Design of IMERS has been strongly influenced by strategy and management best practices as well as lessons learned from development of large scale market-places.
The transaction costs are minimized by applying centralized solutions and eliminating intermediaries that do not add value.
Unnecessary or low-quality data are eliminated, cost of compliance and effort of end user are limited to minimum. Elements that add value are raised. Adaptation funding and Technology Fund are created as new features within the overall low cost.
This is shown in outline below using the framework from the Blue Ocean Strategy.

Value Innovation of IMERS compared with Cap & Trade for Shipping

For more details see Value Innovation section.

Rapid progress in tackling climate change requires innovation both in solutions and diplomacy.

See our case study on innovation in Climate Change Diplomacy (0.5MB), as presented in Malta.

The topic was discussed at the International Conference on Climate Change Diplomacy, Malta, 7-8 February 2008, organised by DiploFoundation .

All sessions were on climate change diplomacy and covered:

• What's different
  
• A multi-stakeholder approach
  
• Regional perspectives
  
• Building Capacity (see conference programme and presentations).
  

Case Study: Innovation in Climate Change Diplomacy

Rapid progress in tackling climate change requires innovation both in solutions and diplomacy

IMERS innovation case study (0.5MB presentation)

Abstract

This case study shows how diverse and conflicting positions in climate change negotiations can be addressed successfully through simultaneous innovation in solutions and the diplomatic process. The potential for synergies is enormous as many officials are constrained by bureaucracy and time, and often lack the vision and skills that business innovators can bring.
We describe how novel thinking and non-state actors have managed to unlock one of the most methodologically complex and diplomatically difficult issues. Emissions from international aviation and maritime transport had to be excluded from the Kyoto Protocol in 1997 and little progress has been achieved since then.
In early 2007 we created an ambitious International Maritime Emission Reduction Scheme (IMERS). It is a novel market-based scheme to mitigate maritime CO2 emissions and simultaneously reduce the gap in financing of adaptation to climate change in developing countries by $3bn annually (from 2010, assuming 2005 emission goal). Within just one year it was brought to the International Maritime Organization (IMO), discussed internationally and followed by practical submissions from various states and organizations. We will discuss how this swift progress was possible, what issues have been unlocked, and what remains to be done for the proposed scheme to be agreed and implemented.
Our experiences show that bringing novel solutions by non-state actors to diplomatic negotiations requires business rigour and diplomatic patience, as well as money - obtaining funding for a public good solution is rather difficult!
Based on our experiences, we find that successful innovation in climate change diplomacy involves three crucial steps:

1. Craft an ambitious yet affordable solution. Do it by following best practices in business strategy, thereby avoiding governmental or other policy constraints.
   
2. Bring the proposal to the multilateral process through an influential government. Ignore the temptation to try to achieve this through associations or large companies, it might take years.
   
3. Engage relevant parties in an iterative process aimed at refining and ultimately supporting the proposed solution. Select diverse parties for initial discussions - obtaining support from the 27 EU countries is well short of what is required in climate change diplomacy. Formalize this iterative process within the multilateral organization and engage business innovators in the process.
   

The last step is for the international community to negotiate, coordinate, and finalize parameters for the solution.
The case study ends with an open discussion drawing on the key lessons learned.

Example quotes from informal discussions in 2007 to enrich the debate:

• I've only 2 hrs per week for this topic.
• Why us? Why not country XYZ?
  
• After so many years of deadlock I don't even remember what's the issue anymore
  
• Seems like a great proposal. But, it might be incompatible with our policy.
  
  • Q: What's your policy?
  • A: We don't have one yet.
• Our experts are uncomfortable.
  • Q: What about?
  • A: I don't know yet.

The proposed approach of Climate Change (Value) Innovation can help to overcome the diplomatic inertia in climate change!

Cap-and-levy

IMERS uses a novel hybrid economic instrument that we call cap-and-levy
(it was presented by Norway and others as a hybrid scheme, and was also called cap-and-charge; some people use the name charge-cap-and-trade to signify the trading aspect of the instrument).

A levy (emission charge) is established in such a way that an agreed emission target (cap) will be delivered for international shipping by purchasing emission credits if required.

The cap-and-levy is:

• Using a carbon price established by the large emitting industries;
  
• Delivering quantity target through a "clearing house" for a sector or its part - a bubble.
  

Note: Bubble is a regulatory concept whereby several emitters are treated as if they were a single emission source.

GHG Policy Options

Cap-and-levy is an example of GHG policy that has the highest theoretical cost-effectiveness. The different GHG policy options are shown below, ordered from the highest to the lowest cost effectiveness.

1. Hybrid quantity-price
   
2. Tax or charge
   
3. Cap-and-trade with banking, borrowing, and allocation auctioning
   
4. Traditional cap-and-trade scheme
   
5. Non-market regulations and standards
   

The ethical arguments for polluters to pay for emissions are well established.
The most recent negotiations in Bali during the UNFCCC COP 13 have also shown the acceptance that developed countries should compensate the developing countries for the harm done. The current increased level of CO2 in the atmosphere is due to the growth and decades of prosperity of developed countries.

