As described above (chapter 5.5), vessels have a large potential in terms of abating CO2 emissions at negative marginal abatement costs. A reduction of emissions ceteris paribus goes hand in hand with cost savings if no regulation would be in place. This is reflected by the results of all studies known to us as well as by our own calculations.
What differs is the share of GHG emissions from ocean shipping that is estimated to be avoided at negative costs. Estimations of no-cost emission reduction potential range between 10 and 25 percent of total emissions, depending, among other things, on the time horizon, the included vessels, state of the art definition, technologies and on bun-ker fuel prices as well as interest rates. It is difficult to understand why ship owners and operators have not implemented these cost saving measures already, which is why in Box 1, page 37, we turned to several potential explanations.
The existence of negative marginal abatement cost has significant implications on the efficiency of emissions trading. To illustrate the causalities, it will first be assumed that
maritime transport will face the same cap as aviation from 2013, that is 95 per-cent of the average emissions of the base years (assuming the base years to be quite recent years),
the system is semi-open, i.e. land-based EU ETS participants may not pur-chase allowances from ship operators, but vice versa trade is allowed,
all emission allowances are allocated freely.
Under this setting, there will hardly be any trading of “maritime” emission allowances in the medium to long term as the sector manages to cut emissions by the required
amount (5%) over time without any cost. As long as the allowance price is positive, many actors would supply certificates to the market in which there is no sustainable demand because operators of land-based installations are excluded from using “mari-time” allowances. Should prices eventually drop to zero, trade would break down. As a consequence, no additional incentives exist to further reduce emissions. Dynamic effi-ciency, in other words, would be zero. Even if emission permits were fully and repeat-edly auctioned, the outcome would not differ significantly. As long as the sector can reach the cap at negative cost, the amount of allowances supplied by the authorities will exceed demand, bringing the price close to zero in the medium to long run.
In principle, at least two options can be considered to overcome this undesirable out-come. First, the cap could be tightened to a level which can only be reached with posi-tive marginal abatement cost. For example, the cap is set at such a level that the price for “maritime” emission allowances equals the price of regular EU emission allowances.
An appropriate cap is difficult to estimate but back-of-the-envelope calculations point to a cap of 40 – 60 % of current emissions (2005) in the case of an allowance price of
€ 30 (again depending on the assumptions of underlying cost estimates and emission projections). However, it seems questionable whether such an ambitious cap can be politically implemented in the short run: Even though there is a high potential for low cost emission reductions, initial adjustment costs (e.g. investment cost for retrofitting or even substituting old vessels by high efficiency vessels) clearly exist. Additionally, other sectors faced significantly lower caps at the start; thus it will be difficult to convince the shipping and relating sectors to be confronted with such a strict cap. But in the medium to long run, after some adjustment time, a tight cap is clearly recommended.
Second, the trading scheme can be fully opened. This would generate efficiency gains within the entire EU ETS because the maritime transport sector added has very low emission reduction costs, which would lower overall emission reduction costs. At the same time, allowing land-based emitters to offset their emissions via allowances from the maritime sector undermines the EU’s international commitments to reduce GHG emissions in those sectors that are covered by the Kyoto Protocol as long as the mari-time activities are not covered by the UNFCCC. However, any prediction on a post 2012 regime is currently speculative. Hence, allowing for complete tradability between all sectors can hardly be realized before an international solution is agreed upon. If such an agreement were reached, “maritime” emission allowances could be used by land-based emitters just as they can use Joint Implementation certificates to offset their emissions to some degree.
