11.2.1 Grandfathering
Under grandfathering rules, responsible entities receive free allowances based on his-toric emissions during a reference period; hishis-toric emissions are reduced by a certain percentage to reflect the available share of allowances to be given out for free. In many member states different reductions were applied in the stationary ETS for energy re-lated and process rere-lated emissions to reflect the different abatement possibilities.
To apply grandfathering it would be necessary to estimate the historic emissions during a specific reference period for each responsible entity and to verify these figures. The reference period does not have to be the same as the one used for determining the cap but should precede the adoption of any legislation to avoid strategic behavior such as the intentional increase of emissions during the reference period to receive more free allocation. One of the main difficulties in such an approach is that there might be sig-nificant differences in the composition of the responsible entities during the reference and the trading period. The main difference compared to stationary sources is that ships can switch their trades, schedules, flags and charterers relatively easy; if ships were chosen as the responsible entity there could be a considerable quantity of ships which might never enter the scope of the maritime ETS during the trading period but receive free allocation because they transported goods to the EU during the reference period and vice versa. If charterers were chosen, the differences between the refer-ence and the trading period would most likely be smaller but could still be significant.
These differences in the composition of responsible entities would not affect the envi-ronmental effectiveness of the scheme but would lead to distortions of competition be-tween charterers and might discredit the entire scheme.
In general the EU is moving away from grandfathering and towards benchmarking as a mechanism for free allocation. Benchmarks can better reward operators that have taken early action to reduce emissions, would better reflect the polluter pays principle and would give stronger incentives to reduce emissions, as allocations would no longer depend on historical emissions (EC 2008b). In line with these considerations we do not recommend grandfathering as an allocation mechanism for the shipping sector.
11.2.2 Benchmarking
Under benchmarks free allocation is based on the CO2 intensity of some activity or production and not only on historical emissions as when using grandfathering. Accord-ing to the ETS Directive, the benchmark for stationary installations “shall be calculated for products rather than for inputs, in order to maximise greenhouse gas emissions re-ductions and energy efficiency savings throughout each production process of the sec-tor or the subsecsec-tor concerned” (EU 2009). In the aviation ETS, tonne-kilometres are used as the product for which the benchmark will be applied. The benchmark is
calcu-lated by taking the cap and subtracting the number of allowances which will be auc-tioned and the number of allowances in a special reserve and dividing this by the sum of all tonne-kilometres within the scope of the regime in the year 2010. This benchmark will then be applied to 2010 tonne-kilometres for each airline. The legislation intention-ally only uses one average benchmark and does not distinguish between different types and sizes of aircraft. This provides a strong incentive to use the most efficient possible aircraft and avoids incentives to use less efficient models which could exist if the benchmark would differ depending on the aircraft type or size. The legislation also includes a factor to convert passenger-kilometres in tonne-kilometres instead of using two different benchmarks for freight and passenger transport.
A similar approach could be applied to the shipping sector as well using tonne-kilometres as the activity data on which to base the benchmark. It would be based on historic activity data and the available number of allowances for free allocation. Two dif-ferences arise due to the specifics of maritime trade.
11.2.2.1 Establishing the benchmark(s)
In the aviation sector is was sufficient to use one benchmark for all aircrafts and trans-port services as the industries’ product. The impact of transtrans-porting of one person or one tonne of cargo by air is relatively homogeneous and less dependent on the aircraft, although emissions per unit of transport rise the shorter the flights are. The situation in the shipping sector is different: services provided by a bulk carrier cannot be substi-tuted by a container ship, RoRo vessels cannot be replaced by tankers. This is also re-flected in the emission intensity: large RoRo vessels emit 20 times more CO2 per ton-kilometre than large bulk carriers (Table 14). It can also be noted that large vessels are considerably more efficient than smaller vessels providing the same services.
For stationary installations the starting point for the development of benchmarks ”shall be the average performance of the 10 % most efficient installations in a sector or sub-sector” (EU 2009). One of the principles suggested when grouping similar products in one benchmark is that the emission intensity of state of the art installations within one benchmark should not exceed 20% (Ecofys et. al 2009). In the aviation sector the benchmark is based on the average historic emission intensity. For the maritime sector we propose to use the following principles to establish a benchmark:
1. To avoid a plethora of benchmarks, ship types should be grouped following the 20 % rule.
2. No differentiation is made between different size classes; the product (transport of one unit of a specific type of cargo) does not depend on the size of a ves-sel59.