The starting point for IMERS was the recognition that mitigation and adaptation are both important, and that the UNFCCC principle of 'common but differentiated responsibilities' can be delivered in a novel way for international shipping.
IMERS has therefore been designed to fulfil on the following five principles:

1. Will contribute fairly to the ultimate objective of the UNFCCC in accordance with its provisions
   • In particular the principle of 'common but differentiated responsibilities and respective capabilities', and take into account social and economic conditions and other relevant factors
2. Will conform to policies and measures of sustainable development
   
3. Equal attention will be paid to mitigation of emissions globally and adaptation to climate change in developing countries
   
4. Technology innovation, transformation and transfer will be comprehensive
   
5. Will contribute to a shared vision for long-term co-operative action, and will be build around a long-term goal for emission reductions
   

Note: There is a growing literature on the ethical aspects of climate change, including on the responsibility of governments to tackle the threats and impacts of climate change. One of the web-sites dedicated to the topic is: climateethics.org.

Legal basis for IMERS, including the proposed differentiation, comprise:

• UNCLOS convention defining the rights and responsibilities of nations in their use of the world's oceans
  
• IOPC Funds precedent for direct funding
  
• WTO rules that do not contradict a harmonized emission charge
  
• GATT rules allow emission charges based on imports
  
• MARPOL convention that could cover GHG emissions
  

UNCLOS

The United Nations Convention on the Law of the Sea (UNCLOS) defines the rights and responsibilities of nations in their use of the world's oceans

. It codifies the principle of international customary law.

• All waters beyond national boundaries are considered international waters — free to all nations, but belonging to none of them.

Dominance of International Law

UNCLOS aims to balance interests of international community and global commons, and therefore codifies the dominance of international law over national law in respect to the high seas.
The following articles are most relevant: 89 (invalidity of claims of sovereignty over the high seas) , 136 (common heritage of mankind), 137 (legal status of the area).
Regarding air pollution the following articles are most relevant: 212, 222.

Supra-national Approach and Equity

Although, UNCLOS does not explicitly regulate equitable division of revenues raised from international emission charges proposed it provides a very relevant analogy. The analogy are minerals discovered in the sea bed under the high seas, which are outside the sovereignty of any country. The revenue from exploitation of these minerals should be distributed equitably (article 140: Benefit of mankind).
In summary:
UNCLOS provides a firm legal framework for a supra-national approach proposed.

IOPC Funds

Within maritime industry there is already a legal precedent for a supra-national fund organization. The International Oil Pollution Compensation Funds (IOPC Funds) are three intergovernmental organisations which provide compensation for oil pollution damage resulting from spills of persistent oil from tankers. The organisations are: the 1971 Fund, 1992 Fund and the Supplementary Fund.
The importance of the precedent is that the contributions to the funds are direct, bypassing the national systems, thereby avoiding the so-called "domestic revenue problem".

WTO

World Trade Organization (WTO) and the UNFCCC have sustainable development as one of their objectives:

WTO, preamble

“Recognizing that their relations in the field of trade and economic endeavour should be conducted with a view to […] allowing for the optimal use of the world's resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with [members’] respective needs and concerns at different levels of economic development”

Cross-references to International Trade in the Climate Change Regime

UNFCCC, art. 3(5):
“The Parties should cooperate to promote a supportive and open international economic system that would lead to sustainable economic growth and development in all Parties, particularly developing country Parties, thus enabling them better to address the problems of climate change. Measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.”
A good source for materials and/or advice on the WTO aspect, if one still has doubts about the legality of harmonized charge as proposed, is the Centre for International Sustainable Development Law in Montreal, Canada.

GATT

General Agreement on Tariffs and Trade(GATT) prohibits differentiated treatments of goods based on their country of origin. As the proposed emission charges are not linked to the country of origin and to any specific goods directly, they conform with the GATT rules.
The conformity is achieved without the need to refer to the article XX that allows exemptions on the grounds of environmental protection.

MARPOL Annex VI

The International Maritime Organization (IMO) develops and promulgates international regulation on air emissions from shipping.

MARPOL 93/97 Annex VI was ratified in 2004, and entered into force on 19 May 2005.
• Regulation 13 of Annex VI applies to emissions of nitrogen oxides (NOx)
• Regulation 14 applies to sulphur oxides (SOx)
• Regulation 15 applies to the emission of volatile organic compounds (VOCs)
• Regulation 18 addresses fuel oil quality, particularly record keeping, fuel sampling and the issue of Bunker Delivery Notes (BDNs).

The sustained reduction in emissions from land based sources has focused attention on the relative contribution from shipping when near coastal areas and in ports. The IMO MEPC decided in July 2005 to evaluate whether a revision to Annex VI was required. This process is currently in progress and advice on revision will be considered by MEPC in March/April 2008.
A summary of the process and options being considered is available from IPIECA as document Maritime air emissions and MARPOL Annex VI (0.5 MB).

GHG addition to MARPOL Annex VI

The most straightforward approach to implement technical parts of legislation on the GHGs from shipping would therefore be to extend Annex VI for CO2, as the major GHG emitted by shipping. Time to enter into force of such amendment is likely to be 16 months. A route through a new convention would take many years.
Including CO2 or selected GHGs within Annex VI has the additional advantage of reuse of other regulations, notably the regulation 18 on BDNs.