Navigating climate action: Assessing the economic impacts and trade-offs of a shipping carbon tax for African states

As the world grapples with the realities of climate change, the shipping industry has come into sharp focus as a catalyst for global climate action. The International Maritime Organization (IMO), the entity responsible for regulating international shipping, has committed to cutting emissions from shipping to net zero by around 2050. Along the way, the organisation aims to reduce total annual greenhouse gas (GHG) emissions from international shipping by at least 20%, striving for 30%, by 2030 (compared to 2008’s emissions); and by at least 70%, striving for 80%, by 2040. The 2023 IMO GHG Strategy emphasises the complementarity and importance of a goal-based GHG fuel intensity standard and a maritime GHG emissions pricing mechanism. The IMO’s Marine Environmental Protection Committee (MEPC) is therefore working within this framework to select the appropriate measures it needs to achieve net zero emissions.

While some countries view the decarbonisation of the shipping industry as a chance to industrialise, for example by developing industry to supply green hydrogen as a maritime fuel, many states, including those with high ambitions, are concerned about the increasing cost of living and food security. It is against this backdrop that this report looks at some of the candidate mid-term measures under discussion at the IMO and the likely impacts they will have on African economies. The report also explores which issues need to be addressed for especially developing countries if the implementation of the measures is to be supported, as well as what opportunities there might be to trade off costs against benefits if the planned economic measures materialise.

To assess the potential impact of a shipping tax on the economy and food security in African countries, we used the Global Trade Analysis Project Energy-Environmental (GTAP-E) Computable General Equilibrium (CGE) model calibrated on the GTAP 11 database. The analysis examined the impacts of the tax on both the African economy as an aggregate and selected individual African economies. We found that the imposition of a levy on carbon would reduce the supply of maritime shipping services among African countries by up to 7%. We also found that in most individual African countries, the levy would have negative but limited effects on GDP, with a forecast reduction in GDP of 0.121% in the case of Equatorial Guinea, which would be the worst affected. The results also show that the global prices of agriculture and processed food commodities would increase by 0.011% and 0.013% respectively, with implications for food security, especially since African countries import a large proportion of food items. Household incomes would fall in most individual African countries. Ghana, for example, is forecast to experience a 0.101% reduction, 10 times the reduction forecast for European household incomes. In general, the results show that a shipping levy is expected to reduce international trade, increase cost of shipping, increase prices of commodities and marginally reduce GDP and household incomes across the continent.

As a case study, our team interviewed key players in Ghana’s maritime sector ecosystem to discover what the key considerations are for stakeholders in reaching consensus around the mid-term candidate measures. These engagements revealed significant hesitation towards the introduction of a shipping levy due to the increased cost of doing business that would arise from the imposition of GHG measures. The disproportionately negative impacts that the GHG reduction measures would have on the economy of Ghana and the majority of African countries is expected to exacerbate existing structural imbalances in freight costs. Fears were also expressed at the likelihood of Ghana’s limited fleet becoming too costly to operate and rendered obsolete if stringent GHG reduction measures are implemented. Hence there is a call for transition fuels to be permissible in the mid-term. Lastly there was strong opposition to the idea that revenues generated from the economic measures would be limited to use by the shipping sector only.

Our report concludes by recommending that the IMO adopts GHG reduction measures which allow for the redistribution of a significant portion of the revenues raised towards funding out-of-sector mitigation and resilience. These funds can be used to develop projects in renewable energy, resilient agriculture and hydrogen production, all of which will contribute to the achievement of an equitable transition to net zero emissions. These redistributions will help to smooth out the effects of the higher costs of doing business. Redistribution should be carried out with due regard to each country’s specific circumstances. Key criteria for determining the revenues a country should receive include exposure to climate risk, economic context, access to climate finance and fiscal space, national income, the magnitude of disproportionate negative impacts that the measures have on the economy as well as the country’s own contribution to GHG emissions. Finally, and perhaps most importantly, redistributions to countries should be in the form of direct transfers, not loans, if they are to truly reflect the principle of ‘polluter pays’.

