Understanding the Economic Impacts of Greenhouse Gas Mitigation Policies on Shipping What Is the State of the Art of Current Modeling Approaches? Executive Summary for Policy-Makers in International Maritime Transport CLIMATE CHANGE TRADE FLOWS GHG REDUCTION IMPACTS ON STATES SHIPPING ECONOMIES OF STATES IMPORT PRICES TRANSPORT CHOICES ECONOMIC MODELLING TRANSPORT COSTS Ronald A. Halim Tristan Smith Dominik Englert 22 May 2019, v1.1 Understanding the Economic Impacts of Greenhouse Gas Mitigation Policies on Shipping What Is the State of the Art of Current Modeling Approaches? Executive Summary for Policy-Makers in International Maritime Transport Executive Summary for Policy-Makers in International Maritime Transport 3 RELATED DOCUMENTS This is an executive summary of a research paper for policy-makers in international maritime transport. The full version of this research paper can be found online: http://documents.worldbank.org/curated/en/215561546957017567/Understanding-the-Economic-Impacts-of- Greenhouse-Gas-Mitigation-Policies-on-Shipping-What-Is-the-State-of-the-Art-of-Current-Modeling-Approaches or http://tiny.cc/econ-model-ship-paper CITATION Halim, R. et alii, 2019. Understanding the Economic Impacts of Greenhouse Gas Mitigation Policies on Shipping — What Is the State of the Art of Current Modeling Approaches? ­ — Executive Summary for Policy-Makers in International Maritime Transport. Washington, DC: World Bank. © World Bank. http://documents.worldbank.org/curated/en/718061546900387225/ License: CC BY 3.0 IGO CONTACT INFORMATION Ronald A. Halim: halim.ronald.a@gmail.com Tristan Smith: tristan.smith@ucl.ac.uk Dominik Englert: denglert@worldbank.org ACKNOWLEDGMENTS T his paper was prepared by Ronald A. Furthermore, the paper has benefitted from the Halim, with valuable contributions from expert discussions taking place at the following events: Tristan Smith (University College London, 1. OECD-ITF & CPLC Shipping Expert Workshop UCL) and Dominik Englert (World Bank on Carbon Pricing in International Maritime Group, WBG). This work was carried out on behalf Transport, 8–9 January 2018, OECD, Paris of the World Bank Group under a joint collabora- tion with the OECD International Transport Forum 1. 4th Session of the International Maritime (OECD ITF) and the University College London Organization’s (IMO) Intersessional (UCL). The paper has been initiated in the context Working Group on the Reduction of GHG of the maritime workstream of the Carbon Pricing Emission, 17–18 October 2018, IMO, London Leadership Coalition (CPLC), a voluntary initiative 2. International Transport and Energy Modelling hosted by the World Bank. It represents the output of 4 Workshop, 29–31 October 2018, International the OECD-ITF & CPLC Expert Workshop on Carbon Institute for Applied Systems Analysis, Vienna Pricing in International Maritime Transport, hosted by the OECD ITF in Paris on 8–9 January 2018. 3. UNCTAD & CPLC Shipping Expert Workshop on GHG policy induced economic impacts on States The authors wish to express their gratitude to and related mitigation options, 19–20 November Olaf Merk (OECD ITF) for his very valuable support 2018, UNCTAD, Geneva. throughout the research process, particularly in terms of expert guidance. The authors would also like to thank the following individuals for their helpful feed- back on and input to various draft versions: Heinrich Bofinger (World Bank), Jan Hoffmann (United Nations Conference on Trade and Development, UNCTAD), Yin Yin Lam (World Bank), Biju Oommen (World Bank), Ian Parry (International Monetary Fund), Isabelle Rojon (University Maritime Advisory Services), Renske Schuitmaker (International Energy Agency), Lóránt Tavasszy (Delft University of Technology), and Ian Twinn (International Finance Corporation). Executive Summary for Policy-Makers in International Maritime Transport 5 CONTEXT FINDINGS AND SPECIFIC The initial International Maritime Organization RECOMMENDATIONS (IMO) strategy on reduction of greenhouse gas (GHG) Four economic impact areas emissions from ships (“Strategy”) stipulates that any GHG reduction measure should be considered in the The paper breaks the economic impacts down light of its impacts on States. This means that these into the following areas: i) Transport costs; impacts should be assessed and taken into account ii) Transport choices; iii) Import prices of goods; and as appropriate before adoption of the measure. The iv) International trade and economies of States. Strategy further notes that the impact assessment procedure should be specified and agreed on as a The application of a GHG mitigation measure matter of urgency as part of the follow-up actions and may impact transport systems. These effects that disproportionately negative impacts should be might propagate to trade systems, which, in turn, assessed and addressed as appropriate. impact the economies of States. In this paper, the term “transport costs” has been defined from the perspective of the shipper, or the user of the APPROACH transport services. It is the price the shipper pays for the transport of the traded goods. This paper aims to contribute to this discussion by reviewing state-of-the-art research on the economic GHG mitigation measures