Case for Rebate Mechanism

In evaluating a design of a measure aiming to resolve equity issues of action on climate change in international shipping it is useful to review why the issue has proved both so important and challenging over the last 15 years. Thus we describe a short background, and then discuss why the current government proposals are unlikely to successfully address the equity issue.


Various proposals for a Market Based Measure (MBM) for greenhouse gas (GHG) emissions from international shipping aim to address one or two complex challenges facing the international community.
First is how to cost-effectively reduce GHG emissions from international shipping. These emissions are large – more than double the emissions from international aviation, and greater than the entire emissions from the sixth most polluting country (Germany). They are not covered under the Kyoto Protocol, and creating a global solution to reduce them has thus far failed.
The second challenge is how to scale-up financing for climate change action, particularly for adaptation to climate change. Current financial mechanisms aimed at helping the world’s poor deal with the consequences of global warming are inadequate in both scale and predictability. The adaptation needs of developing countries are estimated at tens of $billions per annum. These needs are widely recognized.
Both challenges require solutions respecting equity, both between countries and between actions by different transport sectors. They may also require unprecedented global cooperation.
The vision to address these two challenges simultaneously was created in early 2007, in a proposal for an International Maritime Emission Reduction Scheme (IMERS). It led to and influenced various MBM submissions to the International Maritime Organization (IMO), and the United Nations Framework Convention on Climate Change (UNFCCC) (such as IMO 2007a, IMO 2008, UNFCCC 2008).
In the Copenhagen Accord of 2009, political leaders agreed that scaled-up, additional, predictable and adequate funding shall be provided to developing countries, in accordance with the relevant provisions of the UNFCCC. In the context of meaningful mitigation actions and transparency on implementation, developed countries committed themselves to a goal of jointly mobilizing US$100 billion a year by 2020 to address the needs of developing countries.
The High-level Advisory Group on Climate Change Financing (AGF), established by the Secretary-General of the United Nations, concluded in 2010 that it is challenging but feasible to meet this goal. Funding will need to come from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance.
Without underestimating the difficulties that will have to be solved, particularly in terms of national sovereignty and incidence (cost burden) on developing countries, the AGF pointed at carbon pricing of international transport as an important potential source for climate financing (and mitigation) that could contribute substantially towards mobilizing US$100 billion (AGF 2010).
The various proposals submitted to the IMO to reduce greenhouse gas (GHG) emissions from international shipping thus far are opposed by developing countries. They insist that the UNFCCC principle of common but differentiated responsibilities and respective capabilities (CBDR) must apply in the IMO. It requires rich nations to take the lead on climate action, based upon their historical contribution to the amount of greenhouse gases in the atmosphere.
The failure of the international community to apply CBDR for international transport for over 15 years combined with the fact that an effective regime must apply to all ships irrespective of flag, has resulted in a deadlock between developed and developing countries. The conundrum is how to make a shipping scheme both global (as per the IMO) and differentiated (as per the UNFCCC), and thus find a new approach that is politically acceptable to both developed and developing countries.
Our solution specifically focuses on how to eliminate the cost burden on developing countries from a potential MBM, and has emerged through an iterative design and negotiation process. The solution centres around a novel rebate mechanism to reconcile the principle of CBDR, on the country level, with the application of an MBM to all, on the ship level. The novelty also comes from using a country’s share of imports by value as the key to eliminate the above cost burden. These are integrated with the third generation of IMERS.

Current MBM proposals versus CBDR

It is useful to consider the current government proposals for a potential MBM vis-à-vis equity and the CBDR principle.
It is generally agreed that any MBM for international maritime transport should be global and apply to all ships irrespective of the flag they fly, inter alia, in order to avoid evasions and competitive distortions. All MBM proposals submitted to the IMO assume application to all ships. Some proposals consider disbursing the majority of the revenue raised to climate change action in developing countries. The discussions at the IMO and UNFCCC have shown that such an approach is not generally perceived by developing countries as fulfilling the UNFCCC principle of CBDR. It became clear that the heart of the matter is “who really pays” for the MBM.
Assuming a global application of an MBM, the cost incurred by the shipping industry will be passed on to end-consumers and producers, in both developed and developing countries. Effectively, some developing countries will therefore carry a share of the burden of the MBM, unless every developing country gains more than the total cost burden of the MBM to its economy. In this context, arguably, none of the government proposals so far truly incorporate the principle of CBDR, regardless of their revenue raising potential.
Consider an example where the majority of the MBM revenue raised is spent on purchasing emission credits from the Clean Development Mechanism (CDM) in developing countries, in order to offset maritime emissions. The proposal for a GHG Fund is an example of such an approach. In this scenario, many developing countries would in fact carry a share of the MBM burden as they would receive less than their cost incurred.
The reason is that an overwhelming majority of CDM projects are concentrated in just a few countries. Many developing countries, especially smaller ones, would therefore be net contributors to the generated funds, rather than being their beneficiaries. The funds would go to the larger, often more advanced developing countries. This is at odds with both the equity and CBDR principle. It is also against the UNFCCC obligations and commitments of developed countries to provide climate financing.
Broadening the revenue disbursement to other categories, such as adaptation and forestry, is unlikely to resolve the equity issue. First, as recent negotiations suggest, the opposition of developing countries to raising financing from all countries is based on fundamental principles, and thus is likely to remain strong. Second, even though some countries or their groups may become net MBM beneficiaries, others would not. The opposition from poor countries that anticipate a significant cost burden, and no benefits, is likely to remain strong