According to the Review of Maritime Transport 2023 (UN Trade and Development, 2023), more than 80% of global trade in 2023 was carried by ships. These ships carry everything from consumer goods, manganese, vehicles, agricultural produce, fuels, etc. across the globe. International shipping has traditionally used fossil fuels, mainly diesel and heavy fuel oil, generating greenhouse gas (GHG) emissions such as sulphur and carbon. According to the International Energy Agency (IEA), shipping contributes some 3% of global GHG emissions.¹ As the world grapples with the realities of climate change, shipping has come into sharp focus, especially as the emissions generated by the industry are increasing by as much as 5% year on year.²

Source: International Energy Agency, 2023

Using the vessel-based allocation of international shipping taken from the Third IMO GHG Study, the Fourth IMO GHG Study has also concluded that CO2 emissions from shipping increased over the period 2012-2018 from 848 megatonnes (Mt) to 919 Mt, an 8.4% increase.³ These rates of growth are in stark contrast to the average 2% year-on-year reduction in GHG emissions that must be achieved to reach the target of 605 Mt CO2 annual emissions by 2030.⁴

Tackling the industry’s emissions is thus seen as a means for making a meaningful impact on global decarbonisation. In 2018, the International Maritime Organization (IMO), through the Marine Environment Protection Committee (MEPC), adopted the Initial IMO Strategy for the reduction of GHG emissions. In addition to the implementation of a cap on sulphur emissions permitted by ships, the strategy also considers the use of market-based measures (MBMs) to limit GHG emissions.

Subsequent MEPC meetings, specifically 2019’s MEPC 73 and MEPC 74, failed to define or reach consensus on the market-based measures necessary to galvanise the shipping industry into decarbonising. In 2019, the slow pace of progress at the IMO led the European Union (EU) to set its own course for maritime decarbonisation in the EU under the European Green Deal Framework. This framework sets out clear pathways for reducing GHG emissions by 55% by 2030 and making the EU climate neutral by 2050.⁵ The maritime industry was to contribute to this GHG reduction agenda via two key initiatives: firstly, including the shipping industry under the existing European Union Emissions Trading System (EU-ETS), and secondly, adopting the FuelEU Maritime regulation to check the GHG intensity of fuels used by the industry.

While the EU embarked on these unilateral initiatives, the IMO continued to receive proposals and to work on improving candidate measures with a view to reaching consensus amongst its 176 member states. In 2023, the IMO adopted the Strategy on Reduction of GHG Emissions from Ships (the 2023 IMO GHG Strategy) with the aim of urgently phasing out GHG emissions from international shipping while promoting a just and equitable transition to net zero. The strategy also emphasised the importance of mid-term measures consisting of an economic element in the form of a levy/tax/carbon price mechanism aimed at putting a price on carbon to discourage emissions, and a technical/fuel standard aimed at pushing the industry towards the use of greener fuels and technologies.

As negotiations continue to define the scope and content of the two measures, several IMO member states, especially the developing countries, have pushed for a consideration of the impact of the measures, including the high costs of compliance, and have argued for an equitable decarbonisation of the maritime sector, as is the case in the general transition to net zero. The principles of ‘equity’ and ‘common but differentiated responsibilities and respective capacities’ are essential elements of the Paris Agreement.⁶ In fact, the IMO states that in the development of candidate mid- and long-term GHG reduction measures, ‘due account should be taken to ensure a just and equitable transition that leaves no country behind’.⁷ An equitable transition implies that the peculiarities of different stakeholders are recognised and reflected in any mechanism that is chosen so that the mechanism can be widely adopted by a wide range of geographically and economically diverse member states.

Depending on which African countries one speaks to, the decarbonisation of the maritime sector is viewed as an opportunity or a threat. While some countries see it as a chance to develop an industry around green hydrogen as a maritime fuel, many states, including those with high ambitions, have concerns around the increasing cost of living and food security. It is against this backdrop that this report seeks to delve into the candidate measures currently under discussion at the IMO, the likely impacts these measures will have on African economies and the issues that need to be addressed for especially developing countries if their implementation of the measures is to be supported. The study will also investigate what opportunities there might be to trade off costs against benefits if the planned economic measures materialise.

