international coverage – fuel consumption – last period
14.1.1 Environmental effectiveness
The environmental effectiveness of option A1 is the best of all options considered, re-garding the volume of emissions covered and the correlation between the emissions covered and actually emitted ones. The effectiveness of a scheme depends largely on the amount of seaborne trade that would participate in it. If all vessels calling at EU ports are integrated and are responsible for all emissions they emitted during the trad-ing year, the reach would integrate export and import trade as well as distances trav-elled by those ships within the period with no connection to European trade as long as they call once at a European port within the trading year. Passenger vessels and fer-ries would be covered similarly.
The environmental effectiveness will be also determined by the emissions cap and the reference period the cap is based on. Due to the high potential for low-cost abatement measures a cap at approximately 30 % below emissions from the historic period 2004 – 2006 seems appropriate. Part of the emission allowances for the sector might be dis-tributed freely – at least in the beginning of the inclusion. Free allocation of allowances may result in large windfall profits by the industry. While it is recommended to distribute a share of allowances for free, the numbers should be based on distinct vessel types and based on historic emissions and tonne-kilometre data. Europe is aiming to phase out free allowances and thus, free allocation should be decreased to zero before the year 2030.
Measures that effectively and permanently reduce CO2 emissions include design for slow steaming and any technical and operational measure. By recognizing in-port emissions in the modelling of the baseline and allocation amounts, vessels would also be incentivized to reduce their emissions while in port, for example through cold iron-ing.
A minimal risk of evasion exists due to the possibility of re-loading vessels at non-European ports and limiting the number of vessels that call at non-European ports. How-ever, the evasion risk of this option is the smallest of all options and unlikely to materi-alize as long as allowances prices are not extremely high.
14.1.2 Reliability of monitoring
The scheme proposed relies on bunker fuel delivery notes and for cross-checking on log-books to gather information on distances travelled and the CO2 emissions in the re-spective trading year (or other time horizon if another reference is defined as ‘last pe-riod’. This approach would require no additional data on board ships and monitoring would be fairly easy. First a manual reporting system and mandate should be estab-lished, transmitting last period’s vessel voyage and fuel consumption data via fax or e-mail. Automated distance monitoring through satellite systems is not ubiquitously avail-able today and thus the automated monitoring of a last period through satellites not possible. Some positive experience has been made with satellite AIS signal reception.
However, technical, legal and economic constraints remain. Table 16 summarizes the data needs and possible sources regarding monitoring emissions during trading peri-ods.
Data needs Source Data Quality
Fuel consumed and distances travelled in trading year / period when calling at a EU port
Vessel log-book; BFDN
High – good
Proof of emission allowance certificates from each vessel for the trading year / period
Vessel account Very high
Table 16: Data needed during trading years (Option A)
Table 17 shows the data needs in the trading period. For baseline and cap setting it is recommended to utilize vessel activities in the past (e.g. period 2004 – 2006) to mini-mize cheating options. A full list of vessel calls and routes of the past might not be available. One option is to back-cast the emissions based on a list of vessel calls from a year after the inclusion has been decided, which can be made available through European ports. Our analysis has shown that back-casting with a bottom-up methodol-ogy likely produces sufficient emission figures to establish the emissions baseline and emissions cap.
Data needs Source Data Quality List of vessel calling at European ports in a year post 2010;
back-casting based on trade data
Ports, trade statistics
Very high, sufficient
Technical vessel by vessel data Lloyds Very high
Operational data by vessel category Literature,
trade statistics
Sufficient
Table 17: Data needed for back-casting baseline emissions and the alloca-tion of free allowances (Opalloca-tion A):
14.1.3 Economic efficiency and economic impacts
Static as well as economic efficiency in static and dynamic terms of option A is high as the assessment basis is proportionately linked to emissions. Administrative costs are manageable as was shown when discussing the issue of monitoring.
The economic impacts discussed in chapter 13 mostly relate to this option. This implies that if prices for emission certificates do not significantly exceed € 30 per tonne of CO2, and if a high share of certificates is allocated for free, no severe economic impacts on the German or European maritime transport industry is expected. This is especially the case as the fuel consumption based approach stimulates all abatement options that are open, including the ones at lowest cost, i.e. negative cost whereas, for example, the distance based approach does not stimulate all options to reduce emissions.
The inclusion of ocean shipping into the EU ETS offers more advantages than disad-vantages for the European ship builders or other suppliers of equipment, because the demand for fuel efficient vessels can be expected to increase. European suppliers are increasingly focussing on advanced and special ship designs and energy efficiency technologies. (EC 2003 and EC 2007).
Further, option A hardly offers any incentives to circumvent the scheme by calling at extra EU harbors. Reloading to ships at ports nearby proves to be uneconomical as long as allowance prices do not clearly exceed € 30. Thus, competitive distortions be-tween ports are unlikely. But the pressure on European ports to steadily invest in infra-structure and improved services may increase, though. Thus, coastal regions may suf-fer if these improvements do not take place. At the same time, as long as the cost of emission regulation incurred by the maritime transport service stays moderate, no se-vere negative impacts are expected. This is due to the price inelastic demand (with an estimated maximum of - 0.25).
