EU ETS & the Maritime Shipping Industry: Barriers Compromising the Economic Efficiency and Effectiveness of the System

Abstract

The European Union has addressed the challenge of greenhouse gas emissions from the maritime shipping industry with its inclusion in the EU Emissions Trading System (EU ETS). Utilising the market-based measure of a cap-and-trade system, the EU ETS aims to promote emission reductions. The purpose of this thesis is to analyse the maritime inclusion and how identified barriers may compromise the economic efficiency of the EU ETS in achieving cost-effective greenhouse gas emission reductions in the maritime shipping sector. This thesis incorporates both legal dogmatic methodology and economic analysis of law to identify the following barriers 1) administrative burden, 2) split incentives, 3) lack of cost-competitiveness of alternative fuels and 4) evasive routes and carbon leakage. The administrative burden associated with the ETS generates added costs and complexity of participation. Furthermore, decarbonisation measures generate increased costs due to the price disparity of alternative fuels, creating a key barrier for its deployment. Subsequently, the incentive to invest in alternative fuels is limited due to the lack of benefits to the party investing in energy efficiency measures, creating a split incentive problem. The increased costs associated with the mentioned barriers of the maritime inclusion may establish an incentive for shipping companies to evade the EU ETS. Overall, these barriers compromise the ETS Directive’s subject matter due to the added costs, misaligned incentives for reducing emissions and the dependency on alternative fuels that are currently not cost-competitive in the market. Our findings show that there is a limited risk of evasive routes and short-term implications of the administrative burden. The lack of cost-competitiveness of alternative fuels and split incentives are assumed to have a greater long-term impact for efficiently reducing emission. Hence, Contract for Difference has been proposed as a solution as it incentivises private investment towards the use and production of alternative fuels for a speedier transition. This thesis distinguishes itself by employing both economic and legal perspectives and proposing Contract for Difference not solely in relation to alternative fuels, but also linking it to the issue of split incentives. A limitation of this thesis includes the lack of case law and previous research on the recent maritime amendment of the ETS Directive. Keywords: EU ETS; cap-and-trade; maritime shipping industry; emission allowances; barriers; efficiency; cost-effectiveness; incentives; pollution; Contract for Difference