The report provides a detailed quantitative and qualitative analysis of the potential impacts of the key candidate economic measures on African countries, using the example of the Ghanaian economy. It ascertains whether any opportunities exist to trade off costs against benefits so that the Ghanaian maritime sector’s drive towards decarbonisation can be equitable. To this end, the report seeks to answer the following questions:

To answer these questions, we designed a quantitative model to assess the potential economic and food-security-related impact of a shipping tax on African countries. In addition, our team interviewed key players in Ghana’s maritime sector ecosystem.

Through its Fit for 55 Package and the Green Deal Framework, the EU is so far the only region that has introduced policy measures affecting shipping. Its agenda for greening the maritime sector is being implemented via the European Union Emissions Trading System and the FuelEU Maritime Regulation, both of which are discussed below:

Established in 2005, the European Union Emissions Trading Scheme (EU-ETS) is the world's first and largest carbon market, and a cornerstone of the EU’s policy to reduce GHG emissions and combat climate change. The EU-ETS is a cap-and-trade system in which the amount of carbon that is allowed to be emitted in a given period is capped. This cap is translated into emissions permits known as European Union Allowances (EUAs). Each EUA allows the holder to emit one metric tonne (t) of carbon into the atmosphere. At the end of the relevant period, companies are required to surrender or return allowances equal to their emissions, failing which severe financial penalties are imposed. The price of one EUA is therefore equivalent to the price of carbon to be paid by the eligible entity. This is currently around EUR 75 per t of CO2.⁸

The shipping industry was brought under the EU-ETS on January 1, 2024, in order to ‘incentivise energy efficiency, low-carbon solutions and reductions of the price difference between alternative fuels and traditional maritime fuels’.⁹ By imposing this carbon tax on shipping, the EU aims to incentivise both shipping companies to internalise the cost of their pollution and the industry to reduce GHG emissions in maritime transport.

The EU-ETS for shipping requires shipowners to surrender allowances for every tonne of carbon emitted above the permitted level as they sail to/from an EU port. The quantity of carbon emitted is calculated by multiplying the fuel’s carbon emission factor by the number of tonnes burned. For example, if a ship burns 5,000 t of heavy fuel oil sailing between two ports, the total CO₂ emitted will be equal to 5,000 multiplied by 3.114, which is 15,570 t of CO₂ (tCO₂). Having determined the quantity of CO₂ emitted, the shipowner then buys carbon credits at the current carbon price to offset its emissions, paying a total of the carbon price multiplied by the quantity of carbon credits required. In the earlier illustration, the total cost to be paid by the shipowner for the emissions would be 15,570 tCO2 x EUR 75 = EUR 1,167,750.00. It is important to note that the EU-ETS for shipping is being implemented in phases, with shipowners being required to surrender allowances for only 40% of the cost of emissions generated in 2024. This will increase to 70% in 2025 and 100% from 2026 onwards. In addition, for sailings between an EU port and a non-EU port, allowances are required for only 50% of the emissions. For example, if the sailing was between Rotterdam (an EU port) and Tema (a non-EU port), the carbon tax payable using a price of EUR 75 per EUA would be 0.4 x 0.5 x 15,570 tCO2 x EUR 75 = EUR 233,550.

Since 2013, the EU-ETS has raised an estimated USD 152 billion. It is expected to generate some USD 40 billion in revenue from the inclusion of the maritime sector in the ETS.¹⁰ The legislation, which provides the legal framework on the use of the resources, requires revenues raised from the maritime sector to be channelled through the EU Innovation Fund to support the acceleration of the decarbonisation of the maritime sector in the EU. According to the commission, an estimated EUR 1.6 billion (20 million EUAs at an average price of EUR 80) is expected to be used in the period up to 2030 to support the development of innovative solutions including the production and uptake of renewable and low-carbon fuels as alternative fuels for shipping.^11 12

FuelEU Maritime is a regulation adopted by the EU in July 2023. Designed to decarbonise maritime transport, its three main goals are reducing the GHG intensity of the energy used on board ships, increasing the use of onshore power supplies (OPS) in major European ports and incentivising the uptake of renewable and sustainable fuels. The regulation prescribes zero-emission requirements for ships at berth in EU ports. This means that ships in port will need to use zero-emission power alternatives such as onshore electricity.

