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Distributing Carbon Revenues from Shipping 1

Distributin Crbon

Rvnus from Shippin

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Please cite the work as follows: Dominioni, Goran; Rojon, Isabelle; Salgmann, Rico; Englert,

Dominik; Gleeson, Cáit; and Lagouvardou, Sotiria. 2023. “Distributing Carbon Revenues from Shipping.”

World Bank. Washington, DC. License: Creative Commons Attribution CC BY 3.0 IGO.

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Cover and design: RRD GO Creative

This document is version 1.0 from 15 June 2023.

Tbl of contnts

Acknowldmnts .......................................................................................................................................... 05

Abbrvitions ................................................................................................................................................... 06

Excutiv Summr ....................................................................................................................................... 07

1 Introduction ...................................................................................................................................................10

2 Hihlihtin k options to spnd crbon rvnus ............................................................................ 15

3 Spndin crbon rvnus on mritim trnsport nd bond ........................................................ 21

3.1 Mximiin climt outcoms ...........................................................................................................23

3.2 Supportin n quitbl trnsition ................................................................................................... 25

3.2.1 Flt uprds nd rnwl .....................................................................................................25

3.2.2 Zro-crbon bunkr fuls nd infrstructur support .......................................................28

3.2.3 Mritim trnsport infrstructur nd srvics nhncmnt .......................................29

3.2.4 Cpcit nd skills dvlopmnt ........................................................................................... 30

3.2.5 Brodr climt ims: mitition nd dpttion.............................................................. 31

3.3 Conclusion ...............................................................................................................................................32

4 Prioritiin crbon rvnu rcipints.....................................................................................................33

4.1 Dvlopin countris s primr rcipints ....................................................................................35

4.2 Additionl support for slctd dvlopin countris lik SIDS nd LDCs ............................. 36

4.3 Dvlopd countris s complmntr rcipints ......................................................................37

4.4 Conclusion .............................................................................................................................................. 38

5 Dvlopin  distribution frmwork ..................................................................................................... 39

5.1 Thr lvrs to oprtionli th distribution frmwork ......................................................... 41

5.1.1 Rcipint lvr ............................................................................................................................. 41

5.1.2 Us lvr ........................................................................................................................................ 42

5.1.3 Finncin trms lvr .................................................................................................................43

5.2 Thr fundin windows to ccss crbon rvnus ......................................................................45

5.2.1 Window A: Exclusiv ccss, brod us .................................................................................45

5.2.2 Window B: Brodr ccss, nrrowr us .............................................................................46

5.2.3 Window C: Opn ccss, nrrow us ......................................................................................47

5.3 Prcticl w forwrd ..........................................................................................................................48

5.4 Conclusion ...............................................................................................................................................49

6 Conclusions .................................................................................................................................................. 50

7 Bibliorph ..................................................................................................................................................53

