Rebate Mechanism (add-on option)

In order to comply with the principles of the UNFCCC, the application of a maritime MBM should be differentiated.
We propose that developing countries could be compensated cost burden of the MBM through an agreed rebate mechanism (RM), thus ensuring a positive net benefit to each developing country. Furthermore, the most vulnerable should benefit most through additional means, such as disbursement of net financing raised.

RM in 30 words

All ships pay for their emissions. A developing country obtains an annual rebate in relation to its share of global imports. Remaining revenue - from developed countries - goes to climate change action.

RM details

The following outlines the proposed rebate mechanism (RM):

  1. Each developing country would be entitled to obtain an unconditional payment (rebate) equal to the burden of its participation in the maritime MBM.
  2. The amount of rebate would be calculated annually in a top-down manner. The global MBM costs and a simple attribution key will be used, country-by-country. The proposed key is a country’s share of global imports by value. Other alternatives are discussed later.
  3. A developing country could decide to forego its rebate, or a part of it, and be internationally recognized for such action. This provides additional flexibility to reflect the differentiated national circumstances of developing countries.
  4. Developed countries are not entitled to any rebates, and are automatically credited for the amount of financing raised through the MBM, based on the same attribution key.
Consequently, net revenue raised, after rebates have been issued, would come from customers in developed countries only, complying with the principles and provisions of the UNFCCC.

The mechanism does not specify how the net revenue raised should be used. Given however that it is generated from international activity, it should be used in its entirety for international purposes rather than to contribute to national budgets. The net revenue could be split between supporting developing countries in implementing climate change action, and assisting the global shipping sector in accelerating reductions of its growing emissions through technological advances.

The disbursement of this net revenue could be managed by the operating entity of the financial mechanism of the UNFCCC, according to relevant rules and provisions (this ultimately will be agreed by the UNFCCC Parties, or similar). Thus, developing countries would be beneficiaries of the MBM, with the most vulnerable countries to benefit most from the net revenue. The shipping sector should also benefit from the net revenue, potentially through a new global Maritime Technology Fund, or similar

RM add-on application

The rebate mechanism (RM) can apply, in principle, to any maritime MBM, which generates revenue, such as a contribution/levy on fuel or an emission trading scheme. We call this option RM integrated.
The mechanism cannot apply to an MBM that does not generate revenue, such as an efficiency-based scheme.

In summary, disbursement of the MBM revenue is proposed to comprise two steps.

  1. In the first step, cost burden on a developing country participating in the MBM is paid (rebated) to it, unconditionally.
  2. In the second step, the remaining revenue (net revenue), is disbursed through the operating entity of the financial mechanism of the UNFCCC.

Based on our extensive research, there is no other practical alternative for a global differentiated scheme.
Rebate Mechanism, as an add-on option, can generally apply to any revenue raising Market-Based Measure to address greenhouse gas (GHG) emissions from international shipping (such as levy or emissions trading).
Furthermore, it may be used to calculate a country's usage of international shipping.

More details

Follow the navigation links below to read about various RM aspects.

Alternatively read about the relevant proposals submitted to the IMO in sections RM & MEPC 60 and RM & MEPC 61 (documents are available in English, French and Spanish).

    You may also read the official proposals directly (in English, French, and Spanish):
  • RM - IMO submissions - 1 & 2 (in English)
  • RM - Mécanisme de remboursement - 1 & 2 (in French)
  • RM - Mecanismo de reembolso - 1 & 2 (in Spanish)

Lack of alternative to RM

There is no practical alternative to the rebate mechanism for a global and differentiated MBM for international shipping.

In theory, it could be more efficient to exclude developing countries from participation in an MBM altogether, in order to comply with the CBDR and avoid the need for rebates (CBDR stands for the UNFCCC principle of common but differentiated responsibilities and respective capabilities). This would require differentiating the application of an MBM based on final destination of goods.

This option was proposed in the second generation of the IMERS proposal (2009), and was thoroughly studied. Ships transporting goods to developed countries would be covered, while ships transporting goods to developing countries would not. Ships transporting goods to both developed and developing countries would be partially covered. Such an approach would eliminate any impact on imports to the developing countries upfront.

