For the purpose of an efficiency analysis of design options, the term “economic effi-ciency” will be defined in a narrow sense, as is often done to assess instruments (Goulder/Parry 2008). In this narrow definition, efficiency encompasses:
a) Static efficiency: reaching a CO2 target at lowest possible individual cost (technical abatement cost).
74 The competence of the European Union with respect to climate change has been strengthened through the express reference to climate change in Art. 174 and Art. 175 of the Treaty on the Func-tioning of the European Union.
b) Dynamic efficiency: providing continuous incentives to foster climate friendly inno-vations in the field of ocean shipping including management innovation and thereby to permanently lower costs of climate protection.
c) Administrative costs: to what extent does the institutional infrastructure for manag-ing the regime already exist? Can it be established at rather low cost or would it involve rather high (start up) costs?
As has been documented, integrating ocean shipping into an emissions trading system can be, in principle, very efficient (IMO 2009; Kågeson 2007). In practice, it has to be kept in mind that high static and dynamic efficiencies are only given under the condition that coverage and the assessment basis are adequate, monitoring is feasible and competition functions in a way that forces producers to constantly improve services and increase efficiency. Further, the statically efficient option of surrendering emission al-lowances from other sectors (including from stationary installations, aviation and inter-national Kyoto mechanisms, e.g. CERs or ERUs) may lower the dynamic efficiency of the approach, as it weakens pressure to be technologically innovative in the shipping sector. It is recommended that this aspect be considered when setting the specific cap for the maritime sectors and the degree to which CERs/ERUs may be used to offset emissions. For example, stationary installations and international aviation are limited in the amount of purchasing extra-sectoral certificates.
The administrative practicability of a full integration into the ETS has at least two op-posing facets: First, the mechanisms (trade, emission registers, emission accounts, etc.) already exist and international aviation can be used as a blueprint, which would make the establishment of a marine system easier. Second, the administrative start-up costs for the shipping sector may be significant as the entities have to register with na-tional emission registers, open up emission accounts and become familiar with emis-sions trading. Depending on the concrete design of the policy instrument, the trading entities could have to implement additional mechanisms to collect and hand in suffi-ciently reliable emission and other data and have this data verified. However, as has been shown in chapter 7, the vast majority of the information needed for monitoring of any of the discussed design options is already in place and hence little extra cost will be incurred in this respect.
As stated above, efficiency will be defined in a narrow sense. Hence, other factors in-fluencing overall economic cost such as effects on the (German) shipping sector, its suppliers, coastal regions and trade will be considered below (see chapter 13.4.1 and 13.4.2). Further, it is obvious that leakage effects following the evasion of a European climate protection regime for ocean shipping lower environmental effectiveness as well as simultaneously raising the overall economic costs for the EU and Germany.
Finally, in theory, efficiency is clearly not independent of an instrument’s effectiveness (Endres 2007). Since efficiency can be measured as the ratio of output (benefit of emission reductions) to input (cost), it is obvious that the efficiency of different options for integrating ocean shipping into the EU ETS can only be assessed by taking the cost
and the amount of emissions reduced into account. As a quantitative analysis is be-yond the scope of this study, it will not be elaborated further, but as in many policy ori-ented studies the analysis of effectiveness and efficiency is strictly divided. Neverthe-less, environmental politics should bear the link in mind. For example, if two options generate the same cost but different emission reductions, the efficiency differs.
13.1.1 Efficiency under fuel based obligation to surrender emission allowances As CO2 emissions are directly linked to fuel consumption, a fuel based emissions trad-ing system would directly create incentives to avoid emissions at lowest possible cost.
This applies to all options that include fuel consumption in the assessment basis. Not only will cost efficiency be reached within the shipping sector, but semi-full integration into the EU ETS theoretically allows for cross-sectoral efficiency.75 In general, a fuel based scheme also promises to be efficient in a dynamic sense as it is expected to fos-ter emission saving innovations, e.g. technical improvements of engines, the introduc-tion of alternative fuel technologies and better managerial practices to optimize trans-port services.
Significant technical innovations might fail to materialize if operative measures prove more cost efficient than retrofitting or investing in more efficient vessels. In these cir-cumstances, additional measures, such as minimum standards or subsidies, may be taken if emission reducing technical progress is considered as a policy objective on its own. In the case that marginal abatement costs in the shipping sector would be very much higher than in other industries, technical innovations in the shipping sector may not occur by the degree desired either. Instead, the maritime sector would buy allow-ances from other sectors. However there is a high potential for the maritime shipping sector to reduce emissions by marginal abatement costs that are much lower than in many other sectors included in the EU ETS (chapter 5.5). Accordingly, the shipping sector will most probably take many emission reducing measures including technologi-cal innovations in order to at least fulfill the cap. Thus this risk can be neglected.
