GHG-EW 3/INF.

COMPARATIVE ANALYSIS OF CANDIDATE MID-TERM MEASURES

Fact sheet

Name of the Emission Cap-and-Trade System (ECTS).

candidate measure:
Please note the following: The Measures Norway proposes are
described in ISWG-GHG 13/4/2. It is important to assess them in
combination. However, for the purpose of this fact sheet, we
address the ECTS only.
Reference MEPC 77/7/16, MEPC 76/7/2, ISWG-GHG 13/4, ISWG-GHG
document(s): 13/4/1, ISWG-GHG 13/4/2, ISWG-GHG 12/3/13, ISWG-GHG
12/3/14, ISWG-GHG 12/3/15, ISWG-GHG 10/5/4, ISWG-GHG
10/5/5 and ISWG-GHG 10/5/6 .

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1 Feasibility of the proposed candidate measure

1.1 Scope and compliance options

1.1.1 Substances CO2, CH4 and N2O
covered (GHG/CO2)
1.1.2 Phases of GHG TtW as a starting point, but can be expanded to WtW based on
emissions covered the establishment of a robust framework for verification of Well-
(WtT / TtW / WtW) to-Wake emissions (the LCA Guidelines).

1.1.3 Acceptable In-sector, based on calculation of emissions as prescribed in the

approaches for soon to be adopted Guidelines for Lifecycle assessment of fuels
compliance (e.g. in- for the maritime sector.
sector/out-of-sector Ship board carbon capture and subsequent permanent storage
offsetting, CCS, etc.) should be included based on results of the proposed workstream
to be initiated at MEPC 80.
The main requirement for compliance would be for the ship to
surrender Ship Emission Units (SEU) equal to the verified annual
GHG emissions reported through the DCS.

1.2 Likeliness to achieve a consistent implementation of the measure

1.2.1 Provisions to The ECTS will generate considerable revenues, estimated to
ensure global around 130 to 140 billion per year from 2030 before gradually
availability of being reduced as the emission level is reduced. These revenues
alternative fuels and should be used based on the preciously agreed general
technologies preference, safeguarding the principles of a fair transition.

Norway proposes to channel revenues to support climate actions

in developing countries and accelerate the introduction of
sustainable low- and zero-GHG fuels and technologies, in
particular the development of production of sustainable climate
friendly fuels and infrastructure capacity.

1.2.2 Provisions to Reporting: A monitoring, reporting and verification system of CO2

limit administrative is already in place for ships above 5,000 GT through the Data
burden for ships and collection system for fuel oil consumption of ships (DCS), and the
Administrations ECTS is relying on this data. In the case the application will be for
vessels above 400 GT, the DCS will need to be amended to
include those vessels.

Revenues: Norway proposes that the auctioning of allowances

and revenue handling is contracted to an external organisation.
IMO is already doing such arrangements on other issues such as
the IMO number on ships. Any MBM needs to handle revenues,
and a benefit of the ECTS is that this can also be handled by the
trading body under the same contract, limiting the additional
administrative burden of the trading part. The costs of running
this body can be covered by a registration fee established for the
registration of an account or per transaction.

Allocation of funds: Being aware of the significant task and

potential administrative costs it is to establish and manage a
large fund, it would be beneficial to use an existing structure
 within the UN family for the administration of a fund. Norway
proposes to let the Green Climate Fund (GCF) - operating under
the framework of the UNFCCC - handle and allocate the
revenues from the auctioning of Ship Emission Units. Taking on
board this task will of course also have implications for the GCF,
but following up on the administrative and steering implications
will be manageable for an organization such as GCF. Using an
existing establishment means added benefit from lessons-
learned from similar tasks from that fund.

1.3 Compatibility and consistency with existing regimes/regulations

1.3.1 Consistency An ECTS for the global maritime sector could be considered as a
with UNFCCC and the market mechanism under article 6 of the Paris Agreement.
Paris Agreement

1.3.2 Coordination / The EU already has an emission trading scheme in place, where
overlap with other the maritime sector is gradually included from 1 January 2024.
international, regional The EU has stated in its regulations that the framework would be
and national initiatives reviewed in the case of the establishment of a global emission
trading scheme.

1.3.3 Compatibility The ECTS would work well together with existing IMO regulations
with other IMO addressing emission reductions from ships, see illustration in the
regulations figure below, which can also be found in document ISWG-GHG
10/5/6:

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2 Effectiveness of the proposed candidate measure

2.1 Expected reductions in GHG emissions

2.1.1 Levels of GHG Levels of GHG emission reductions obtained through an ECTS
reduction with would be directly linked to the emission reduction ambition level
associated timeframe of the revised IMO GHG Strategy to be adopted at MEPC 80. The
emission reduction will be as defined in the framework. The IMO
would need to agree on whether a phase in approach is wanted,
if the reduction should follow a gradual reduction pathway
towards the final emission reduction ambition level or whether the
reduction in allowances should be adjusted stepwise at pre-
defined intervals.

