸ such as estimates of the GHG price level needed to deliver on established climate targets. If implemented in the shipping industry, double pricing of GHG emissions would be far from an exception.

Overall, the question whether double pricing should be avoided depends on a balancing of competing interests, but the normative case to avoid it can be disputed. Moreover, the design of the carbon pricing instruments can mitigate some of the potential negative impacts discussed above. Nonetheless, beyond those considerations, policymakers may choose to avoid double pricing of GHG emissions from shipping. On this ground, the next section discusses potential lessons from academic and policy work on designing and implementing BCA mechanisms that can be useful in addressing concerns related to double pricing.

IV. Learning from Border carbon adjustment mechanisms

This section argues that, in situations where the policy choice is to avoid double pricing of GHG emissions from shipping, policymakers working on the decarbonisation of shipping could learn from the knowledge and experience that has been gained in implementing another type of regulatory instrument that puts a price on GHG emissions; that is, from BCA mechanisms. In particular, there are lessons to be drawn from (i) the implementation of crediting mechanisms to avoid double pricing and ii) the comparison of GHG pricing instruments for shipping implemented by the IMO and sub-global jurisdictions (EU or individual countries).

1. Implementing crediting mechanisms to avoid multiple pricing

One way in which double pricing could be avoided is through the implementation of a crediting mechanism whereby entities whose GHG emissions are covered by multiple carbon pricing instruments have the right to see the payment made under one of the instruments recognised against the payment due in application of the other instrument. For example, if GHG emissions from shipping are priced twice – either by two sub-global instruments, or by a sub-global instrument and an IMO instrument as per the scenarios in section 2 – a crediting mechanism could be implemented. This mechanism would allow entities that pay the carbon price under one instrument to see this payment credited by the other instrument, so that there is no multiple payment for the same applicable share.

In practice, such a crediting mechanism could take two forms: first, the form of an exemption from paying the carbon price under one of the instruments or, second, the form of a rebate, whereby the payment made under one instrument is returned or detracted from future payments. The exact form of such crediting mechanisms will depend on the specific design of the pricing instruments that apply to the same tonne of GHGs.

BCA mechanisms can include crediting mechanisms of this type, and therefore offer learning opportunities. BCA mechanisms put a price on GHG emissions embedded in imported products. For instance, the recently adopted EU Carbon Border Adjustment Mechanism (CBAM) Regulation⁴⁹ requires EU-based importers to buy and surrender CBAM certificates equal to the GHG emissions embedded in products imported into the EU.⁵⁰ However, if these emissions have already been subject to a GHG price in the exporting country, the amount of allowances that the EU-based importer needs to surrender is reduced.⁵¹ To illustrate with figures, let us imagine that an EU-based importer has imported 1 tonne of a product subject to CBAM into the EU with 10 tonnes of embedded GHGs therein, and the price of CBAM certificates is 100 euros per tonne. In this example, the importer would need to surrender CBAM certificates for a value of 1,000 euros. However, if the product were already subject to a GHG pricing mechanism in the exporting country equal to 50 euros per tonne of GHGs, this price would be credited in the application of CBAM. Here, the importer would need to pay CBAM certificates only for 500 euros insofar as 500 euros have already been paid in the country of origin of the goods. Based on this parallel, similar mechanisms could be implemented to avoid multiple payments under multiple GHG pricing mechanisms for international shipping.

Various other jurisdictions are considering the implementation of a domestic BCA mechanism. These include Australia,⁵² Canada,⁵³ Japan,⁵⁴ the United Kingdom,⁵⁵ as well as the United States.⁵⁶ In each of these jurisdictions, policymakers will need to decide whether and how policies implemented in exporting countries will be credited.⁵⁷ These jurisdictions and others considering a BCA mechanism will develop expertise in designing crediting mechanisms. This knowledge could be harnessed to the similar situation of double pricing of GHG emissions from shipping.

