Since most maritime emissions occur in international waters, taxation by single states may be legally infeasible. Due to legal prohibitions of extraterritoriality, i. However, such a narrow tax base would leave almost all of the maritime sector emissions uncovered Faber et al. Due to the mobility of sea trade, taxation might furthermore also be economically infeasible.
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There is already severe competition in taxes on shipping activities, and concerns are that maritime emissions taxes could be avoided by moving to tax havens e. Keen et al. Furthermore, a maritime emissions tax might be infeasible if trade patterns are to be safeguarded from distortions e. All these concerns have led to the conclusion that taxation of maritime emissions may only be feasible through a unanimous international agreement.
Yet, whilst taxation by individual jurisdictions has been deemed legally and economically infeasible, taxation through a unanimous international agreement appears politically infeasible. Due to incompatibility of views, for instance between island states and oil producing countries, such unanimity is utopian.
Consequently, with some important exceptions, Footnote 7 years of negotiations within the IMO and the G20 on carbon pricing in maritime transport have produced no tangible progress. This gridlock is symptomatic for negotiations on climate change mitigation in general where any reluctant party can bring the whole process to a halt because on a global level unanimity is required for reaching an agreement. Economic contract theory suggests that parties negotiating a global climate agreement will block the introduction of an emissions tax in case it reduces their payoff relative to their reference point, i.
For negotiations requiring unanimous agreement, the reference point equals the status quo, as parties know that without their consent no deviation from the status quo is possible. This gridlock may be unsettled if at least one party is able to threaten to set up a unilateral tax scheme — which requires such a tax scheme to be effective and its implementation to be feasible.
Ironically, it is the introduction of a unilateral tax regime that could then render a unanimous agreement possible. This is because the existence of a feasible unilateral tax scheme improves the outside option of those in favour of a global emissions tax, whilst simultaneously changing the reference point for those blocking it: If its negative effects on the non-cooperative payoffs are large enough, unilateral action will make the outsider willing to engage in a global agreement, thus overcoming the current stalemate.
More details on the potential impact on negotiations are provided by Heine et al.
Kollamthodi et al. They suggest that any exact tracking of released GHG emissions and of other relevant data would carry a high administrative burden. Faber et al. According to this proposal, the scope of emissions covered by the tax varies by whether the incoming vessel carries a single Bill of Lading i. The authors recommend that the tax bill be determined per vessel.
This implies that the vessel owner is taxed only for the emissions released on the last leg of the cargo transport into the EU, as emissions of other ships prior to transshipment taking place outside EU waters cannot be considered. As a result, Faber et al. The emissions coverage is further reduced by the proposed introduction of size thresholds: The authors recommend that the tax be based on data from emissions measurements executed by each vessel. As this is considered costly for small ships, those would be exempted from the tax. Therefore, they hold that international shipping should be exempted, at least temporarily, from the tax.
Like Faber et al. In the case of multiple Bills of Lading where the cargo composition varies during the voyage, he suggests calculating the emissions for the route over which the majority of the goods destined for the EU was transported. Shipping lines therefore would be able to reduce their tax liability somewhat through varying the location of transshipments and the composition of their cargo. The necessary data can be retrieved, amongst others, from customs databases.
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Total emissions, however, are not calculated from actual data but based on vessel and trade lane specific average values. The authors highlight that the suggested tax regime does not establish a link between cargo consignees consignors and vessel owners, which puts a question mark on the environmental effectiveness of the tax.
In the following, we will present a regional Pigouvian tax scheme on emissions from maritime shipping, i. We will discuss the main features of the tax scheme by expanding on the appropriate tax base, the definition of the legal tax liability and the recommended tax rate. In doing so, we build upon the strengths of the above-discussed strand of literature whilst sketching a tax regime that both reduces the opportunities for tax avoidance and solves extraterritoriality issues usually occurring with unilateral taxation. Furthermore, we present new arguments on the effects of the schemes established in the literature referred to above.
Unilaterally removing implicit subsidies for maritime fuels | SpringerLink
The tax scheme presented below consists of two different regimes for emissions released in both international shipping Sections 3. To be effective, both regimes should be put in place jointly and by the EU as a whole. Determining the tax base requires defining both the taxable activity and the geographical coverage of the emissions tax.
We will also elucidate the treatment of transshipment and transit under the tax. The choice of the taxable activity should be made based on which option allows the internalisation of the greatest share of the external social cost of the emissions at the lowest policy cost Demsetz Literature suggests, strictly under the condition that the policy is applied globally, that a tax on maritime fuel consumption would be the first-best option for internalising climate damage from carbon emissions: The own-price elasticity of maritime fuels is rather low Keen et al.
