March 2025

As the UN works to finalize an agreement on key climate laws for shipping, a unified, ambitious Latin American front on a key policy–pricing emissions from ships– would help ensure a better outcome for the region’s low carbon future, as well as the wellbeing and prosperity of our communities.

Shipping, though the most energy-efficient transportation mode, still accounts for nearly 3% of global greenhouse gas (GHG) emissions and represents 5% of global oil demand, as almost all vessels use fossil fuels, particularly a highly polluting heavy fuel oil (HFO). If shipping were a country, it would rank among the top 10 carbon polluters globally.

To address this, in July 2023, the UN’s International Maritime Organization (IMO) agreed to cut emissions by 20% by 2030 and achieve net-zero emissions by 2050. Now, the IMO’s 175 member states need to decide on policies that will help meet these targets. 

The IMO has already agreed that both a global fuel standard (the “technical” measure) and a pricing mechanism for GHG emissions (the “economic” measure) are necessary, and are set to be adopted in 2025 and implemented in 2027.

The key question that remains is how these crucial policies will be designed, and whether they will be ambitious enough to deliver shipping’s climate commitments. This was and will be addressed at the upcoming round of IMO negotiations, starting on February 17-21 during the Intersessional Working Group on Reduction of GHG Emissions. This, after parties were unable to reach consensus during the tense negotiations from October of last year. 

The Economic Measure: Levy or Fee?

Various national and regional measures, such as the EU’s carbon trading system and California’s HFO ban, have created a regulatory patchwork that increases compliance costs and risks carbon leakage. A unified, global pricing mechanism would be more effective, marking the first-ever industry-wide price on carbon emissions internationally.

Economically, a carbon levy or tax is the most cost-effective way to achieve the IMO’s 2023 emissions targets, as shown by the latest research from leading economists at the UN’s Trade and Development agency (UNCTAD). 

A majority of countries in the IMO—including nations in Africa, the Caribbean, the Pacific and Asia, as well as the European Union—are in favor of a levy. This includes several maritime powers and key players such as Panama, the Marshall Islands, Liberia, Greece, Malta, Japan and the Republic of Korea, as well as the International Chamber of Shipping. With the recent support of Panama, in fact, the proposal to establish a universal tax has garnered the support of 66% of the world’s fleet by volume.

This mechanism signals to investors, shipping companies, and cargo owners to transition to zero-emission fuels and solutions. Green fuels are projected to cost nearly double per ton by 2030 compared to current bunker fuels, making them less competitive. A carbon price would help close this gap by directing resources toward low- or zero-emission alternatives.

Some shipping and energy giants, like Maersk and Ørsted, have committed to investing in green fuels but have made clear that realizing these plans requires global policies to spur demand. A carbon tax would advance these initiatives by making green fuels more competitive.

While there are other alternative economic measures being discussed, they carry serious risks of prolonging the use of climate-damaging fuels in shipping. 

Here, a few countries such as China and Brazil, are proposing a flexible market measure, that implies charging a fee per ton of carbon based on fuel carbon intensity. This would likely exempt lower-carbon fuel options, such as biofuels and fossil fuel-derived hydrogen, from the fee. In fact, a new study from the UCL Energy Institute concludes that policies based on fuel standards and a flexible financial mechanism would fail to drive the adoption of non-fossil fuels before 2040 and as a result, these options—such as green ammonia and methanol—would not be available in significant volumes for its use in shipping.

Another Key Debate: Where Does the Revenue Go?

If the IMO agrees on a carbon levy, the next step is to decide on the price and revenue distribution. The price needs to be high enough to incentivize investments in greener fuel alternatives and close the gap between those and traditional shipping fuels. On the other hand, the higher the tax means the higher the impact on economic activity. 

However, recent research finds that these impacts can be mitigated with strategic revenue use (e.g. investments in addressing disproportionate negative impacts and supporting broader maritime decarbonization and resilience).

This will be another focal issue in the upcoming IMO meetings.

A carbon levy could channel critical finance from private polluters to support the shipping industry’s transition to zero emissions and enhance climate resilience in trade. Additionally, part of the revenue could assist climate-vulnerable nations in the Global South, including Latin America and the Caribbean, helping them offset higher transportation costs, adapt to climate change, and develop renewable energy industries.

UNCTAD indicates that global GDP impact by mid-century is lower in scenarios with a carbon tax, especially with a higher levy price, which also achieves greater emission reductions. 

In addition to helping the industry align with a net-zero world by 2050, this policy measure would also incentivize energy efficiency through speed reductions and other efficiency measures, and the development of green hydrogen supply chains creating high-quality jobs in many Latin American nations that have this potential. 

In the February negotiations, Mexico, Latin America’s second-largest economy, supported the tax, suggesting a change in tide of the status quo, and somewhat countering Brazil. It remains to be seen if Mexico will be able to bring other countries in the region on board with this more ambitious position, which has the potential to transform the industry and bring great benefits to our communities

By Tania Miranda, EC2 Director

Contact: tmiranda@iamericas.org

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