affect State economies impacts of GHG mitigation measures on States using through a chain of causalities: model-based analysis. Specifically, this report: • First, the GHG mitigation measure increases 1. Identifies areas of economic impact from GHG costs of running a ship, be it through higher fuel mitigation measures and the mechanisms by prices (due to a levy or other market mechanism) which these impacts could propagate through or higher capital costs as carriers invest in new transport and trade systems and the economies technologies and vessels or other emissions- of States. reduction solutions. These higher costs lead to higher freight rates, or “transport costs,” for 2. Compiles the latest findings on the order of clients. These may not be incurred immediately magnitude of the economic impacts of GHG depending on market structures, trade balances, mitigation measures in the specified economic or possible cross-subsidies, but it can safely be impact areas. assumed that higher transport costs will eventually 3. Presents different modeling approaches to assess lead to higher prices. economic impacts of GHG mitigation measures, • Second, higher transport costs may cause ship- along with best practices on pers in international freight transport networks to selecting and applying these models for shift to cheaper alternative modes and routes of efficient and effective impact assessments. transport, which can impact State economies. While this study takes economic impacts as its • Third, increases in transport costs may inflate primary focus, it acknowledges that the Strategy lists import prices of goods and reduce the volume of eight types of impacts: i) Geographic remoteness of commodities traded worldwide. and connectivity to main markets; ii) Cargo type and value; iii) Transport dependency; iv) Transport cost; • Fourth, in the long term, increases in import v) Food security; vi) Disaster response; vii) Cost- prices may cause firms to relocate their manufac- effectiveness and viii) Socio-economic progress and turing facilities or consumers to substitute local development. Most of these impacts, with the excep- or cheaper products for the import. On a global tion of disaster response, can be estimated using scale, this could lead to changes in States’ export models and data similar to those discussed here. and import volumes, which eventually impact States’ gross domestic products (GDP) and other socio-economic performances. 6 UNDERSTANDING THE ECONOMIC IMPACTS OF GREENHOUSE GAS MITIGATION POLICIES ON SHIPPING GHG mitigation measures INTERNATIONAL SHIPPING Increase in ship running cost 1) Transport costs 2) Transport choices Increase in Shift to cheaper Changes in demand Changes in generalized transport modes, for maritime GHG transport costs routes and ports transport emissions INTERNATIONAL TRADE 3) Import prices 4) International trade and economies of States Increase in Reconfiguration of Changes in import Socio-economic import prices global logistics and export volumes impacts on of goods networks of countries States Specific recommendation: Impact studies may Specific recommendation: In general, GHG use this framing of four main areas of economic mitigation measures are expected to increase impact as a guiding principle for systematic analysis. maritime transport costs only by a small to moderate percentage. Moreover, transport costs usually 1) Impact on maritime transport costs represent only a small to moderate share of overall consumer prices of goods. Hence, the overall impact GHG mitigation measures, such as energy efficiency of increased transport costs on the industry is standards, carbon pricing, or a bunker levy are likely expected to be, at most, moderate. Further study on to increase the operational and/or capital costs of how the increase in transport costs will be passed on ships. Existing literature estimates that a carbon to stakeholders such as carriers and shippers price on bunker fuels — often also used as a proxy will allow better estimation of the impacts. for the impact of any GHG mitigation measure — in the range of 10–50 USD/ton CO2, would increase 2) Impact on transport choices maritime transport costs by 0.4–16%. While some commodity types such as grains might see an increase Existing studies have investigated the potential in the lower bound of the range (2.5%), the upper impact, at a global level, of GHG mitigation measures range might apply for bulk products (11%), and on transport choices among shippers. One study containerized products (16%). These differences come analyzed the impact of a 100% increase in maritime from the different shares of transport costs in the transport cost (due to a carbon tax) combined with overall costs of these respective goods: the higher a 25–65% reduction in ship speed on the modal the share, the larger the increase. This implies that choice of shippers. Results indicated that the share impact assessments should focus on flows of low- of sea transport could decrease globally very slightly, value bulky goods and containerized products. by 0.16%. This slight decrease would be equivalent to approximately 34 megatons (Mton) of freight volume, or equivalent to the total amount of crude Executive Summary for