2. Comparing climate policies

Academic scholarship and grey literature have long analyzed ways to compare GHG policies across jurisdictions, for instance looking at their relative GHG emissions reduction outcomes or stringency (for instance, in terms of marginal abatement costs imposed).⁵⁸ Scholarly and policy attention towards the question of how to compare policies has increased in recent years due to policy activity on BCA mechanisms. This is because, normally, these mechanisms would apply a GHG price on products imported from countries that have less stringent (or less effective) GHG policies in place.⁵⁹ Thus, the implementation of these policies entails a comparison of GHG policies in the importing and the exporting country.

In the remainder of this section, we argue that the expertise in comparing climate policies and frameworks can support policymakers working on shipping. Such expertise can support them with the design of a GHG pricing mechanism for international shipping that avoids double pricing of GHGs from this sector. We elaborate on two different situations envisaged by the Amending EU ETS Directive – which extends the application of the EU ETS to international shipping. These scenarios represent, respectively, the comparison of IMO GHG pricing mechanism with the EU ETS, and the equivalence between the EU ETS and third countries’ market-based measures (considered as synonymous to “GHG pricing mechanisms”).

First, the EU ETS Directive establishes that in the case the IMO adopts a global GHG pricing mechanism, the European Commission shall review the ETS Directive.⁶⁰ In particular, the Commission will prepare a report on the IMO GHG price that analyzes (i) its ambition in light of the Paris Agreement’s climate objectives, (ii) its environmental integrity, both in its own right and in comparison with the EU ETS, (iii) and its coherence with the EU ETS.⁶¹ The report is to be submitted to the European Parliament and the Council within a year and a half from the adoption of the measure by the IMO.⁶² Alongside this report, the Commission may submit also a legislative proposal to amend the EU ETS directive in light of the IMO GHG pricing mechanism with the aim of preserving the environmental integrity of the EU ETS, “while avoiding any significant double burden,”⁶³ and ensuring that the EU is on track to reach its 2030 and 2050 climate targets.

Second, if the IMO does not adopt a GHG pricing mechanism by 2028, or the adopted GHG price is not aligned with the Paris Agreement temperature goals and comparable to the EU ETS, the Commission will submit a report to the EU co-legislators, the European Parliament and the Council.⁶⁴ This report will consider whether the requirement to surrender allowances under the EU ETS should be extended beyond 50 percent of GHG emissions released in voyages from/to an EU port.⁶⁵ In this report the Commission should, among other things, analyze the progress made at the IMO and analyze whether other jurisdictions have implemented a GHG pricing mechanism for international shipping equivalent to the EU ETS.⁶⁶ This report will be submitted alongside a legislative proposal to amend the EU ETS Directive.⁶⁷

Thus, the EU ETS Directive foresees a comparison between the EU ETS and other GHG pricing mechanisms for international shipping in at least two situations. The first compares the IMO GHG pricing mechanism with the EU ETS, and the second considers the equivalence between the EU ETS and third countries’ GHG pricing mechanisms. From the wording of the EU ETS Directive, it is uncertain whether the use of different words in these two situations, that is, “level comparable” in the first situation, and “equivalent” in the second, should be interpreted as entailing different types of analyses and assessment by the Commission (regarding the meaning of “equivalence” in EU practice, see section V.2 below). In any case, knowledge and methods regarding the comparison of GHG pricing mechanisms can feed into either type of assessment made by the Commission.

Knowledge on methods of comparing GHG pricing mechanisms could also help other non-EU countries in designing GHG pricing mechanisms for shipping. IMO member states can build on this knowledge to design the IMO GHG price in order to avoid an extension of the EU ETS beyond 50 percent of GHG emissions released by vessels in voyages between EU ports and ports of third countries. In principle, the implementation of an ambitious GHG pricing mechanism at the IMO could also lead to a withdrawal of the application of the EU ETS to shipping. Similarly, outside of the IMO context, non-EU countries can build on knowledge in comparing GHG pricing mechanisms to design domestic GHG pricing instruments for international shipping that could be considered “equivalent” to the EU ETS.