59 This rule could increase the tendency to move towards larger ships. Although this is favorable from a climate perspective, larger ships could cause other environmental problems, demand for harbor space and deepening of shipping routes, e.g. the Elbe. These effects would need to be addressed through other legislation or provisions but not through the benchmarks for free allocation.
3. The total quantity of allowances which will be used for benchmarking is distrib-uted across the different benchmarks according to the respective shares of the historic emissions of ships within the benchmarks during a reference period.
The reference period might need to be updated periodically to reflect changes in global fleet composition/transport demand.
4. Responsible entities apply for free allocation and report serviced tonne-kilometres during the reference period for each benchmark.
5. Each benchmark is calculated by dividing the quantity of allowances available by the sum of respective serviced tonne-kilometres.
It is not suggested that the 10 % rule be applied as it is assumed that the quantity of al-lowances available for benchmarking will already be more demanding than the emis-sion intensity of the best ships of a class; this is consistent with the approach for the aviation sector. Table 14 shows that this approach would lead to 6 different bench-marks; in practice there might be a need for a few more benchmarks, e.g. passenger ships are not included in the IMO figures on which the table is based. An estimation of the specific benchmarks is beyond the scope of this study and depends on many pa-rameters which would need to be determined first.
minimum
weighted global average
maximum
Bulk carrier (dry) 2.5 3.5 29.2
Crude oil tanker 2.9 4.2 33.3
Products tanker 5.7 8.9 45.0
Chemical tanker 8.4 10.2 22.2
LPG tanker 9.0 10.2 43.5
LNG tanker 9.3 11.4 14.5
General cargo vessel 11.0 13.1 19.8
Container vessel 12.5 15.9 36.3
Vehicle carrier 32.0 38.0 57.6 BM 4
Ro-Ro vessel (ferries) 49.5 51.0 60.3 BM 5
BM 3 BM 2 Total CO2 efficiency in g/t-km
Vessel type Benchmark
BM 1
Table 14: Average maximum, minimum and weighted global average (based on transport work) emission intensities for different types of ships and proposed benchmarks
Source: Buhaug et al. (2008)
11.2.2.2 Activity data used for the allocation
As discussed above there might be a significant difference in the group of responsible entities during the period used to calculate the benchmark and during the trading pe-riod. Applying the benchmark to historic tonne-kilometres to calculate the free alloca-tion for each responsible entity could therefore lead to responsible entities which do not operate within the Emissions Trading System but would receive free allocation and vice versa. If the period on which the allocation is based lies after the date of the adoption of
the legislation it might even lead to responsible entities intentionally operating within the scope of the regime during that period. On the other hand new responsible entities which commence operation within the scope after that period will face a competitive disadvantage compared to incumbents. In principle two approaches are foreseen which could partly amend these difficulties
1. New entrants and closure provisions A special reserve could be established to provide new entrants with free allocation at a similar level as the benchmark.
At the same time closure provisions could be used to limit free allocation to re-sponsible entities which do not operate within the scope anymore, e.g. if no ac-tivity within the scope occurred during the previous year(s).
2. Allocation based on activity during the trading period Responsible entities would not receive their free allocation ex-ante as in the stationary and aviation ETS. Instead, each time one of their ship(s) enters the scope of the scheme it receives free allocation based on the benchmark and the activity data in the current period.
Both approaches are not without problems. Establishing new entrant and closure provi-sions would be in line with approaches in the stationary and aviation ETS. The differ-ence in the maritime sector could be that the number of closures and new entrants might be significantly higher than in other sectors, especially if each ship is chosen as the responsible entity. This might lead to high administrative costs in competent au-thorities and responsible entities. If charterers are elected as the responsible entity this would less likely be a major problem as the most important charterers are not enter-ing/leaving the scope of a maritime ETS on a regular basis.
The second approach would violate the ex-ante principle established in the emissions trading Directive. The idea behind that principle is that market participants have as much transparency as possible during the trading period to be able to better include emissions trading in their operations. In addition, such an ex-post approach would only incentivise the reduction of specific emissions but not the decommissioning of ineffi-cient ships. Another issue in the second approach might be that the quantity of allow-ances would be used up sooner or later which would mean that ships entering the scheme towards the end of a year would not receive any free allocation anymore.
Despite the potential administrative burden the first approach is therefore recom-mended. This would require the establishment of a new entrants reserve, allocation rules for new entrants and closure provisions.