Carbon Taxes in the Shipping Industry – Assessment of Japan’s Proposal


The shipping industry currently accounts for 3% of global emissions, and according to some estimates, if left unchecked, shipping could account for up to 20% of global emissions by 2050. It is in this context that calls for the introduction of a tax on ship emissions.

One of the first countries to put forward a landmark carbon tax proposal for shipping was the Marshall and Solomon Islands, proposing a levy of $100 per tonne of carbon dioxide (CO2) in early 2021. The proposal was met with a lukewarm response from other countries. countries, and various tax proposals have since been made.

In May 2022, Japan offered a financial incentive to decarbonize shipping. He called for a global carbon tax that would see the shipping industry pay $56 per tonne of CO2 from 2025. If imposed, the tax is expected to raise more than $50 billion a year. The current proposal that Japan has put forward would see the tax increase every five years, to $135 per ton of CO2 in 2030, $324 per ton in 2035, and up to $637 per ton by 2040. The proposal also suggests that the carbon tax for bunkers would be three times higher, given that each tonne of bunker fuel produces around three tonnes of CO2.

We understand that the proposal was considered as part of a set of carbon reduction options at the 78th meeting of the Marine Environment Protection Committee (MEPC), held from 6 to 10 June 2022. Decisions on the various proposals to reduce greenhouse gases, including carbon levies, are to be taken at MEPC 80, in July 2023. Given Japan’s position as the second largest owner country of ships in the world, any proposal will be taken seriously and seen as a guide by other jurisdictions on the parameters of any plans to reduce emissions from shipping, be it carbon taxes or incentives for owners of green ships.

It is understood that Japan’s proposal would use the money generated from the taxes to subsidize zero-emission ships.

The EU’s approach to carbon taxes

Japan’s approach would see the proposal implemented globally, but other jurisdictions have considered region-specific approaches. For example, the EU has sought to tackle the problem of carbon emissions in the shipping industry. In July 2021 the EU presented its “Fit for 55” package which sets out a plan to reduce emissions in the bloc from 2023. The Fit for 55 plan proposes to introduce a carbon tax on emissions from shipping .

When the measures in the package enter into force, regardless of their flag, ships will be required to buy carbon allowances to cover all emissions produced during voyages within the EU and half of the emissions generated by voyages that begin or end at an EU Port. In 2023, companies chartering large ships will have to buy allowances for 20% of their emissions from ships calling at EU ports, rising to 100% by 2026.

It should be noted that the proposal has been criticized for creating a risk of carbon leakage. Indeed, one problem with the EU’s carbon tax package is that operators may seek maritime hubs outside the EU to reduce their costs. It is therefore possible that operators moor their large freighters outside the EU and then transfer their goods to Europe on smaller vessels, which have lower carbon emissions.

In contrast, Japan’s proposal covers all global shipping emissions and is therefore more taxing (if you’ll forgive the pun) on the shipping industry as a whole. However, it can allow for a more level playing field, as all companies will be treated equally and have the same chance to develop greener practices with the same timeframe to begin (or continue) this transition. Using taxes to subsidize zero-emission ships will also incentivize those who started the transition early.

However, the question remains whether zero-emission ships are viable over this short period or whether it would be more beneficial to encourage low-emission ships during the transition period as the technology develops. This is a key consideration given the importance of the shipping industry in the supply chain, when the world is already facing significant disruption due to supply chain issues, to the skyrocketing cost of living, the continued impact of Covid-19 and Russia-Ukraine. conflict.

Can the aviation industry provide lessons?

Although different in many ways, as key transportation industries with similar emissions statistics, there may be lessons the shipping industry can learn from the taxation that already applies to aviation. Carbon taxes in the aviation industry have been controversial, with strong opposition from carriers to taxes introduced by countries such as the UK, Australia and Sweden. For example, the Aviation Intelligence Unit has argued that carbon taxes have not necessarily resulted in reduced CO2 emissions. The UK introduced an air passenger tax in 1994, but carbon emissions have continued to rise. However, the impact may be more significant in the context of commercial transport compared to consumer travel.

The EU Fit for 55 package proposes that polluting aviation fuels, in particular kerosene, will no longer be exempt from energy taxation on intra-EU flights. The tax, applicable to both private and commercial flights, will be phased in from 2023 before being enacted in full in 2033.

The response from the aviation industry as well as environmentalists may prove valuable to the shipping industry. For example, environmentalists have criticized the 10-year implementation deadline as being too slow. To maximize its effectiveness in reducing emissions, a carbon tax on the maritime industry may require a shorter implementation period.

The EU scheme has also been heavily criticized by airlines such as Lufthansa and Frankfurt and Munich airports, which have argued that the policy provides an unfair advantage to competitors outside the bloc. This criticism can also be leveled at policies applying to EU shippers and can negatively impact the price of goods within the EU as shipping costs increase.

This highlights the benefit of a comprehensive approach to any tax on the shipping industry, which in turn can also reduce the possibility of carbon leakage.

Thinking about the future

Growing calls for a carbon tax on shipping, packages such as the EU Fit for 55 and Japan’s call for a global carbon tax could serve to build momentum and accelerate plans to include shipping in other jurisdictions’ taxes. At this time, it is important to note that the EU package only applies to vessels inside the EU, so shipping operators can plan around this, but the proposal Japan would not allow geographic planning.

It will be essential for maritime industry players to start planning for the distribution of these costs and to determine who will take the risk of increased emissions in the event of a voyage being delayed or disrupted. The distribution of tax costs and risks of increased emissions should be integrated into the charter parties. Additionally, if shippers are bearing these costs, they will need to consider how the costs can be absorbed or passed on, and whether the risks resulting from freight problems can be passed on to the end customer.

Prior to the implementation of carbon taxes on shipping, companies will not only need to consider investing in ships with greener technologies and fuels, but also prepare for how they can use tax incentives for low- or zero-emission vessels. Shippers can also consider diversifying their fleets, to allow greater use of smaller, lower-emissions vessels.

It is encouraging to see that this trend is already taking place. For example, Maersk plans to power new carbon-neutral methanol container ships. In the first quarter of 2024, Maersk will introduce the first in a groundbreaking series of eight large ocean-going container ships capable of being operated on carbon-neutral methanol. The series will replace older vessels, generating annual CO2 emissions savings of approximately one million tonnes. If Japan’s proposal is adopted, it would save Maersk $56 million per year (between 2025 and 2030) in taxes.

It is clear from the response to the aviation industry carbon tax in the EU, the risks of carbon leakage, the geographic layout and the risk of unfair competition in siled jurisdictional proposals that a holistic approach would likely be more effective in combating emissions, with less impact on supply.

Japan’s carbon policy proposal is comprehensive and, if adopted, would therefore allow for a more coherent approach to the issue of addressing emissions in the maritime industry. However, it remains to be seen whether this is seen as a broad enough proposition by the industry as a whole, and whether it is possible to create a truly global proposition that will be accepted by both governments and industry players. industry.

The implementation and legal framework for a business of this size will be a significant but valid challenge if it can have a real environmental impact without crippling such a key industry.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jim Loftis is a partner, Ciara Ros is a senior partner and Tatiana Freeman is an articling student at Vinson & Elkins LLP.

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