2.1.2 Provisions to The periodical review will capture this issue and enable the IMO
avoid unintended to respond and adjust for such effects.
outcomes that could
increase GHG
emissions
2.2 Incentives for first movers
2.2.1 Provisions for The ECTS will, if set up to meet the 2050 level of ambition,
reducing/bridging the provide an increasing price on conventional fuels, making low-
price gap between carbon solutions more competitive. At some point, the low-carbon
conventional and low- solutions will become the preferred option, as the SEU for fossil
carbon solutions fuels will reach a high enough price and the infrastructure for low-
carbon fuels is sufficiently available. The market will define a
price which will trigger the needed action for emission reductions.

2.2.2 Provisions to Strict compliance regime, based on flag and port state control.
ensure a level playing The Ship Emission Unit (SEU) should be valid for only one
field specific calendar year and ships should not be able to bank units
between years.
The cost of the SEUs will ensure that using fossil fuels does not
provide a competitive advantage.

2.2.3 Provisions to Both through the use of funds from the ECTS through GCF and
ensure global access through technical cooperation, funds and technological
to technology cooperation will be available in all relevant countries.

2.3 Compatibility of different elements within the basket of measures

2.3.1 Identification Documents ISWG-GHG 13/4/1 (Norway) and ISWG-GHG 13/4/2
where elements of the (Norway) discusses how the GFS and ECTS complements each
measure are other by providing both a market-based incentive and a technical
complementary to requirement.
each other without
overlap or Document ISWG-GHG 12/3/13 (Norway) considers the CII in
redundancy relation to the proposed basket of measures.

Further document ISWG-GHG 13/4/2 (paragraphs 17-21)

identifies the importance and role of supporting measures.
2.3.2 Provisions to Both the GFS and ECTS should use existing framework with
avoid double aligned requirements and penalties. We can’t see that double
accounting, payment, accounting, etc. is relevant for the proposal.
reward or punishment

2.4 Process for development and implementation

2.4.1 Possible legal Norway proposes to include the main requirements of the system
framework in MARPOL Annex VI, and to establish an ECTS code further
outlining the details of the system. There are several legal options
for the inclusion of ECTS in MARPOL Annex VI. See document
ISWG-GHG 13/4 (Norway) for the legal outline.
The framework should build on existing framework to ensure
compliance and enforcement, like Port State Control, the Data
Collection System and the Bunker Delivery Note (BDN).

2.4.2 Expected Document ISWG-GHG 13/4/2 contains an indicative timeline of

timeframe for both current and proposed work streams. It is expected that
development and amendments necessary for the establishment of an ECTS can be
implementation adopted at MEPC 83 in 2025. This means that the measure could
enter into force end 2026/beginning of 2027, after actions to
address impacts as appropriate has been considered. We want to
underline that this will require that several intersessional GHG
WGs will be established, and it will require a willingness and
constructive cooperation.

2.4.3 Mechanisms of Norway proposes a periodical review for updating any regulations
accountability and of MARPOL Annex VI or the ECTS Code to improve the ECTS.
adjustment To ensure a predictable requirement, limitations are put on the
changes that can be made to the cap after each review.

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3 Potential impacts on States of the proposed candidate measure

3.1 Initial impact assessment

3.1.1 Does the Yes, document ISWG-GHG 12/3/14 (Norway) contains an initial
proposal provide a impact assessment of the emission cap-and-trade proposal.
description of impacts
on ships and The ECTS, if implemented on the 2019 fleet, would impact about
emissions? 63,500 ships of 400 GT and above with an estimated CO2
emissions of 762 million tonnes per year. These numbers also
include ships that trades partly or fully domestic.

The ECTS will lead to large reductions in GHG emissions as well

as reductions in air pollution from the use of fossil fuels.

From 2026 to 2030 the carbon price under the ETCS is assumed
to be gradually phased in reaching $ 200 and $ 210/tonne CO2 in
2030. In the “decarbonisation by 2050” scenario the carbon price
slowly increases towards 2050, reaching $ 300/tonne CO2.

See full assessment of impacts on ships and emissions in the

document referred to above.