The administrative costs depend on how costly it is to obtain data on actual fuel con-sumption and verify the information provided. Bunker fuel delivery notes which all ships above 400 Gt are obliged to keep are potential data sources. The administrative cost is rather negligible, increasing slightly if log books are examined in order to verify the va-lidity of bunker delivery notes (see chapter 7.1). More sophisticated monitoring and es-timating methods such as satellite surveillance would have significantly higher verifica-tion costs.
The risk of evasion appears comparatively low in a system based on fuel consumption over the last period of travel because high evasion costs would evolve when reloading
75 In practice, though, a semi-full integration poses some problems to emission trading within the mari-time sector which may lead to a non-functioning of the market for “marimari-time” emission allowances. See chapter 13.3.1 for details and possible solutions.
cargo to short-sea travelling ships (see chapter 9.1.1). However, if prices for emission allowances turn out to be very high, savings may outweigh the costs from reloading.
13.1.2 Efficiency under distance based obligation to surrender emission allow-ances
The emission target will hardly be reached at lowest possible cost in the short run if a distance-based approach is chosen linked with a vessel efficiency index,76 regardless of whether the vessel’s last trip or last period’s trips are covered. Distance-independent emission saving measures will not be incentivized. For example, the study by DNV (DNV 2009) suggests that slow shipping is a more economic method to lower emis-sions than some technical measures. Assuming this is the case (although the IMO’s study (IMO 2009) comes to other conclusions) a distance based system by itself will be a costlier option than a concept based on fuel consumption However, a distance-index-based approach has a relatively high potential of resulting in efficient technical im-provements over time, lowering the average fuel consumption of the fleet. In this sense, the dynamic efficiency of a distance-index based approach may be considered to be relatively high.
The administrative costs will not differ significantly from those of the fuel consumption based approach as long as the monitoring is limited to already existing distance re-cords, cross-checked on the basis of bunker fuel delivery notes. The additional cost of determining the efficiency index can be considered to be fairly low. But again, if more sophisticated automated distance reporting systems are to be used, implementation and monitoring costs will be significantly higher.
Evasion effects in a system that is based on last trip are extremely likely to occur as the obligation can be easily circumvented by simply stopping over at a port near the EU.
Defining an original port of departure other than the last port of call proves impossible.
Hence, high leakage destroys most of the theoretical efficiency potential of the ap-proach.
13.1.3 Efficiency under a freight based obligation to surrender emission allow-ances
With respect to its economic efficiency, a freight based concept, which accounts for the distance the freight travelled and the ship’s efficiency, can in principle be similarly as-sessed as a distance based obligation covering all trips within a period. Static efficiency may be rather low as certain mitigation measures such as slow steaming or, in this case, better logistic management to improve the vessel’s capacity utilization are not or only indirectly incentivized. Again, dynamic efficiency might be fairly high due to an effi-ciency index, which stimulates technical innovations to increase the fuel effieffi-ciency of the fleet over time.
76 The option B2 where distance monitoring is backed up with fuel consumption data is not considered here because it would behave in a similar way to the fuel based approach.
One difference, though, is that in contrast to an approach based on the last trip’s dis-tance it does not motivate docking or reloading at non-EU harbors if the cargo’s total trip is chosen as an assessment basis. This can, especially for imported cargo, be de-termined on the basis of already existing custom documents. Legal evasion is therefore less likely to occur. Illegal counterfeiting of freight documents cannot be ruled out. For exports, new procedures would have to be introduced to avoid fraud.
Additionally, the efficiency of the incentive to reduce emissions must be challenged if the entity that surrenders emission allowances is not directly linked to the vessel. The cargo consignee may have little influence on the vessel’s owner, operator and flag state to improve the technical efficiencies of the vessel or change operating practices.
Cargo may be carried on vessels not owned or operated by the contracting ocean car-rier. Even if the consignee could forward the pressure to its contracted carrier, whether the last carrier’s operator has enough (market) power to make the former carriers or partner carriers reduce emissions cannot be predicted. And if so, the difficulties and transaction costs of doing so have to be taken into account. The transaction cost of making the antecessor reduce emissions might lead to a situation in which the legal en-tity prefers to buy certificates for reasons of simplicity even if a reduction in emissions would be economical. The fact that emitter and the party held responsible are not nec-essarily identical makes this approach less efficient than the ones discussed above.
The freight based approach also has an alien character when seen in the overall con-text of policies to internalize climate-related external costs of transport. All other options focus on the characteristics of the transport vehicle (e.g. emission performance). In the freight based approach freight would be a major component of the assessment basis.
The administrative costs would be higher than in the case of fuel consumption or dis-tance based approaches. This is particularly the case if accurate emission data are de-sired, which is especially difficult in the case of exported freight. If outgoing freight is neglected, the scheme would definitely collide with international trade rules (see chap-ter 12), as it is clearly discriminatory. Further, if the incoming or outgoing freight is transported on a vessel other than the docking vessel, fuel efficiency indexes for all other carriers have to be known, which increases transaction costs significantly. The correlation between assessment basis and emissions would weaken, thus lowering the approach’s efficiency further if the data is inaccurate.