If the EU acts alone, one option is to allow for complete tradability between EU emis-sions trading for ocean shipping and international aviation. This may well be sufficient to give “maritime” emission allowances a price. Actually, this is most probably the case because marginal abatement cost in the aviation sectors is estimated to be between
€ 114 and € 325 /t in 2020, assuming a cap of 2005 emissions (EC 2006). This is much higher than in ocean shipping and in stationary installations, which means that the avia-tion sector will become a net buyer of certificates. Model based projecavia-tions suggest that aircraft operators will purchase allowances for almost all of their emissions
exceed-ing the cap (EC 2006). Beexceed-ing more optimistic about the economic feasibility of emission reductions within the aviation sector, we assume that this sector will cut its emissions exceeding the cap by 30 % and will buy the remaining 70 % on the market. Thus the excess demand of aviation will amount to allowances for 130 Mt CO2 in 2020 (our own estimates based on EC 2006, table 3). This demand would seek supply on the market for “maritime” emission allowances as they are cheaper than certificates from the sta-tionary sector. Therefore, the “maritime” certificate price will go up. It would need so-phisticated modelling to quantify how ship operators will react to certain allowances price increases. But the probability is very high that aviation’s demand for “maritime”
emission allowances is high enough and the maritime sector’s excess supply low enough to equalize the price of “maritime” emission allowances with the price of the EU ETS for stationary instalments. For example, this can be shown under the assumption that certificate prices increase to € 30 per t CO2 and by applying IMO’s 2020 most op-timistic estimates of marginal abatement cost in the shipping sector in 2020 as well as IMO’s emission projections. With these simplifications, ship operators could reduce emissions efficiently by a maximum of 30 % below BAU emissions, which is within the range of 60 – 90 Mt CO252
. As a 95 % cap of current emissions is assumed as well, the remaining excess supply of the maritime sector will be a fraction of these 90 Mt CO2.
This is less than sufficient to satisfy the aviation sector’s demand. In other words, if these projections come true, aviation’s demand matching the maritime transport sec-tor’s supply would equalize the price of emission allowances on the “regular” and the
“maritime-aviation” market for emission allowances. Ideally, aviation would then be the perfect vehicle to link the submarkets together, offering the efficiency advantages of emissions trading.
It has to be noted, though, that little is known about actual marginal abatement cost in the aviation sector (ICF 2006) although studies are in the pipeline.53 Additionally, more empirical research is needed to calculate the marginal abatement cost specifically for vessels entering the EU. Hence, it is beyond the scope of this study to make more than a rough guess on how prices of certificates on the semi-separated markets would actu-ally develop in a trading scheme that allows complete tradability of allowances between the aviation and shipping sector only. Among other things, prices react to develop-ments in the trading of emission rights of the land-based sector, which itself depends on numerous variables such as technological progress, the structure of power plants, policy measures, etc.
52 The range of 30 – 70 Mt is estimated as follows: It is estimated that CO2 emissions by the maritime transport sector increase to 1400 Mt by 2020 (IMO 2009). Assuming that the share of emissions in-duced by freight transport to and from the EU stays stable at 25% of global emissions, it follows that these emissions will be around 350 Mt of CO2 in 2020. IMO’s most optimistic marginal abatement cost curve assumes that approx. 26% of BAU emissions in 2020 can be avoided at a marginal cost below
€ 30 (i.e. approx. $ 40). 26% of 350 Mt equals 90 Mt. Legal or political infeasibilities, leakage effects or monitoring problems may lower the volume of emissions covered.
53 For example:see Omega 2009.
In summary, emission allowance prices for the maritime sector will very much depend on the cap implemented and its openness towards the EU ETS. Because maritime al-lowances should not be used to offset land-based emissions (at least if the Kyoto prin-ciples prevail) a cap would need to be strict enough to force marginal abatement cost for vessel CO2 emission reductions up to approximately € 30 per ton. Then, since ma-rine vessels would become net buyers, the price of “maritime” emission allowances would be equal with the price of “ordinary” emission allowances. If the cap is set too weak, certificate prices may be very low (if not zero) for the sector of maritime trans-port. If the aviation sector is allowed to buy emission rights from the shipping sector, prices may come closer to the regular EU ETS, even if the cap is not set very tightly.