Policy-Makers in International Maritime Transport 7 oil imported by sea to Africa. Most of the modal shift 4) Impacts on international trade and is expected to happen from sea to road (13 MTon) economies of States and rail (18 MTon). Another study found that the application of a carbon price on bunker fuel reaching In terms of wider economic impacts, such as GDP, 49 USD/ton CO2 by 2040 could lead, on average, to several existing studies examined the impact of a 0.5% decrease in the annual container throughput GHG mitigation measures like carbon pricing of ports worldwide. With the potential exception of on the real GDP of States. These studies, which specific geographic locations (e.g. coastal areas) where considered carbon prices ranging from 10–90 USD/ there is strong competition from alternative modes of ton CO2, found only modest impacts: The highest transport, it is likely that impacts on transport choices losses in GDP were estimated to be within the do not need to be too diligently taken into account, at range of -0.002% (estimated for a large developing least for initial estimates of overall impacts. country at a carbon price of 90 USD/ton CO2) to -1% (estimated for a small island developing state, Specific recommendation: Studies suggest that at a carbon price of 30 USD/ton CO2), with some increases in maritime transport costs induced by GHG countries potentially even seeing a slightly positive mitigation measures will only have a limited impact change in their GDP. Even among least-developed on the modal shift from maritime transport to other and developing countries included in those studies modes globally. Consequently, this economic impact with high geographical detail, the majority of these area might not need to be the primary concern countries were estimated to lose less than 0.2% of for initial impact assessments, except for regions their real GDP. In terms of global trade flows, a study with large coastal areas or with strongly competing concluded that a carbon price of up to 49 USD/ton transport modes. CO2 could reduce the volume of global trade by -0.9% by 2040 with the agriculture sector potentially 3) Impact on import prices of goods experiencing the strongest reduction (-4.2%) In line with the finding that maritime transport costs due to consumers’ substitution of foreign with account for a limited share of overall trade costs and domestic products. of the value of many traded goods, the increase in Specific recommendation: Similar to prior find- import prices of goods is found to be marginal (<1%) ings, impacts on GDP are estimated to be very low at a carbon price ranging from 10–50 USD/ton CO2. It globally and limited to specific countries. Analogous is important, however, to understand how the increase to impacts on import prices, GDP impact assessments in import prices may pass between the relevant actors should therefore put the most focus on flows of low- (shippers, carriers, and consumers). Furthermore, it was value bulky goods and low-value consumer goods. also found that the total weight of certain commodities It is important to note that, for this type of overall on certain routes, such as electronics, metal products, economic impact, negative impacts from increases in fishing products, and manufacturing and transport prices of imported goods can be partially offset by equipment, might be negatively affected by an positive economic impacts from increased domestic increase in the import prices of goods. This means production. Thus, both need to be included when that an increase in transport costs might lead to a estimating the full range of impacts. reduced trade volume of these commodities. Specific recommendation: The overall impact on import prices of goods can be considered negligible in many cases (e.g. often <1%). Analysis should focus on the few goods where maritime transport cost might account for a significant share of the overall value of the good, e.g. industrial raw materials. 8 UNDERSTANDING THE ECONOMIC IMPACTS OF GREENHOUSE GAS MITIGATION POLICIES ON SHIPPING Three main models COMBINED TRADE-TRANSPORT MODELS can provide detailed impact assessments of the major In general, three different models can be used to indicators for both transport and economic systems. assess the effects of GHG mitigation measures on This integration means that the impacts of GHG miti- States: economic trade models, transport models, gation measures both on transport and trade systems and combined transport and trade models. can be examined comprehensively. That is, the propa- gation of effects due to changes in trade relationships ECONOMIC TRADE MODELS between States can be reflected in international ship- describe the responses of an economic system, ping; and the changes in international shipping, such which may include international trade flow values as changes in mode and route choice or development (e.g. financial flows, such as investments), wider of new infrastructure, can be taken into account in economic indicators of States (e.g. GDP), or both. estimating trade activities. While economic trade models can implicitly include features of transport systems, physical responses of Combined models are best used when the scope the transport system (e.g. value-to-weight conversion of impact assessments include detailed transport of commodities, modal or route choice) are often and economic system responses at the global level. not captured. Specifically, combined models can provide valuable insights when: i) the impact of disruptive/strong GHG Examples of economic trade models include mitigation measures may lead to significant increases regression, input/output, and computable general in transport costs; ii) redistribution of international equilibrium (CGE) models. Regression models are trade is expected and the wider economic indicators best used when data are limited, and the scope of of States, such as GDP, welfare, and the production/ analysis is focused on the short- and medium-term consumption of different sectors, are of interest; impacts on a single economic indicator or one par- and iii) changes in shippers‘ behavior (both choice ticular sector. CGE models are best suited to estimate of modes and routes) could affect the economies of the long-term redistribution of trade flows and eco- States, especially those that are driven by the port nomic indicators of States at the global level due to and shipping industry. the application of strong/disruptive GHG mitigation measures where significant economic consequences Specific recommendation: A range of modeling are foreseen. approaches with distinct strengths and limitations are available. Choosing the right model for impact assess- TRANSPORT MODELS ment should be based on an informed decision in the describe the responses of a transport system, which light of the specific modeling purpose. may include the redistribution effect of trade flows due to changes in transport costs, conversion of Data availability and needs trade values to weights, or mode and route choice of shippers. While these models can estimate the There are several data sets available that can help economic impacts on States due to changes in their modeling exercises for impact assessments. However, international (export and import) volumes, they are many of them are incomplete. These data sets need not suited to estimate impacts on wider economic to be updated with newly available or estimated data indicators, such as GDP and welfare. to allow thorough analysis, especially for countries where data are scarce. Transport models are best used when GHG mitigation measures are expected to induce changes in shippers’ transport choices, such as mode, route and port choice, next to changes in the patterns of international trade. Executive Summary for Policy-Makers in International Maritime Transport 9 OVERALL RECOMMENDATIONS 4) Do not let perfect be the enemy of the good Beyond the more specific recommendations, several general recommendations that apply to future impact While a combined transport-trade model might be assessments of GHG mitigation measures in shipping desirable to assess the comprehensive economic emerged during the development of this paper. impacts of GHG mitigation measures, the use of such models might be more valuable when detailed and 1) No need to reinvent the wheel thorough country-specific insights are needed. The studies reviewed in this paper have shown that the Much groundwork research exists that can be lever- use of simpler models with fewer data requirements aged to better understand economic impacts, both can still provide very valuable insights on specific globally and on specific States. Much existing ground- economic impact areas and can still make important work that can be leveraged to better understand eco- contributions to the time-critical policy discussion. nomic impacts, both globally and on specific States. There is no significant need for the development of 5) Seeing the forest for the trees new models or additional analytical tools. Given there are numerous GHG mitigation measures 2) “Kaizen1” — continuously improve that can be implemented, it is useful to consider cer- and innovate tain principles that can increase the efficiency of the assessment process. For instance, impact assessments As modeling expertise, computing technology, and should be proportionate to the likely impacts of a mea- data availability continue to improve, the quality sure. If initial studies in the literature suggest insignifi- of information on economic impacts will continue cant impacts (see previous section on “Four economic to improve. Policy makers are encouraged to work impact areas”), a full impact assessment for a GHG closely with academic and business experts to effec- mitigation measure might not be needed and scarce tively advance the relevant policy discussions. research resources can be allocated to more significant 3) Prioritization economic impact areas and geographic locations. This paper has reviewed different modeling approaches and shown that these can be applied in different contexts depending on the geographi- cal scope of the study and the impacts that are anticipated to be of greatest importance. In other words, there is not a single model that can solely deliver on all possible impact assessment objectives. Prioritization is key, and these priorities must be reflected in the choice of the model. 1  Kaizen is the Japanese term for continuous improvement.