In addition, the regulation sets maximum limits on the annual average GHG intensity of the energy used by ships above 5,000 gross tonnage and which call at European ports, irrespective of their flag. These limits will be set with a view to reducing the GHG intensity of fuels used in the sector over time, starting with a 2% decrease by 2025 and reaching up to an 80% reduction by 2050 (European Commission, 2024). In this way, the EU aims to stimulate an increase in the uptake and production of renewable and low-carbon fuels whose GHG intensity is lower. FuelEU Maritime will target CO2, methane and nitrous oxide emissions, while considering the full lifecycle of the fuels used onboard on a Well-to-Wake (WtW) basis. The regulation is set to come into effect on January 1, 2025.

The IMO has committed to cutting emissions from shipping to net zero by 2050. Along the way, the organisation aims to reduce total annual GHG emissions from international shipping by at least 20%, striving for 30%, by 2030 (compared to 2008’s emissions); and by at least 70%, striving for 80%, by 2040. The 2023 IMO GHG Strategy emphasises the complementarity and importance of a goal-based GHG fuel intensity standard and a maritime GHG emissions pricing mechanism. The Marine Environment Protection Committee (MEPC) is therefore working within this framework to select the appropriate measures to achieve net zero emissions.

Since the strategy was adopted at MEPC 80, several proposals have been tabled before the IMO to achieve the targets. As of the end of MEPC 81, the candidate measures with the most traction include:

The 6PAC+ Proposal is championed by Belize, Fiji, Kiribati, the Marshall Islands, Nauru, the Solomon Islands, Tonga, Tuvalu and Vanuatu, some of the most climate-vulnerable island states. The co-sponsors, nicknamed 6PAC+, propose a high levy on emissions in combination with a simplified fuel standard of increasing stringency. The proposed levy – the Universal Mandatory GHG Levy (GHGL) – is a flat rate that will be applied to lifecycle emissions. 6PAC+ also propose the highest carbon price of all the candidate measures, beginning at USD 150 per t of CO2 equivalent, and increasing every five years. Studies show that this could generate up to USD 3.7 trillion by 2050, which translates to USD 40-60 billion annually.¹³

This proposal has two key features. First, it excludes any flexibility mechanism.¹⁴ Second, it ensures that a significant portion of the revenues generated are distributed in line with an agreed strategy, with as much as 51% of the revenues allocated to climate resilience projects in small island developing states (SIDS), 33% to research and development for international maritime fund research projects and the remaining 16% to administrative costs.¹⁵ In line with the equitable transition goals of the co-sponsors, the proposed allocation of funds places a significant weight on out-of-sector uses.¹⁶ This also ensures that the polluters (shipowners) pay for the cost of climate mitigation of which SIDS and least developed countries (LDCs) have to bear the brunt as a result of being on the frontline of the adverse impacts of climate change.

The International Maritime Sustainability Fuels and Fund (IMSF&F) is a technical proposal sponsored by Argentina, Brazil, China, South Africa, Norway, Uruguay and the UAE. This proposal consists of an economic and a technical element. The sponsor group, which has a strong BRICS¹⁷ leaning, proposes a tank-to-wake (TtW) GHG fuel intensity (GFI) limit in combination with a flexibility mechanism that allows for revenue generation.

The technical element of this proposal works by setting a TtW limit on the GHG intensity of fuels used by ships (a required GFI), against which ships will measure their attained annual GHG fuel intensity (attained annual GFI). As with the EU’s FuelEU Maritime, if the attained annual GFI is lower than the required GFI, the ship is considered to have outperformed the target and is entitled to Surplus Units (SUs). A ship which fails to meet the target is considered under-compliant and will incur Deficit Units (DUs).

