The allocation of part of the proceeds of market-based measures (MBM) to developing nations is becoming a critical part of the International Maritime Organization’s negotiations on a carbon pricing scheme.

The latest proposal which is to be debated at the IMO’s June meeting is from Japan and includes the option of allocating funds for least developed countries (LDCs) and small island developing states (SIDs).

Japan’s idea is for a feebate scheme — in which a levy collected on ships’ CO2 emissions would be used to rebate owners that have taken on the additional costs of using zero-emission fuels.

Japan is suggesting that if the IMO can agree on the scheme by 2023, then it could enter into force as early as 2025.

It estimates an initial levy of $56 per tonne of carbon emitted would generate around $50bn annually.

Japan suggests the carbon price should be periodically set by the IMO based on the price differential between conventional marine fuel oils and zero carbon emission fuels, with additional consideration for SIDs and LDCs.

One of the advantages of the scheme is it could build on a revenue collection mechanism established by an industry proposal for an IMO Maritime Research Fund (IMRF).

The fund involves a $2 per tonne levy on fuel sales to be used for decarbonisation technology research and development.

But, the IMRF proposal is now also coming up against some challenges.

India, the Solomon Islands, Tuvalu and the Marshall Islands argue that the IMRF idea will take just as much of the IMO’s time and resources to develop as it would to come up with a more substantial carbon tax — that would be more impactful in encouraging shipowners to switch to low carbon fuels.

Cut to the chase

The Solomon and Marshall islands want the IMO to cut to the chase by ditching the IMRF idea and instead develop a $100 per tonne carbon tax, along the lines of their joint proposal.

A substantial part of the revenue generated by the Solomon and Marshall islands proposal would go to helping developing economies affected by climate change.

The International Chamber of Shipping and other shipping associations have updated their IMRF proposals.

The IMRF backers are now suggesting that of the $500m per year raised by the IMRF, $50m could be committed to a GHG Technical Cooperation Trust Fund for use by developing countries.

Developing countries China, Argentina, Brazil, South Africa and the United Arab Emirates have come up with their own idea. They are proposing ships should be set a maximum benchmark for carbon emissions

Ships will either have to pay penalties for exceeding carbon emission limits or be rewarded for outperforming the benchmark. Similar cap-and-trade schemes are also on the table from Europe.

With IMO member states leaning toward a cap-and-trade scheme, Japan has come up with an alternative idea of awarding ships a carbon allowance allocation. Owners will have an option to buy or sell allocations depending on performance.

And while the proposals stack up at the IMO, the European Union is moving towards including shipping in its emissions trading scheme from next year.