Can an Emission Trading Scheme really reduce CO2 emissions in the short term? Evidence from a maritime fleet composition and deployment model

Abstract

Global warming has become one of the most popular topics on this planet in the past decades, since it is the challenge that needs the efforts from the whole mankind. Maritime transportation, which carries more than 90% of the global trade, plays a critical role in the contribution of green house gases (GHGs) emission. Unfortunately, the GHGs emitted by the global fleet still falls outside the emission reduction scheme established by the Kyoto Protocol. Alternative solutions are therefore strongly desired. Several marketbased measures are proposed and submitted to IMO for discussion and evaluation. In this paper, we choose to focus on one of these measures, namely Maritime Emissions Trading Scheme (METS). An optimization model integrating the classical fleet composition and deployment problem with the application of ETS (global or regional) is proposed. This model is used as a tool to study the actual impact of METS on fleet operation and corresponding CO 2 emission. The results of the computational study suggest that in the short term the implementation of METS may not guarantee further emission reduction in certain scenarios. However, in other scenarios with low bunker price, high allowance cost or global METS coverage, a more significant CO 2 decrease in the short term can be expected.Recently, the voice for implementing a market-based measure (MBM) in the shipping sector has become strong. An MBM addresses the negative externalities of a market, such as pollution, through market mechanisms. Different from command-and-control measures (e.g., legislations), a MBM offers economic incentives rather than fixed rules to achieve a more cost-effective and sustainable pollution control (Miola et al., 2011). In terms of shipping, an MBM can help to internalise the external costs of the fleet emission by making the ship owner or operator pay for the CO 2 emitted from their ships, which finally creates an incentive for them to cut the emissions (Psaraftis, 2012).Although seven MBM proposals have been submitted to the IMO for discussion and evaluation, it seems that only two of them, namely the Emissions Trading Scheme (ETS) and the GHG Fund, are favoured and widely studied in the literature (Shi, 2016). The ETS is a type of cap-and-trade system. In such a system, first a legally binding limit on total emissions (cap) during a certain period is set by the authority. Then the equivalent amount of emission allowances are issued by the administration and assigned to or purchased by different concerned parties. In the system, participants can choose to submit the allowance for their own emissions or trade with other players for cash based on the market price of the allowance. However, if all the issued allowances are consumed, no more emissions will be allowed due to the legal limit. Such a market-based cap-and-trade system will help achieve the emission reduction target with certainty as well as minimal costs. However, the uncertainty of the allowance price may cause problems, for example cost volatility and investment risks ...

Towards the IMO’s GHG Goals: A Critical Overview of the Perspectives and Challenges of the Main Options for Decarbonizing International Shipping

“…Some scholars argue that the ship must be charged for its emission during the whole voyage between two ports as long as one of them is within the ETS area [108]. Others propose a geographical-based approach where the ship only needs to submit the allowances for the CO 2 emitted inside the territorial waters and economic zone of the regulating authorities [88,109]. Both approaches pose important challenges: The former may be easily evaded, and countries not included in the ETS can question the legitimacy of the ETS authority to charge the emissions outside its territorial space [110], the latter requires careful monitoring of emissions.…”

“…The cap should be carefully set: A too cautious cap may lead to skyrocketing prices when the availability of allowances is low on the market, whereas a too generous cap may undermine the original goal of the ETS. The expected emission reduction brought by ETSs can be divided into long-term and short-term effects [88]. In the long-term, an effective ETS can push the shipping companies to invest more in technological innovation to reduce their CO 2 emissions and save money.…”

“…Although the emission reduction effect of ETS in the short-term is generally taken for granted, some scholars have demonstrated that this is not always true. The implementation of ETS can even increase CO 2 emissions depending on other factors, such as charter rate and bunker price [88].…”

A Literature Survey on Market-Based Measures for the Decarbonization of Shipping

“…Introducing a levy on bunker fuels is an easy measure to implement and has certainty at the price as shipping companies can act proactively to a known increase in the fuel cost. In their study, Gu et al [50] advocate that it is the only strategy that allows the participants to decide a cost-effective way of reducing their emissions without governmental intervention.…”

Sustainable Feasibility of Carbon Trading Policy on Heterogenetic Economic and Industrial Development

“…From the perspective of different industries, scholars have studied the impacts of ETS on different industries and human behavior. It is generally believed that an ETS can significantly reduce pollution and promote sustainable development [18][19][20][21][22][23]. Some scholars also studied the efficiency of China's ETS pilot provinces and cities with respect to the carbon price.…”