Although the measure is applied on a TtW basis, it takes into account the broader well-to-wake (WtW) GHG emissions of marine fuels by applying different categorisations on fuels, ranging from sustainable to unsustainable.¹⁸ A ship’s attained GFI will vary with the fuel it uses: Ships using unsustainable fuels cannot earn SUs. The proposal also contains the option for an exemption: Ships serving ports in certain developing countries will be allowed ‘to apply a correction factor to their GFI, making it easier to comply’.¹⁹

Ships with SUs may claim them from the Sustainable Shipping Fund while those with DUs may purchase Remedial Units (RUs) from the fund at a price determined by the committee. This would be set at a level that bridges the cost gap between compliant and non-compliant ships.²⁰ The sponsors expect that the bulk of the revenue will come from the sale of RUs but that voluntary contributions/donations will also flow into the fund. Only after the satisfaction of reward claims for SUs have been fulfilled can any remaining funds be used to tackle research and development, capacity building, etc.

This proposal does not contain a levy and therefore is predicted by developing countries to have only a limited negative impact on their economies. It also allows for grey fuels to be utilised until they are progressively phased out, such that the existing, ageing fleets of these developing countries can remain operational in the mid-term.

The GHG Fuel Standard (GFS) is another technical standard with an in-built economic element. The standard is sponsored by Austria, Belgium, Bulgaria, Croatia, Cyprus, Czechia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the European Commission.

This proposal is based on a WtW approach and aims at reducing the GHG intensity of fuels utilised by the maritime sector. It works by setting a GHG Fuel Intensity standard (required GFI) which will be progressively reduced over time in line with the IMO’s targets and checkpoints in its 2023 Strategy. Ships that sail on fossil fuels with more than the required GFI will be required to hand in Flexible Compliance Units (FCUs) or Greenhouse Gas Remedial Units (GRUs) to comply. By setting the price of FCUs as a function of the marginal abatement costs of clean green fuels, the GFS bridges the price gap between conventional fuels and fuels with the required GFI. Ships that out-perform the required GFI receive FCUs whose value they can realise, thus bridging the price gap between conventional and green fuels.

The key aspect of this proposal is that the lifecycle emissions of the fuel are considered, thus removing any risk of increasing emissions, unlike the IMSF&F which allows a spectrum of fuels including LNG.

It is clear from the design of this proposal, and from the list of sponsors behind it, that it shares many similarities with FuelEU Maritime, likewise aiming to stimulate a convergence of global standards with the EU’s legislation. The sponsors have also indicated that if the IMO adopts the FCM, thus making FuelEU Maritime redundant due to regulatory convergence with the IMO, provisions in the FuelEU Maritime regulation will need to be reviewed (and perhaps dropped).²¹

Sponsored by the World Shipping Council, the Green Balance Mechanism (GBM) seeks to achieve a reduction in GHG intensity by rewarding shipowners whose fleets perform better than a defined GHG intensity threshold. These rewards will be in the form of payments out of a Green Balance Fund, which will be funded by shipowners whose fleets perform below the same threshold. It is a feebate/reward mechanism that aims to be more targeted, graduated and financially efficient than conventional levies by distributing the additional cost of low-emission fuels and technologies used in the sector such that the effective cost to all ships is roughly equal.²²

The notable elements of this measure are the Green Balance Mechanism GHG Fuel Intensity (GBM GFI), a threshold against which a fleet’s annual and independently verified WtW GFI (attained GFI) is measured. If the attained GFI is superior, the shipowner is entitled to receive payments, called Green Balance Allocations, from the Green Balance Fund. Should the vessel or fleet be unable to achieve the GBM GFI, the shipowner will pay Green Balance Fees to the Green Balance Fund.

The GBM system of implementing fees and allocations has been designed along the lines of a Marginal Abatement Cost (MAC) policy. Due to its nature, the Green Balance Fund is not expected to build up excess funds from one year to the next as the funds collected each year in the form of Green Balance Fees will be distributed to shipowners through the payment of Green Balance Allocations. This is because the World Shipping Council, which is made up of shipping lines, is focused on closing the gap between conventional fuels and low-emission fuels for the industry. It also aspires to achieve the 2030 target of at least 5% of the energy used by international shipping to be from zero and near-zero GHG emitting technologies, fuels and/or energy sources. However, the council does propose that the GBM can be used in concert with or integrated into other measures to allow for out-of-sector disbursements towards research and development and climate mitigation.

