Green recovery or 'nightmare' for trade? Europe wants to tax emissions from ships

London(CNN Business) Europe's plan to raise billions each year for coronavirus relief by charging ships for their pollution could inflame trade tensions at the worst moment for the global economy and set back efforts to tackle the climate crisis.

The European Commission is proposing to extend its Emissions Trading System (ETS) to shipping as one of a series of measures to help pay for rebuilding the EU economy, and to promote a green recovery from the crisis.

The European Union plans to spend 30% of its €750 billion ($889 billion) coronavirus recovery fund and next seven-year EU budget on climate-related projects in a bid to become the first carbon-neutral continent.

But the proposed shipping tax has run into fierce opposition from the industry, which says it would undermine efforts to tackle climate change at a global level and is likely to spark a backlash from non-EU countries, raising the specter of new trade disputes.

The ETS already caps greenhouse gas emissions from more than 11,000 power and manufacturing plants, as well as all internal EU flights, covering some 500 airlines. Together, the activities it covers generate nearly half the bloc's greenhouse gas emissions. Companies receive or buy emission permits or "allowances," which can subsequently be traded. The number is reduced over time so that emissions fall.

The Chamber of Shipping of America told CNN Business that it is urging all non-EU governments to oppose the extension to shipping and "recognize the pre-eminence" of the International Maritime Organization, a UN body, in tackling emissions from ships.

Ships carry 80% of world goods trade by volume, according to the United Nations Conference on Trade and Development. Any increase in costs from pollution charges could be passed on by operators to businesses and consumers in the form of higher prices.

Critics of the proposal say that countries outside the European Union are likely to view it as little more than a way to raise money. The European Commission has estimated that extending the ETS to the maritime sector and requiring airlines to pay more for their pollution could generate €10 billion ($11.8 billion) a year.

"This is an admission that this is not about climate whatsoever, it's about raising funds," said Lars Robert Pedersen, deputy secretary general of international shipping association BIMCO, which is headquartered in Copenhagen.

The proposal amounts to asking US and Chinese shipping companies to help finance Europe's recovery plan, Pedersen told CNN Business. He said it is likely to face staunch opposition, of the kind experienced when the European Union tried to include international aviation in the ETS in 2012.

EU officials eventually relented, after the United States threatened to ban its carriers from complying with the directive and China threatened to withhold outstanding plane orders from Airbus (EADSF). As a result, the ETS only covers flights between EU countries, as well as Iceland, Liechtenstein and Norway.

Putting a price on carbon

EU member states generated €14 billion ($16.6 billion) from auctioning ETS allowances in 2018, according to the European Commission's carbon market report — double the revenue collected the prior year due to the higher price of the permits. Nearly 70% of that money was spent on "climate and energy-related purposes," the report said. Emissions from factories and power stations have fallen by a third since the ETS launched in 2005, largely as coal was replaced by renewable energy sources.

In a statement to CNN Business, the Commission explained why it wants to extend the ETS to the maritime sector and reduce the allowances allocated for free to airlines. "Transport accounts for a quarter of the EU's greenhouse gas emissions, and to achieve our climate neutrality goals, a 90% reduction in transport emissions is needed by 2050," a Commission spokesperson said.

"This will be coordinated with action at global level, notably at the International Civil Aviation Organisation and the International Maritime Organisation."

Transport & Environment, a European climate lobby group, has backed the move. "Shipping's carbon pollution has grown at an alarming rate and could rise by [50%] by 2050 if real action is not taken," shipping program manager Faïg Abbasov said in a statement earlier this month, noting that container shipping line MSC emitted more carbon last year than Europe's biggest airline, Ryanair (RYAAY).

"Extending emission trading to the shipping sector and increasing carbon pricing for international aviation is long overdue," added Climate Action Network Europe's Klaus Röhrig.

But the ETS extension is by no means a done deal. While the European Parliament's environment committee last month voted to include international carbon emissions from ships in the ETS, the final shape of the legislation will need to be approved by Parliament and EU leaders, which is not expected to happen before next year.

Trade blocks ahead?

Shipping industry players worry that the proposal, if adopted, risks undermining further progress on reducing shipping emissions through the International Maritime Organization and leading to a proliferation of regional and national measures to address pollution.

The International Maritime Organization has begun putting in place mandatory measures to cut annual greenhouse gas emissions from international shipping in half by 2050, compared with their level in 2008. Separately, at the beginning of this year it introduced new limits on the sulfur content of fuel oil, known as "IMO 2020," which should reduce overall sulfur oxide emissions from ships by 77%.

If countries begin setting their own laws on shipping emissions it would "create a patchwork quilt of regulations globally, introducing barriers to the smooth operation of ships on international voyages and so to international trade," wrote Edmund Hughes, the former head of energy efficiency at the International Maritime Organization, in a July report seen by CNN Business.

It also opens the door for other countries and regions to tax ships coming into their ports in the name of climate change, creating a "nightmare" scenario for global trade, said BIMCO's Pedersen.

There is a further risk. It could ratchet up political tension with non-EU countries, potentially leading to trade disputes, added Hughes, who prepared the report in an independent capacity for the International Chamber of Shipping and the European Community Shipowners' Association.

The United States and Europe are already locked in a costly trade dispute over aircraft subsidies to Airbus (EADSF) and Boeing (BA), with Washington resorting to tariffs on billions of dollars worth of EU goods. In another dispute, Brussels has responded to US tariffs on steel and aluminum with retaliatory taxes on US products.

Shipping companies, meanwhile, have also sounded the alarm. German shipping giant, Hapag-Lloyd (HPGLY), told CNN Business that the EU proposal targets just "a fraction" of global emissions and would divert funds that would otherwise go towards improving the energy efficiency of ships. "We should support pursuing global solutions only," it added.

French firm CMA CGM echoed this view, saying in a statement that a global approach driven by the International Maritime Organization would "ensure equal treatment for all shipping lines in the world."

"A scheme that does not benefit climate action in the industry would be counter productive to [the stated] objective [of the EU ETS]," added Maersk (AMKBF)'s head of regulatory affairs, Simon Bergulf.

A spokesperson for the International Maritime Organization said it urges member states to bring proposals for emissions reductions to the body for "discussion, development and potential adoption on a global basis."