3.1.2 8 Impact criteria The initial impact assessment considers the following sections:
assessed 1. Impacts on ships and emissions
2. Identification of positive and negative impacts
3. Analysis of the extent of the impacts
4. Assessment of whether the measure is likely to result in
disproportionately negative impacts and possible
mitigation actions

3.1.3 Potential The ECTS will lead to large reductions in GHG emissions as well
positive and negative as reductions in air pollution from the use of fossil fuels. This
impacts contributes to mitigating climate change and reduce negative
welfare impacts from air pollution. The measures reduces
negative impacts form fuel spills, but this effect and the reduction
of air pollution depends on the alternative energy carriers used.
Expected reduction in speed can also lead to reduced
underwater noise and collision risk of whales.

The fuel price is expected to be the element with the highest

uncertainty when projecting costs. A higher growth in seaborn
trade would increase the costs in 2030 and 2040, but in 2050 the
relative cost increase is expected to be the same although
absolute costs will be higher due to the high number of ships in
operation.

The ECTS is likely to create net negative economic impacts.

Increased transport costs could reduce shipping activities, move
and reduce economic activity and increase the prices on shipping
services. In the short term, it is likely that shipowners will bear
larger proportions of the costs. In the medium and long term,
these costs will – to some extent – be transferred to the buyers of
shipping services and users of the produced and transported
goods. The cost distribution is uncertain, and will likely vary with
industries and goods. Indications on price increases for end
 users, given they take all costs and that the price surge on
freights is representative for the measure discussed here, point to
relatively modest price increases globally in 2050, relative to the
“current regulations” pathway; on average 3 and 0.4% for
imported goods and consumer goods respectively. Given that
such cost increases will likely be shared by shipowners, cargo
owners and others in the supply chain, the cost increases, once
distributed in the supply chain, are expected to be relatively
modest.

A risk of the ECTS is that there are not enough emission units to
buy for the total amount of emissions from the shipping industry.
However, by combining the ECTS with remedial action under the
GFS, the ships can pay their way out of such a situation. The cost
of remedial action should be based on a price above the average
market price of an emission unit.

Depending on the design of the ECTS, there could be substantial

revenues from ship emission unit sales. There could be a
revenue stream at around 130 to 140 billion in 2030, before
gradually being reduced as the emission level reduces. In the
“Decarbonisation by 2050” pathway, the revenue stream stops in
2050 as shipping will have achieved zero emissions. If the
revenue stream is controlled, for instance through yearly
auctions, and with limited administrative costs, there is
substantial funds available e.g. to compensate for
disproportionately negative impacts.

3.1.4 Extent of the Administrative burden.

impacts on States Effects of increased transport costs, see above.

3.1.5 Description of The initial impact assessment analyses the impacts of an ECTS
methodological tools following two possible decarbonisation pathways:
and data sources i) “IMO ambitions”: in line with the current ambitions set
used out in the Initial IMO Strategy of at least 50%
reduction in GHG emissions and 70% reduction in
carbon intensity by 2050, relative to 2008
ii) “Decarbonisation by 2050”: complete decarbonisation
of international shipping by 2050, anticipating that the
ambitions of the IMO GHG Strategy may be
strengthened in the 2023 review.
The impacts are considered relative to a “current regulations”
reference pathway that takes into consideration already adopted
IMO GHG policy measures. In this way, additional costs due to
decarbonisation requirements of the ECTS can be calculated.

Impacts on ships and emissions are analysed using the same

method and data sources as applied in the comprehensive
impact assessment (document MEPC 76/INF.68/Add.1), including
using marginal abatement cost curves (MACC) to estimate the
carbon prices due to a cap.

3.2 Possible disproportionately negative impacts

3.2.1 Is the measure Smaller States with high reliance on shipping for importing goods,
likely to result in including SIDS, are likely to be more affected relative to other
disproportionately States. This could be most particular in the measure’s effect on
negative impacts on imported prices and consumer prices, where indications give
States? import price increases of up to 6% for SIDS and 2 to 3% for
LDCs, relative to the "Current regulations" pathway. For
consumer prices these price increases are indicated at around
2% for SIDS and about 0.6% for LDCs. These are again based
on the hypothetical assumptions that end users bear all cost
increases and that the price surge on freights is representative
for the measure discussed here. States with industries reliant on
ships for importing inputs are also likely more affected. But also,
for these, the impacts are likely relatively modest, compared to
other larger economic, political and other trends, such as the
surge in container rates, bottle necks in ports and supply chain
disturbances in the aftermath of the pandemic.

The significant funds generated through the mechanism also

have the potential to alleviate negative impacts for the most
vulnerable states.

3.2.2 Description of The revenues from the ECTS are proposed to be channelled into
how these impacts the GCF, supporting investments developing states to reduce
could be addressed emissions. This should be used to develop necessary
(e.g.: avoided, infrastructure for low carbon solutions in the maritime sector, as
remedied, mitigated), well as in other relevant sectors for the decarbonisation of the
as appropriate maritime sector, for instance the energy sector.

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