The Fund and Reward (Feebate) mechanism is proposed by the International Chamber of Shipping (ICS), the Commonwealth of the Bahamas and the Republic of Liberia. The proposed mechanism will be used to fund a Zero Emission Shipping Fund (ZESF) to accelerate the transition to net zero by 2050 and incentivise the production and uptake of zero GHG marine fuels while providing billions of US dollars to support the transition in developing countries.

The sponsors propose that ships pay a mandatory flat rate to the ZESF for each t of CO2 they emit; ships that use clean fuels will be rewarded via a payment of the flat rate for every t of carbon emissions avoided. It is proposed that the ZESF be managed by the IMO – the regulator of the global maritime industry.

The ICS estimates it will cost USD 5-10 billion per year to reduce the cost gap between conventional fuels and alternative fuels and reach the IMO’s target of 5-10% of the energy used by shipping to come from zero/near-zero GHG sources by 2030. It also commissioned an impact assessment which shows that the mandatory contribution rate – if set at between USD 20-300 per t of fuel oil consumed – would have minimal impact on the cost of freight for shippers.²³ However, it concludes that USD 20-40 per t of fuel oil consumed should be sufficient to generate the required USD 5-10 billion per year for the ZESF.

The architecture of the ZESF allows for the IMO to raise the actual contribution, if member states agree, and the extra to be paid into what it calls an IMO GHG Maritime Sustainability Fund (IMSF) which can be used to support an equitable transition in developing countries.

Article 37 of the IMO Convention establishes the MEPC as a committee that comprises all member states (the parties) of the IMO. According to the IMO, there are currently 176 member states: 40 from the African continent, 19 from the Latin American region and 22 from Asia.²⁴

As of MEPC 81, several key issues remain under discussion, including whether to use WtW or TtW to calculate emissions; whether the ‘pricing regulation’ should be in the form of emissions trading, a carbon tax or both; and how revenues raised from the economic measures should be used. Nearly three quarters of the countries represented on the committee have agreed that the fuel standard should apply to emissions from burning fuel on ships, not to emissions from supply chains for that fuel, i.e. TtW was preferred to WtW. Furthermore, 22 out of 34 member states expressed their preference for the economic measure to take the form of a carbon tax. Most member states were opposed to a ‘pay to pollute’ option that allows ships to get out of fuel efficiency standards. Finally, 27 out of 37 member states wanted the revenues from a carbon tax to be applied in-sector only.²⁵

In order for the GHG candidate measures to be adopted by the IMO – using an amendment to MARPOL Annex VI as the preferred pathway – broad consensus amongst states is required in accordance with Article 16(2)(f)(i).²⁶ The threshold for consensus is as follows: An amendment to MARPOL Annex VI will be deemed to be accepted unless objected to in writing by not less than one third of the parties or by the parties the combined merchant fleets of which constitute not less than 50% of the gross tonnage of the world's merchant fleet. This means that the amendments to MARPOL Annex VI will be deemed accepted unless rejected. The member states’ active participation in deliberations is therefore key to ensuring that the outcome is reflective of the collective interest.

The goal of the modelling is to examine the economic and climate impacts of the IMO’s proposed shipping levy on African economies. We aim to analyse the impacts on the African economy as an aggregate and on selected individual African economies. We are particularly interested in the effects of the levy on Africa’s international trade, food security, GDP and prices. To do this, we use a Computable General Equilibrium (CGE) model – the Global Trade Analysis Project Energy-Environmental augmented version (GTAP-E) – which is commonly used for this type of analysis.

The GTAP-E model is an extension of the standard GTAP model, which provides a framework on how changes in policies (such as taxes and subsidies) affect the economic behaviour of firms and individuals in terms of the goods, services and factors of production that they demand and supply, as well as the interaction between countries, and how these reshape the global economy. GTAP does this by combining behavioural equations (which describe how firms and individuals respond to different prices in the economy) with market clearing conditions (i.e. that demand equals supply in each market of the economy – though it does allow the modeller to specify deviations from this condition). GTAP models how changes in demand and supply of goods in one market affect others by using ‘input-output accounting’, where the level of production in one industry determines the level of demand for specified inputs from others.