Thus, demand for maritime fuels can be expected to only slightly decrease as a reaction to the introduction of a global tax on maritime fuels. In addition, because of the low elasticity of cargo demand, the increase in the fuel price triggered by the tax will have a high pass-through to the purchaser of the freight services Keen et al.
As a result, introducing a tax on maritime fuel consumption is an effective policy to price carbon emissions if — and only if — the policy is implemented via an international agreement with global coverage. The success of introducing a tax exclusively in one region, however, depends on the cross-price elasticity of demand for maritime fuels in that region relative to maritime fuel prices in regions outside the tax regime.
This elasticity is much higher because, to avoid the tax, vessels navigating in several jurisdictions can refuel en route in a port not included in the tax scheme or in international waters e. Consequently, in the absence of a global agreement unilateral fuel taxation would cause too much tax base erosion.
Many argue that these avoidance opportunities render regional taxation of maritime emissions infeasible e. Mishra and Yeh ; Keen et al. Consequently, if a unilateral EU tax on maritime transport emissions was introduced, internationally mobile deep-sea vessels should not be charged based on their fuel uplifts within the EU. Instead, the appropriate tax base still covers the total emissions but circumvents the issue of tax avoidance which results in carbon leakage.
Footnote 8 Whilst the cross-price elasticity of demand for refuelling internationally mobile vessels within the EU is too high for fuel consumption to serve as a sound tax base in the case of unilateral action, the elasticity of demand for the service of lading and unlading cargo Footnote 9 in the EU is much lower. As transshipment is irrelevant for customs purposes, any transfer of cargo from a vessel to a mode of inland transport or vice versa in a port just outside the EU e.
Although this method might in certain cases — albeit only slightly — reduce the overall tax burden, it would be irrelevant since the cost advantage of maritime transport over land transport is considerable. Another possible vehicle for tax avoidance would be to ship intermediate products to a port close to the EU for final assembly and then ship the final products to the EU with regard to imports or the foreign destination with regard to exports , replacing the direct shipment of final products.
Then the emissions tax would be charged only for the short distance between the EU port and the closeby non-EU port, thus massively reducing the tax burden. However, this would likely be discouraged by the cost of shifting production and the potentially substantially higher duty burden due the fact that both the intermediate and the final products would be subject to import and export duties if applicable in the customs areas concerned.
Taxing emissions without risking base erosion and a decline in the competitiveness of EU ports mandates an exemption for transshipment — the act of shipping cargo to a hub port for onwards shipment to a destination port — and for transit — the act of transporting cargo via the EU to third countries without releasing the cargo into free circulation in the EU. One reason for mandating these exemptions is that the implementation of an EU emissions tax must not discourage other countries from for their part putting in place an emissions tax.
If emissions taxes were levied on several legs of a transportation chain, taxation would likely become complex, hence increasing transaction costs markedly. Second, in contrast to the elasticity of demand for loading discharging cargo at source destination ports, the elasticity of demand for transshipment and transit services is high. Thus, whilst in most cases it is commercially unviable to substitute EU destination ports with non-EU destination ports, this may not hold for transhipment and transit services.
For global shipping companies, there is more flexibility in the location of transhipment as opposed to destination ports.
Introduction
Hence without an exemption of transhipment and transit in place, an EU emissions tax could both distort transhipment and transit patterns and constitute a comparative disadvantage for EU ports. Exempting transshipped cargo is administratively simple. Transshipped cargo does not clear customs, so if the emissions tax is levied at the point of customs clearance, transshipped cargo will be excluded from the process anyway. Furthermore, the transshipment status of products is already documented in the existing customs systems. Exempting cargo in transit is similarly straightforward.
Exempting cargo designated for transit from the emissions tax would hence be highly automatable and not require extensive new tax administration or rule compliance processes, thus limiting the transaction costs of the proposed measure. We instead argue that emissions released during the whole voyage should be subject to the tax. First, it is not rare that ships change their port of destination after having left their port of origin. En route shifts in the port destination can occur, for instance, because of changes in cargo purchasers.
For this reason, limiting the taxation coverage to the first outbound voyage could be problematic, as it allows tax avoidance behaviour via artificial en route destination shifts. Second, taxing emissions from the last inbound or first outbound leg only would provide an incentive for shipping companies to have cargo transshipped or at a port outside of EU waters, causing a significant loss of tax revenue Faber et al. Footnote 10 The costs of transshipment might not outweigh the tax savings in all cases, but on the margin trade lanes would be distorted, environmental effectiveness compromised and tax revenues reduced.