Considering the relatively high value of Germany’s exports the induced increase in freight rates is not expected to significantly lower global demand for German goods as the price of exports will rise by a minor percentage, even if the absolute price increase may be noticeable. A similar assessment holds for Germany’s imports, except in the case of raw mining products and some agricultural goods, in which case high increases
in freight rates will be felt by importers and the processing industry or consumers. But, it should be kept in mind that price volatility of mining and agricultural products is al-ready very high. Price fluctuations stemming from the factors behind this volatility are more likely to have economic impacts than the increase of freight rates due to emis-sions trading.
However, it should be noted that in our general analysis we assumed that all emissions resulting from maritime freight entering or leaving the EU were covered. However, op-tion A covers addiop-tional emissions as well, i.e. those of the vessels between non-EU ports. The problem is that on these entirely extraterritorial routes, the vessels will com-pete with vessels that are neither obliged to reduce emissions, nor to buy emission al-lowances. Hence, providers that are subject to EU emission regulations may come un-der pressure on these routes and will try to regain the cost of these emissions by in-creasing freight rates to and from the EU. As a consequence, the impact on freight rates and the economic impact on the German or European economy increase. On the other hand, if competition functions, there will be a tendency to relocate the vessels in such a way that vessels either only serve EU trade routes or vessels only serve trade routes. In the end, the findings of our general economic analysis will apply to option A after all.
14.1.4 Legal feasibility
It has already been stated that the use of unilateral measures should be handled with adequate caution and that the justifiability of extraterritorial measures is dependent on the strength of the nexus between the conduct regulated and the state asserting juris-diction. In that context it has been pointed out that such a nexus is relatively strong with respect to emissions that are caused by transports to and from the relevant port state.
It is clear that any system based on fuel consumption is directly linked to the aim of the port state to reduce emissions as the relation between fuel consumption and the emis-sion of greenhouse gases is straightforward. More difficult to assess is the question of whether a system based on a “last period” approach provides a link that is close enough to justify the use of extraterritorial jurisdiction. Especially if ships are included in the ETS that have no other link to the port state than a single stopover in the European Union the argument could be raised that – depending on the term of the period in-cluded – most emissions of such a ship would have nothing to do with the European Union as these emissions are not caused by transport to or from the European Union.
Having said this, it must be stressed that the possibility that ships are included which only have a weak link to the European Union in terms of transport to and from the European Union is quite unlikely. Ship operators will struggle to optimize the routes of their fleets in order to avoid unnecessary coverage of their ships by the ETS-regime.
This means that a functioning ETS regime (i.e. an ETS which results in a considerable reduction of emission allowances) will itself optimize the coverage of the system in a sense that ever more transport covered by the ETS can be directly linked to the Euro-pean Union, even if a relatively long term is chosen for the relevant last period. Al-though that does not necessarily mean that vessels with only a weak link will not be
covered by an ETS-regime, the system as such can be justified as being suited and necessary in order to bring about the environmental effects.
Another problem of the “last period” approach is the inclusion of emissions that have been produced in the territory of third states. Two questions arise in this context. First:
Can the inclusion of such emissions by the European Union be justified if another (third) state has regulations in place that aim at the reduction of emissions within its ter-ritory (and beyond)? This question has already been discussed in more depth in the context of the inclusion of aviation into the EU ETS (Pache, 2008). In such a case a justification for the exercise of extraterritorial jurisdiction becomes difficult. Therefore the ETS regime should provide for the possibility of it being suspended with respect to those emissions of affected ships that are already subject to measures of third states, if and to the extent that such measures have a similar effect as the ETS regime. The Di-rective 2008/101/EC which amended the existing ETS DiDi-rective so as to include avia-tion activities into the greenhouse gas emission allowances already provides for the possibility of adopting amendments to the directive if necessary in order to provide for
“optimal interaction between the Community scheme and that country’s measures” (Art.
25 a of Directive 2008/101/EC).
The second question is whether emissions that are produced in a third state’s territory can be included at all. In that context it has to be kept in mind that port states are in principle allowed to regulate that special CDEM standards are complied with as a con-dition for entry on port. At least some of the measures introduced in chapter 5.3 contain CDEM-standards that due to their static nature are uniform throughout a vessel’s voy-age. Considering this, the use of an economic instrument such as the ETS has compa-rably less impact on the behavior of the shipping industry in third countries. Further-more it must be pointed out that the obligation to reduce greenhouse gas emissions is global: All states are obliged to take measures in order to reduce greenhouse gas emissions. Therefore the inclusion of emissions produced on third state’s territory can surely be justified under the effects doctrine.
As the “last period” option aims to include all greenhouse gas emissions that relate to transports destined to and originating from the territory of the member states of the European Union there is a very strong link to the responsibility of the European Union to reduce its emissions. Concerns about the strength of that link with respect to ships that only have a single, short stop in the European Union should be negligible if the ETS regime works as intended. In order to provide for adequate consideration of third state’s measure with respect to international shipping, the ETS regime should provide for the possibility of adopting changes that give due regard to such measures. If this condition is fulfilled, there should be no legal obstacles with respect to the implementa-tion of Opimplementa-tion A.