Other key assumptions include the following:

The GTAP-E model builds on the standard model by incorporating carbon emissions from fossil fuels and extends the production structure of the model. The production structure also includes energy in the capital bundle, assuming that energy is a critical input in the production process and is substitutable with other inputs. In other words, output is a combination of intermediate consumption of energy and value added, ‘value added’ being a combination of land, natural resources, labour and capital-energy bundle. The capital-energy bundle is disaggregated into capital and energy and, further down, to different forms of energy. Depending on the level of analysis of the study, the energy input can also be disaggregated into different forms using a constant elasticity of substitution (CES) function.

The GTAP-E model has been widely used to analyse energy and environmental policies. For further information on the model, please see McDougall and Golub (2007) and Corong et al. (2017).²⁸

The GTAP-E model is calibrated on the GTAP 11 database. The database provides an overview of the global economy in 2004, 2007, 2011, 2014 and 2017, and includes bilateral trade flows, transportation and protection linkages and flows between domestic industries. The database also includes carbon emissions (CO2) from fossil fuels linked to each sector and region. The database includes a total of 160 countries/regions (including 141 individual countries and 19 aggregated regions), 65 sectors and eight primary production factors (land, capital, natural resources and five types of labour based on skill types).

For this study, we use data relating to 2017 and aggregate the 160 countries/regions into seventeen (17) countries/regions (EU, China, India, USA, UK, Egypt, Morocco, Ghana, Nigeria, DR Congo, Equatorial Guinea, Kenya, Ethiopia, Zambia, South Africa, Rest of Africa and Rest of the World).²⁹ Similarly, the 65 sectors in the database are aggregated into 11 sectors (agriculture, processed foods, coal, crude oil, gas, oil products, electricity, water transport, energy intensive industries, other manufacturing industries and services). The inclusion of coal, oil, gas, oil products and electricity as individual disaggregated sectors is a requirement of the GTAP-E model. The water transportation sector in the GTAP database is a proxy for the shipping sector, as non-seaborne maritime activities appear to be marginal.³⁰ The water transport sector is the focus of this analysis.

The goal of the IMO is to reduce the emissions of the sector by imposing a ‘shipping levy’ akin to a carbon tax on the sector. We follow a simple approach to analyse the impact of the levy on the economy, viewing the water transport sector as any other activity in the GTAP database. The commodity of the sector is used in other sectors of the economy, such that an increase in the production cost or price of the commodity affects other sectors that use it.

To calculate the ad valorem equivalent of the shipping levy, we calculate the monetary value of the emission of the sector assuming a carbon price of USD 100 per metric tonne (t). This choice is partly informed by the IPCC’s 6^th Assessment Report, which notes that a carbon price of USD 100 per t of CO2 can reduce global GHG emissions by at least 50% by 2030 relative to 2019 levels.³¹ Also, USD 100 per t had been discussed at IMO negotiations and is one of the values for the comprehensive impact assessment commissioned by the IMO on various options for greening international shipping.³²

To calculate the monetary value of the emissions for the sector in each region, we multiply the emissions of the sector in t of CO2 equivalent in each region by USD 100. We then use the monetary value of the emissions of the water transport sector in each region as a proportion of the margin to calculate the ad valorem equivalent. This implies that the carbon tax is applied as a proportion of the monetary value of the emission on the water transport margin. We then use this ad valorem equivalent as the carbon tax shock in the model.

In our model, the tax/levy is imposed on individual countries’ shipping sectors and the revenue raised from the tax accrued to the country or region that levies it.^{33   34} We make this assumption because current discussions at the IMO do not clearly indicate where the shipping levy will be collected and how the resulting revenues will be used. The only point on revenue use of which most member states appear to be in favour is that revenues should be used within the shipping sector. It would therefore seem reasonable to assume that they will be used to help shipping fleets go green. The idea that countries will receive revenues in proportion to the amount of carbon tax that they pay would seem to be in line with this tendency.

