Key Takeaways
The International Maritime Organization (IMO) has a proposal, backed by several European Union member states and small island nations, to cut greenhouse gas emissions from international shipping, which, if adopted, would have been the first global greenhouse gas tax.
The proposal includes a fuel standard and a two-tiered carbon tax at $100 and $380 per metric ton of carbon dioxide equivalent emissions, as well as awarded, transferable tax credits that can be carried forward to offset a shipping company’s tax liability.
The Trump administration rejects the IMO proposal, as the global tax is estimated to cost American shippers more than $100 billion over the next seven years, if enacted.
A carbon levy would raise the costs of shipping and disproportionately impact developing economies dependent on global trade.
The world’s largest maritime nations met in London last week to consider adopting regulations that would set a global tax on greenhouse gas emissions from shipping for ships of all types — cargo and cruise. In April, members of the International Maritime Organization (IMO) agreed on the contents of the regulatory framework and intended to adopt it at the meeting. However, the Trump administration’s pressure — through threats of tariffs, visa restrictions, and financial penalties, alongside arguments about potential costs and national security risks — convinced nations to vote to delay a decision on the framework by a year. According to the Associated Press, if the IMO agreed to the regulation, it would have been the first global tax on greenhouse gas emissions. The proposal would have entered into force beginning in 2027, with a target for reaching net zero emissions in 2050. Greenhouse gas emissions from shipping account for about 3% of total emissions worldwide.
The system for compliance is essentially a cap and trade program with an associated pricing system that would impose fees for every ton of greenhouse gases emitted by ships above allowable limits. Via the Associated Press, there is a base level target of compliance for the allowable greenhouse gas intensity of fuels and there is a more stringent direct compliance target that requires further reduction in the greenhouse gas intensity. Greenhouse gas fuel intensity measures the amount of greenhouse gases emitted per unit of energy used.
The regulations would set a marine fuel standard on the amount of greenhouse gas emissions allowed from fuels used in shipping. The standard would decrease over time, making it more difficult to meet. Fees would be imposed on the greenhouse gases emitted above the standard. As explained by the Associated Press, ships that have lower emissions than the compliance target earn “surplus units,” or credits. Ships with emissions above the standard would have to buy credits from ships having credits or from the IMO at $380 per metric ton of carbon dioxide equivalent. Additionally, there’s a penalty of $100 per metric ton of carbon dioxide equivalent to reach direct compliance.
Via the Associated Press, the fees could generate $11 billion to $13 billion in revenue in the first year. The revenues are to go into an IMO fund to invest in fuels and technologies needed to transition to net zero, reward low-emission ships, and support developing countries in making the transition. The rules are designed to make biofuels the cheapest fuel to use for compliance, as the fees to meet the standards close the cost gap between fossil fuels and alternative fuels such as ammonia, hydrogen, and methanol.
Since large ships operate for about 25 years, the industry would need to make changes and investments now to reach net-zero at the target date around 2050. According to FreightWaves, Ocean carriers for years have been proactive in reducing emissions. About 41% of container ships on order – more than half the tonnage on order — are designed to operate with alternative fuels such as liquefied natural gas or ammonia.
Before the vote, U.S. Secretary of State Marco Rubio, Energy Secretary Chris Wright, and Transportation Secretary Sean Duffy jointly said that the Trump administration “unequivocally rejects” the maritime proposal. The U.S maritime industry believes the global tax would cost American shippers more than $100 billion over the next seven years, if enacted.
Analysis
In addition to violating the sovereignty of nations to impose their own taxes, a global tax on greenhouse gas emissions from ships would have imposed immense costs on the industry, which is responsible for 90% of global trade and only produces 3% of carbon emissions. Carbon taxes and cap and trade programs are often sold as a common-sense policy solution to transition carbon-intensive industries towards low- or zero-carbon alternatives. However, the theory of a carbon tax becomes fraught when dealing with real-world politics. As IER’s Samuel Peterson and Alex Stevens wrote for the National Interest, “Carbon taxes are frequently presented as scientifically sound and politically feasible tools for climate mitigation. However, they are fraught with methodological, political, and economic challenges that warrant serious reconsideration.”
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