However, the approach based on final destination of goods proved complex, particularly for container ships. It would require obtaining a verifiable share of goods transported to developed countries by each ship or company worldwide. Given the tens of thousands of ships operating worldwide, collecting and validating such information would require significant administrative efforts. This complexity was recognized also by various experts and negotiators from developing countries, paving the way for the next proposal.

In contrast, the rebate approach is much simpler than the above complete exemption of developing countries, and thus can be easily implemented globally. Only approximately a hundred fifty rebates are to be issued, one to each developing country, and the data required to calculate the rebates is readily available. Such rebates could be issued annually, or more frequently. Furthermore, it provides important additional flexibility for a country to forego the rebate or part of it.

Integration conditions

In principle the proposed rebate mechanism could apply to any MBM, providing it generates enough gross revenue to cover the rebate needs. Given that developing countries import approximately 30% of goods worldwide, the gross revenue of an MBM that can provide rebates for developing countries must be greater than 30% of the instrument’s global cost burden (assuming a uniform application; before any benefits are taken into account).

Any MBM based on a levy or a GHG contribution can directly use the proposed rebate mechanism, as its cost burden equals the gross revenue raised.

For an MBM based on emissions trading, such as cap-and-trade, the integration depends on its design. For instance, the total economic cost of cap-and-trade is the sum of (1) the cost of emission allowances distributed to the maritime sector and (2) the cost of emission allowances and credits purchased from other sectors. As the revenue in cap-and-trade is typically raised through emission allowance auctioning, only schemes that auction at least 30% of the emission allowances could apply the proposed rebate mechanism.

For any scheme that assumes non-uniform application, for instance applying different charges based on the efficiency of ships, integration of the rebate mechanism would be more difficult. The cost burden on a given country would for such schemes depend on efficiency of ships serving the country, and thus its rebate cannot be calculated easily.

Country's usage of international shipping

The most equitable key for the rebate mechanism should relate to a country's usage of international shipping. But is calculating such usage feasible at all?

As is often argued, international shipping provides a service to international trade. Each country therefore could be seen as a user of that service - even land-locked countries. As in any shared service environment, the usage of a service by each user can be calculated, and attributed to each user if required.

A country’s usage of international shipping is closely related to its imports. It can be estimated through a country’s share of global seaborne imports. It is not related to the amount of fuel sold to ships, or the number of ships registered or owned in the country. The recent recession has demonstrated clearly this relationship to imports; lower demand for imports has caused a drop in shipping activity.

As an example, seaborne imports to the United States of America (USA) in 2007 were $1,082 billion. This equates to 13.6% of global seaborne imports of $7.7 trillion in that year.

Thus the USA usage of international shipping is estimated as 13.6%, according to this approach. We also estimate the USA usage of international shipping by a share of unloaded goods by weight, which equals 13.4% in that year. These two estimates are very close.

Data on seaborne imports, country-by-country, is not generally available. However, data on share of global imports by value, country by country, is readily available; for instance from the International Monetary Fund (IMF), and UNCTAD. Thus it could be used to proxy a country’s usage of international shipping, and therefore to estimate a country’s share of cost burden, or tax incidence, from a global MBM. For instance, the USA share of imports by value was 14.2% (UNCTAD).

Given that many developing countries trade mostly by sea and air, using share of imports instead of share of seaborne imports is justified, if a very high degree of accuracy is not required.

For islands, especially remote ones, this is even more so as they only trade by air and sea. However, for countries that trade extensively via other modes of transport, for instance land and pipe, such as the European countries, this approach is less accurate. However, for these countries, there may not be a need to calculate their usage of international shipping country-by-country, as they would not be entitled for rebates. Thus this may not be an issue. If needed however, relevant adjustments could be made as data on transport modal split is generally available for developed countries.

Given that the main objective is to create a practical approach to incorporate the CBDR principle into a global MBM, rather than create a theoretical or perfect regime to attribute shipping emissions to countries, using share of imports may be fully justified.

This is further discussed at the end of the next section, including why we propose using imports by value rather than by volume, or by volume-distance, as well as why and when a share of imports by sea and air is the preferred choice.

The above approach could also potentially be used to proxy the share of international shipping emissions of a particular country and could be included in its national emission accounts, if required.