United Nations Trade and Development (UNCTAD) and Det Norske Veritas (DNV) have also modelled various scenarios for the IMO’s approach to greening the shipping sector. UNCTAD analyses the global economic impacts, like ours, while DNV’s assessment focuses on the effects on the fleet.

DNV models the effects of regulatory measures to reduce emissions from ships, such as the fuel standard that governments are discussing, as well as feebates and/or carbon levies. They analyse how this will impact ships’ costs, as well as their ‘[e]nergy use, fuel mix [and] revenue streams and other effects’. They do not analyse the broader economic impacts beyond those on the global shipping fleet. Since Africa’s shipping fleet is relatively small, and the interest of this report is on the broader economic impacts of shipping tax measures, the above description of DNV’s work is included mainly for completeness.³⁵

There are some similarities between our and UNCTAD’s approaches. Like UNCTAD, we conduct CGE analysis based on the GTAP model (though we use the GTAP-E variation). We also both model a scenario using USD 100 per t to calculate the levy equivalent. However, there are also differences. UNCTAD’s model simplifies the effects of the potential shipping levy and fuel standard as an increase in maritime trade costs, which vary by commodity. While this has the advantage of providing a more accurate model of the increased cost to international trade, UNCTAD does not directly analyse how this will affect the shipping costs faced by different countries’ maritime transport sectors. Using slightly different assumptions, our approach achieves this. As a result, it builds on UNCTAD’s work, and will be particularly useful for understanding the effects of the levy on the shipping sectors of different countries.³⁶

In addition to modelling different options for the carbon levy, UNCTAD also models the global fuel standard that the IMO is proposing to adopt. They also model various scenarios for how the revenues from the levy would be used. Based on our reading of the discussions, it may be premature to model revenue distribution as it remains unclear what are the most likely scenarios for the model to consider.³⁷

Lastly, previous models only examine the impacts of the levy at the aggregate regional or developed level, versus the developing countries level. Our study is far more disaggregated, examining the impacts on a number of individual countries, with particular reference to Africa. In fact, our study is the first to examine how the levy might impact individual countries in Africa.

The impacts of the maritime levy on African economies are presented in this section. These results assume a maritime levy of USD 100 per t of carbon for the analysis.

The increased cost and reduction in supply of maritime shipping services resulting from the maritime levy will impact imports and exports, with varying effects on different countries and sectors. The higher shipping costs will impose additional costs on transportation of merchandise, thereby increasing the price of imports. As a result, international trade will decline on average. Based on 2017 levels, our model finds that, across sectors and the 10 African countries and the ‘Rest of Africa’ region, imports will fall by 0.04% (USD 457 million) while exports will increase by 0.21% (USD 258 million) in aggregate.³⁸ However, the effect differs by sector and by country. Tables 3 and 4 below show the impacts disaggregated by these two variables.

Food trade is of particular interest, given the link to Africans’ livelihoods. To proxy food trade, we look at agricultural commodities (which approximate unprocessed food commodities) and processed food. Our model suggests that adoption of the levy will decrease imports of agricultural commodities in Egypt (0.013% or less than USD 1 million), Morocco (0.011%, again less than USD 1 million), Ghana (0.075% or USD 1.98 million), Nigeria (0.029% or less than USD 1 million), Ethiopia (0.198% or USD 4.14 million) and Rest of Africa (0.019% or USD 4.2 million). This suggests that the levy may reduce the availability of food in these countries. However, the value of food imports increases in the DR Congo (0.016% or less than $1 million), Equatorial Guinea (0.121% or less than USD 1 million), Kenya (0.019% or less than USD 1 million), Zambia (0.009% or less than USD 1 million) and South Africa (0.027% or USD 1.8 million). The different impacts of the levy on agri-food imports in these countries vis-à-vis the other countries are dependent on the structures of the individual economies, their levels of dependence on food imports and the relative levels of domestic and import prices. Given that the model projects that the levy will increase global food and agricultural prices (see Figure 3 below), countries whose domestic prices are higher than the global price experience an increase in agri-food imports, while those with lower domestic prices compared to global prices experience a reduction in agri-food imports.