14 March 2024 (Lloyd's List) - TEETHING problems with shipping’s inclusion in the European Union Emissions Trading System have led to industry worries about the potential for an equivalent carbon tax across the Atlantic.

Shipping groups have argued for years that overlapping regional regulations will be hard to comply with and fail to cut global shipping emissions. But the potentially vast sums on offer from taxing shipping may tempt China, the US and other governments to follow the EU’s example.

The consensus at CMA Shipping in Connecticut this week is that the US should wait for a global tax by the International Maritime Organization rather than try to introduce its own regional cap-and-trade system.

“I think there are a lot of lessons to be learned from what is happening in the EU,” said Holland & Knight partner Sean Pribyl.

“The US has an option to either be progressive with this or it could take a wait-and-see approach,” he explained, which would instead look to lean on an IMO directive.

“From my end, the US would be wise to continue to see if a global scheme emerges that would make a level playing field worldwide. Wait and see what comes up, even if it takes several years.”

This was view was shared by Helen Baden, freight demurrage and defence senior solicitor at NorthStandard, one of the largest P&I clubs in the International Group, who said if shipping is going to be regulated effectively it would be better done on a global scale “rather than having different patchwork emission trading systems”.

“We have got that the upcoming MEPC [81] and at the end of the year MEPC 82. After… we will have a better idea of what is on the table and what are the preferred options in relation to the economic market-based measure,” she said.

“I think any country that jumps in this year, when there is quite a lot of work being done within the IMO in that space, would not be too helpful for the shipowner community.”

A US ETS tax would face several problems in common with its EU equivalent.

Opaque roadmap 

Darren Shelton, director at North American maritime agency Moran Shipping, wanted to know how the ETS tax would raise and distribute funds to help drive decarbonisation.

In the US, there have been difficulties in collecting funding from the Environmental Protection Agency designated for port redevelopment.

“Whose coffers does it go into? And what is the mechanism for it to come back and actually do what it was intended for?” asked Shelton.

But perhaps the biggest challenge is functionality.

Pribyl said the EU ETS tax applies to almost all vessels trading within the bloc. However, for the US, this is much more complicated.

“You have the inland shipping sector that is only going to US to US, coastwise trades — where you are talking Jones Act operators. And they do not have a similar Jones Act cabotage trade in the European Union,” said Pribyl.

The EPA would be the logical agency to administer an ETS, but then the question would be who would manage the carbon trading market.

“So now you are talking about multiple agencies being involved.”

There is also the problem of the federal-state divide. The US Coast Guard last week said it would refrain from enforcing California’s small harbour craft regulation, requiring a phase-in of zero-emission short run ferries travelling up to three nautical miles by the end of next year.

“For what it would take to actually put this [US ETS] in place, I think it would be very difficult. We are not carrying any appetite,” Pribyl said.

“Let us get to a national policy first. Then we can work with the agencies that have funding like the Department of Energy through the Inflation Reduction Act, shaping those regulations and funding streams.”

Pribyl said the upcoming 2024 election would be critical in choosing future governments’ priorities and could throw a curveball to any progress on an ETS.

Nevertheless, Shelton said an ETS, whether based on similar EU metrics or not, is coming, even if he has his reservations.

“The general idea has been once the IMO comes up with its own ETS then regions would adapt. But I do not know if any of us have any confidence in that,” he said.

“Whatever these costs are, they are going to get passed on to the shippers and consumers.

“It is going to drive up the cost of shipping. I think that is a very significant concern, especially when the industry is already investing deeply to try to drive decarbonisation probably more efficiently than what these organisations will.”