Shippers fear carbon tax will cause freight rates to jump

by Emily Atkins

The Global Shippers Forum (GSF) is raising the alarm over a proposed carbon tax on bunker fuel, saying if implemented it will cause already record freight rates to climb again. 

The International Maritime Organization’s (IMO) Marine Environment Protection Committee (MEPC) is considering a proposal put forward by the shipping industry to introduce a carbon tax on bunker fuel. The tax is intended to incentivize a switch to lower carbon emitting fuel options and could eventually double the current price of tradition bunker fuels. 

The initiative follows the decade-long effort to gain agreement on the IMO 2023, a set of energy efficiency measures for existing ships, which final take effect next year.

Removing tonnage to raise rates

GSF is urging regulators to make sure that the potential for shipping lines to remove older tonnage from the market, which they deem uneconomic to upgrade to progressively more demanding efficiency levels, is not used as a disguised means for capacity management resulting in higher freight rates. 

Moreover, there is perhaps a more obvious danger to shippers. Given the widespread use of bunker adjustment factors (BAF) and the rash of new surcharges ahead of the introduction of low sulphur fuel in 2020, shippers will be wary of how much of this proposed carbon tax will just be passed through to them.  

“Shippers will be forgiven for thinking that the proposal, and its consideration at the IMO will inevitably result in still higher freight rates,” said James Hookham, director of the GSF.

“That’s because the shipping industry has a very efficient mechanism for passing through higher fuel costs in the form of BAF; a surcharge to cover variations in fuel price. There are few reassurances in the existing proposals that a carbon tax won’t just be passed through as an added cost for shippers.” 

Consider who drives global trade

GSF is urging members of the MEPC to consider the interests of exporters and importers – the drivers of international trade – and given the potential sums of money involved, insist any carbon tax mechanism be fully transparent with exposure to scrutiny. 

“If the shipping industry is serious about market based mechanisms as a route to decarbonization, then it needs to insulate its customers from their inflationary effects. Otherwise emissions will be reduced by suppressing demand for world trade rather than by incentivizing the  step-changes in fuels and propulsion technology, so urgently required,” Hookham said.

“The MEPC needs to think through the realities of the shipping market and avoid simplified comparisons with experiences in other sectors of their economies.”