The comparison of different GHG pricing mechanisms is not only a technical endeavor, but it will also entail political considerations. In the next section, we argue that there is a case for cooperation between the EU, the IMO, and third countries on methods of comparing their GHG pricing mechanisms.

V. Scope of regulatory cooperation on GHG pricing mechanisms for international shipping

In the previous section, we argued that knowledge created in the context of implementing BCA mechanisms could help reach the policy goal of avoiding double pricing of GHG emissions from shipping. On this basis, we concluded that cooperation among policymakers, academics, and civil society experts working on BCA mechanisms and GHG pricing mechanisms for international shipping could be beneficial. In this section, we discuss options to foster such cooperation. To this end, we distinguish three levels of cooperation: (i) multilateral cooperation in the context of IMO negotiations and outside the IMO; (ii) bilateral cooperation between jurisdictions at government level, and (iii) internal cooperation in a given jurisdiction (i.e. EU as a supranational jurisdiction or intra-government within a State). In this examination, we consider both the content and modalities of such cooperation.

1. Multilateral cooperation

Let us begin by looking at multilateral cooperation in the context of IMO negotiations. In terms of actors involved at this level, the IMO MEPC and Intersessional Working Group on Reduction of GHG Emissions from Ships (ISWG-GHG) represent an existing platform for debate among IMO member states and observer organisations. Organisations with an observer status at the IMO include inter alia the EU and other international organisations with expertise on comparing GHG policies instruments and implementing crediting mechanisms for BCA mechanisms, such as the World Bank, the OECD, and the IMF. Another organisation with significant experience in comparing GHG pricing mechanisms is the World Trade Organization (WTO).⁶⁸ The WTO does not have observer status at the IMO, but the secretariats of these organisations have collaborated in the past.⁶⁹ These channels can foster cooperation on the following substantive matters.

Multilateral cooperation in the IMO context could focus on three broad areas. The first of these could be the exploration of possibilities to harmonise, or at least align, GHG pricing mechanisms (and related MRV requirements) to reduce compliance costs for regulated entities. Similarly to other sectors,⁷⁰ regulatory cooperation between entities or jurisdictions that are adopting and implementing a carbon pricing mechanism in international shipping could help harmonisation or alignment efforts.⁷¹ Second, cooperation could focus on identifying characteristics of an IMO GHG pricing mechanism that could be seen as “comparable” to the EU ETS. This can focus on key characteristics of a GHG pricing instrument, such as the carbon price level, GHGs covered, use of offsets and exemptions, the integrity of the GHG measurements, reporting and verification, and enforcement. Third, in case the IMO GHG pricing mechanism is adopted and overlaps with EU or national GHG pricing mechanisms, cooperation could focus on identifying how to design crediting mechanisms so as to avoid doubling the burden and identify adequate arrangements for the sharing of revenues between entities or jurisdictions that – in the absence of a crediting mechanism – would put a price on the same emissions.

Multilateral cooperation may take place also outside the IMO. This form of cooperation could involve the EU, other countries that aim to put a price on GHG emissions from shipping through a domestic instrument, and other organisations with expertise on BCA mechanisms. It could take a loose form, including a transfer of knowledge, sharing of best practices and expertise across jurisdictions and stakeholders’ organisations via joint workshops. It could also take a more structured form, where regulatory cooperation is facilitated by settings that are more formal and regular, like forums or joint groups, on the basis of a common cooperation framework (at bilateral level,⁷² or in this case at multilateral level). Such settings allow the parties to convene regularly, and foster dialogue. In both loose and structured settings, the aim is to encourage the development of common regulatory approaches towards a shared regulatory objective. In this regard, multilateral cooperation outside the IMO could focus on the same three areas discussed above: instrument harmonisation or alignment to reduce compliance costs, comparability of GHG pricing instruments, and options for crediting mechanisms.

