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Do carbon credits have a place in shipping’s future?

With over 194 states (representing 97% of global greenhouse gas emissions) having ratified or acceded to the Paris Agreement and an ever increasing number of countries and entities making net zero their 2050 target, anyone not preparing for significant changes in carbon emissions regulation risks missing the boat.

Net-zero means achieving a balance between the greenhouse gases put into the atmosphere and those taken out. The term is intrinsically linked to the idea of carbon offsets (or carbon credits) which certificate the way projects or activities reduce, avoid, or destroy greenhouse gases. For every metric tonne of carbon a project or set of activities reduces, one carbon credit is generated. Project owners, such as solar and wind energy developers, or protectors of endangered forestlands can sell these certificates to individuals or a company as an additional revenue stream.

This idea is that, by purchasing a carbon credit, the buyer is funding the reduction, elimination, or total avoidance of a metric tonne of carbon. When the buyer amasses the carbon credits to match its carbon footprint (in tonnes), it can be considered “carbon neutral”.

Carbon credits can help companies which operate in areas where there are very limited ways of reducing carbon emissions improve their environmental profile, ensuring that they balance out their pollution by paying for a solution. However, the scheme is also criticised for this very reason: it allows companies to continue burning fossil fuels and polluting whilst still claiming carbon neutrality through projects which are often far removed from their actual operations. Some of the world’s biggest polluters can now claim to be carbon neutral by investing in carbon credits.

Voluntary or enforced?

The limits of carbon credits are most distinct when considering the two different types of carbon markets. Compliance markets involve companies using carbon credits to comply with certain regulatory caps on emissions. Voluntary carbon markets, in contrast, function outside of these programs and allow businesses to offset their carbon emissions by purchasing carbon credits or investing in carbon-reducing projects.

The voluntary carbon market is still underdeveloped – in its latest report, the Taskforce on Scaling Voluntary Carbon Markets estimated that in order for the private sector to align with the Paris Agreement’s 1.5 °C trajectory, the current voluntary carbon market for offsets will need to grow by at least 15-fold by 2030. While there is much discussion among global elites about expanding the voluntary carbon market (this proposal was a key focus of the World Economic Forum’s 2021 “Davos Agenda”), it remains unclear as to how much scope for growth there is realistically in shipping.

One voluntary scheme specific to shipping that attracted some publicity involved a collaboration between coatings supplier AkzoNobel and the Gold Standard Foundation. The project encourages owners to consider the carbon credits available from selecting a particular antifouling coating due to its ability to reduce fuel consumption and emissions. Carbon credits are awarded for every tonne of verified CO2 saved.

In terms of using carbon credits to help meet certain regulatory carbon targets – shipping companies and vessels are not currently required to adhere to any specific CO2 caps. However, there are indications that the EU, as well as the UK, may bring shipping within their emissions trading schemes (ETSs) over the coming years.

Official positioning

In September of last year the European Parliament voted to include ships over 5,000 gross tonnes in the EU ETS by 1 January 2021, and is expected to make an official proposal for shipping’s inclusion into the scheme in July.

At the end of June 2021, Reuters reported the European Commission as declining to comment on reports that a draft proposal had been circulated to expand the carbon market to cover shipping emissions within the EU, international voyages to the bloc and those at berth in an EU port. This would force owners to buy permits from the ETS when their ships pollute.

Likewise, in April 2021 the UK announced that shipping be included in their new Carbon Budget, which enshrines in law the government’s commitment to cutting emissions by 78% by 2035 compared to 1990 levels. A spokesperson for the Department for Transport has indicated that bringing shipping within the UK’s post-Brexit ETS is one of the emission-cutting schemes being considered to meet this goal. Earlier this year China also introduced its ETS, the world’s largest to date, after three years of preparation, and in March news broke that Beijing would seek to bring shipping within its scope in the near future.

Also known as “cap and trade”, an ETS caps the total amount of certain greenhouse gases that may be emitted annually by individuals and companies covered by the scheme. This cap could be applied to the shipping industry in any number of ways. For example, a ship-owning company may face a cap on the total emissions for its fleet or each vessel may have a cap on its annual emissions. Likewise, to use the UK ETS as an example, the cap may be applied to UK-flagged vessels; or it may apply to UK-based ship-owning entities, or to any vessel entering UK ports or sailing in UK waters. If required, participants in the ETS can obtain permits for additional CO2 emissions from the relevant regulator or by trading with other participants. Any spare permits can be used towards next year’s annual target or the participant can sell them on the secondary market to another business.

However, there are some practical considerations which can make ETSs unsuitable for an industry as international as shipping. Although the Paris Agreement sets out provisions for linking carbon markets in the future, there is a limit to the use of carbon credits or permits outside of the scheme in which they are issued. For example, credits issued by certain hydroelectric projects exceeding 20 MW of installed capacity are not currently eligible for exchange with EU ETS-compliant credits.

Without proper communication and cohesion between ETSs, shipowners could find themselves unfairly penalised by multiple schemes in different jurisdictions. Furthermore, those hoping to use carbon credits to potentially avoid emissions-based taxation could be in for a rude awakening: the two policies may well be combined – with companies required to pay a per-unit tax on emissions and procure carbon permits to cover emissions for the compliance period.

Changing landscape

The most detrimental blow to the carbon credit revolution may come from the ever-developing environmental ambitions of certain countries, especially if they are able to influence organisations such as the IMO to follow their lead. The US Climate Envoy, John Kerry, caused shockwaves in the shipping community last month when he announced the US’s commitment to achieving zero emissions by 2050 in the global shipping industry.

A zero emissions target is significantly more formidable a challenge than a net-zero emissions target – allowing for none of the wriggle room provided by carbon offsetting and requiring much firmer dedication to reducing actual output of carbon emissions through investments in low or zero-emission fuels and propulsion technologies. The US is not alone; in its “Clean Maritime Plan” published in the Summer of 2019, the UK’s Department for Transport re-iterated its commitment to and set out a plan for the UK’s pathway to zero emissions shipping by 2050.

As global demand for a stronger stance on the environment grows, especially with the more environmentally-conscious younger generations reaching voting age in many democracies around the world, the next decade may well see the abandonment of the “net-zero” target – which may leave carbon credits to end up as fossils. Although there are many benefits to participating in the voluntary carbon credit market, shipowners should maintain a clear focus on technological and practical methods of reducing their carbon emissions – as this will serve them well regardless of what carbon-cutting regulations emerge in the years to come.
Source: Campbell Johnston Clark Limited

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