2. Bilateral cooperation and consideration for EU equivalence

Cooperation on GHG pricing for shipping and BCA mechanisms could take place also between the governments/public institutions of two jurisdictions, for instance, between the EU and a third country,⁷³ or between two non-EU countries. Such cooperation could materialise in a loose or structured form through cooperation frameworks, as mentioned above, for multilateral cooperation.

Substantively, these cooperation efforts could focus on harmonising or aligning GHG pricing instruments to reduce compliance costs, agreeing on the design of potential crediting mechanisms (in the case of two instruments overlapping), comparing GHG pricing instruments between jurisdictions, or establishing “equivalence” between the EU ETS and the GHG pricing mechanism of a third country – as envisioned by the revised EU ETS Directive (see section IV above). Bilateral cooperation could be particularly needed in the latter case, ie, for establishing “equivalence” between the EU ETS and third countries’ GHG pricing mechanisms, as further discussed below.

In the EU context, the term “equivalence” is mostly used to refer to a process with specific features that entails a comprehensive assessment of regulatory and supervisory frameworks of third countries against the EU domestic framework to assess whether these are indeed “equivalent.” This framework may contain rules, standards, and administrative practices to enforce the rules (broadly captured as the regulatory regime). At the end of this process, the Commission may adopt equivalence decisions, also called adequacy decisions. Several EU policy areas foresee equivalence in EU secondary law itself, such as financial services (including clearing counterparties), data protection, and third-country auditor oversight.⁷⁴ While it is primarily a technical assessment, equivalence remains an area of political choice as equivalence decisions are unilaterally granted and potentially withdrawn at any time. Regulatory changes in one jurisdiction and/or the other may lead to divergence in regulatory approaches, which can halt equivalence.⁷⁵

Most often, the equivalence assessment is outcomes-based, in other words, it considers the regulatory outcomes of the frameworks assessed, and whether third countries’ rules have the same effect as the EU’s. In the context of GHG pricing for shipping, this assessment would entail examining the outcomes of third countries’ GHG pricing mechanisms against the Amending EU ETS Directive. This approach seems to be the one taken in this Directive, as recital 28 states that “account should be taken of measures in third countries that have an effect equivalent to Directive 2003/87/EC”⁷⁶ (emphasis added). Establishing equivalence will normally require substantial knowledge of the GHG pricing mechanism implemented in the third country and its maritime transport sector (eg, to identify potential avoidance risks).⁷⁷ As such, bilateral cooperation between the EU and another third country is essential to establish equivalence between the EU ETS and the third country regime.

It is uncertain whether the analysis of the Commission underpinning the report sent to the co-legislators, the European Parliament and the Council will entail this assessment process in a similar fashion to other EU policy areas, or whether “equivalence” will entail another type of assessment of third countries’ approach to GHG pricing. In any event, if deemed “equivalent” by the EU, the implementation of a GHG pricing mechanism by third countries could preempt the further extension of the EU ETS to their jurisdictions, and therefore, could solve the issue of double pricing instruments to GHG emissions from shipping. Such assessment will be facilitated by both loose and structured form of cooperation at bilateral level, on the fringe of the ongoing multilateral cooperation in the IMO setting. Prior internal cooperation will also be instrumental to foster such informal and formal dialogue.

3. Internal cooperation

Internal cooperation refers to either intra-government cooperation within a country, or intra-EU cooperation in a supranational setting.

Within a country, knowledge acquired or developed on how to compare GHG pricing mechanisms or to implement crediting mechanisms by units working on BCA mechanisms could be shared with units working on GHG pricing mechanisms for international shipping. This may require cooperation across different Ministries or Departments, depending on the organisation of a given jurisdiction’s Government.

Intra-EU cooperation can take place not only during the EU legislative process itself and among the co-legislators i.e. the European Parliament and the Council,⁷⁸ but also in the implementation of EU Law. The latter matters in this field considering the nature of the legal act setting the EU ETS regime, that is, a Directive. Member States had to transpose the Amending EU ETS Directive in their national system by 31 December 2023.⁷⁹ Under the application of the principle of sincere cooperation,⁸⁰ the Member States shall implement and transpose the EU ETS Directive into national law by the given deadline and fulfil the obligations arising out from it. At the time of writing, still fourteen EU Member States need to transpose it in their legal systems or notify that they have done so.⁸¹

Overall, this section has argued that multilateral regulatory cooperation within and outside the IMO, at the bilateral level, and within jurisdictions among policymakers working on BCA mechanisms and GHG pricing for international shipping, can be beneficial to address potential issues related to double pricing of GHG emissions from shipping.

VI. Conclusion and policy implications

Recent policy developments at the global and sub-global level indicate that a share of GHG emissions from international shipping will soon be under multiple GHG pricing mechanisms implemented by the IMO, the EU, and perhaps other jurisdictions. Various countries and shipping companies have expressed concerns about this based on its potential impact on profit margins and trade.

Building on this background, this article analyzed the potential pros and cons of double pricing of GHG emissions from shipping, discusses options to reduce the negative impacts of double pricing, and identifies regulatory cooperation avenues to avoid double pricing or reduce (some of) its potential negative effects.

Overall, the analysis suggests that double pricing of GHG emissions from shipping can have both positive and negative impacts. The relative weight of these effects depends on the stakeholders’ interests considered, contextual factors, and instrument design. The normative case to avoid double pricing depends on these elements and cannot be established a priori. Moreover, from a climate change mitigation perspective, the argument for double pricing becomes stronger when the IMO implements weak GHG policies.

The article argued that, if policymakers decide to avoid double pricing, there are lessons to be learned from the policy debate surrounding BCA mechanisms in at least three areas.

First, knowledge developed on how to compare GHG policies across jurisdictions in the context of BCA mechanisms can be used to compare GHG pricing mechanism for international shipping implemented by the IMO with those of sub-global jurisdictions, such as the EU or individual countries. Such comparison can help to harmonise or align GHG pricing mechanisms and thereby reduce compliance costs for regulated entities.

Second, recently, the EU has extended the application of the EU ETS to international shipping covering 50 percent of GHG emissions released in voyages from and to EU ports. This coverage could be expanded beyond 50 percent of the emissions in case the IMO or other jurisdictions do not implement sufficiently stringent GHG pricing instruments for international shipping in the coming years. This article argued that knowledge on how to compare GHG pricing instruments can help to design instruments at the IMO or in non-EU countries that are sufficiently similar to the EU ETS (eg, in terms of climate change mitigation effects), so as to avoid the further expansion of the EU ETS to international shipping beyond the current coverage. In principle, the implementation of ambitious GHG pricing instruments by the IMO might even result in a retraction of the extension of this instrument from international shipping.

Third, in case two GHG pricing instruments for international shipping overlap, one way to avoid double-pricing of the same emissions is to implement a “crediting mechanism”. Crediting mechanisms are a key element of the design of BCA mechanisms. When a crediting mechanism is included in BCA mechanism, GHG policies implemented in the exporting country are “credited” in the imposition of the BCA instrument on imports. For instance, the EU CBAM credits importers for carbon taxes and ETS implemented in trading partner countries. Similar crediting mechanisms could be implemented to avoid double pricing of GHG emissions from shipping and lessons could be learnt on how to do so.

On this basis, the article argued in favor of regulatory cooperation, at both a multilateral and bilateral level as well as internally (ie, within a jurisdiction), between policymakers who work on BCA mechanisms and the decarbonisation of international shipping. In particular, multilateral cooperation between the IMO, the World Bank, the IMF, the OECD, the EU, and countries working on GHG pricing for international shipping and BCA mechanisms can help to reduce potential negative impacts of double pricing or to avoid double pricing tout court. The article discussed the content and potential modalities of such regulatory cooperation.