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DistributingCarbonRevenuesfromShipping1DistributingCarbonRevenuesfromShipping©2023InternationalBankforReconstructionandDevelopment/TheWorldBank1818HStreetNWWashingtonDC20433Telephone:202-473-1000;internet:www.worldbank.orgThisworkisaproductofthestaffofTheWorldBankwithexternalcontributions.Thefindings,interpretations,andconclusionsexpressedinthisworkdonotnecessarilyreflecttheviewsofTheWorldBank,itsBoardofExecutiveDirectors,orthegovernmentstheyrepresent.TheWorldBankdoesnotguaranteetheaccuracy,completeness,orcurrencyofthedataincludedinthisworkanddoesnotassumeresponsibilityforanyerrors,omissions,ordiscrepanciesintheinformation,orliabilitywithrespecttotheuseoforfailuretousetheinformation,methods,processes,orconclusionssetforth.Theboundaries,colors,denominations,andotherinformationshownonanymapinthisworkdonotimplyanyjudgmentonthepartofTheWorldBankconcerningthelegalstatusofanyterritoryortheendorsementoracceptanceofsuchboundaries.NothinghereinshallconstituteorbeconstruedorconsideredtobealimitationuponorwaiveroftheprivilegesandimmunitiesofTheWorldBank,allofwhicharespecificallyreserved.RightsandPermissionsThisworkisavailableundertheCreativeCommonsAttribution3.0IGOlicense(CCBY3.0IGO)http://creativecommons.org/licenses/by/3.0/igo.UndertheCreativeCommonsAttributionlicense,youarefreetocopy,distribute,transmit,andadaptthiswork,includingforcommercialpurposes,underthefollowingconditions:Attribution—Pleasecitetheworkasfollows:Dominioni,Goran;Rojon,Isabelle;Salgmann,Rico;Englert,Dominik;Gleeson,Cáit;andLagouvardou,Sotiria.2023.“DistributingCarbonRevenuesfromShipping.”WorldBank.Washington,DC.License:CreativeCommonsAttributionCCBY3.0IGO.Translations—Ifyoucreateatranslationofthiswork,pleaseaddthefollowingdisclaimeralongwiththeattribution:ThistranslationwasnotcreatedbyTheWorldBankandshouldnotbeconsideredanofficialWorldBanktranslation.TheWorldBankshallnotbeliableforanycontentorerrorinthistranslation.Third-partycontent—TheWorldBankdoesnotnecessarilyowneachcomponentofthecontentcontainedwithinthework.TheWorldBank,therefore,doesnotwarrantthattheuseofanythird-party-ownedindividualcomponentorpartcontainedintheworkwillnotinfringeontherightsofthosethirdparties.Theriskofclaimsresultingfromsuchinfringementrestssolelywithyou.Ifyouwishtoreuseacomponentofthework,itisyourresponsibilitytodeterminewhetherpermissionisneededforthatreuseandtoobtainpermissionfromthecopyrightowner.Examplesofcomponentscaninclude,butarenotlimitedto,tables,figures,orimages.AllqueriesonrightsandlicensesshouldbeaddressedtoWorldBankPublications,TheWorldBankGroup,1818HStreetNW,Washington,DC20433,USA;e-mail:pubrights@worldbank.org.Coveranddesign:RRDGOCreativeThisdocumentisversion1.0from15June2023.TableofcontentsAcknowledgments...........................................................................................................................................05Abbreviations....................................................................................................................................................06ExecutiveSummary........................................................................................................................................071Introduction��102Highlightingkeyoptionstospendcarbonrevenues��153Spendingcarbonrevenuesonmaritimetransportandbeyond��213.1Maximizingclimateoutcomes��233.2Supportinganequitabletransition��253.2.1Fleetupgradesandrenewal��253.2.2Zero-carbonbunkerfuelsandinfrastructuresupport��283.2.3Maritimetransportinfrastructureandservicesenhancement��293.2.4Capacityandskillsdevelopment��303.2.5Broaderclimateaims:mitigationandadaptation��313.3Conclusion��324Prioritizingcarbonrevenuerecipients��334.1Developingcountriesasprimaryrecipients��354.2AdditionalsupportforselecteddevelopingcountrieslikeSIDSandLDCs��364.3Developedcountriesascomplementaryrecipients��374.4Conclusion��385Developingadistributionframework��395.1Threeleverstooperationalizethedistributionframework��415.1.1Recipientlever��415.1.2Uselever��425.1.3Financingtermslever��435.2Threefundingwindowstoaccesscarbonrevenues��455.2.1WindowA:Exclusiveaccess,broaduse��455.2.2WindowB:Broaderaccess,narroweruse��465.2.3WindowC:Openaccess,narrowuse��475.3Practicalwayforward��485.4Conclusion��496Conclusions��507Bibliography��53BoxesBox1.1:Potentiallevelofacarbonpriceandtheamountofrevenuesgenerated��13Box2.1:AddressingdisproportionatelynegativeimpactsonStates��20FiguresFigureE.1:Possibledistributionframeworkforcarbonrevenuesfrominternationalshipping��9Figure2.1:Carbonrevenueuseoptions��17Figure2.2:Keycarbonrevenueuseoptionsandexamples��18Figure3.1:Globalshareofflagregistration,vesselownershipandshipbuildingvolumebycountrygroup��26Figure3.2:Landlockeddevelopingcountriesandtheirdevelopmentstatus��29Figure5.1:Possibledistributionframeworkforcarbonrevenuesfrominternationalshipping��40Figure5.2:Economiesbydevelopmentstatusandincomegroups��43TablesTable2.1:Keycarbonrevenueuseoptionsandspecificexamples��19DistributingCarbonRevenuesfromShipping5AcknowledgmentsThepreparationofthisreportwasledbytheWorldBank,basedonexpertinputfromDublinCityUniversity,SchoolofLawandGovernment.TheWorldBankteamresponsibleforthisreportwasledbyDominikEnglert,andcomprisedSotiriaLagouvardou,IsabelleRojonandRicoSalgmann.TheDublinCityUniversityteamwasledbyGoranDominioniandcomprisedCáitGleeson.ThepeerreviewerswereJosephPryorandChristophedeGouvellofromtheWorldBankaswellasJanHoffmannoftheUnitedNationsConferenceonTradeandDevelopment(UNCTAD).AdditionalvaluablefeedbackandperspectiveswereprovidedbyAlyShawandTristanSmith(bothUniversityCollegeLondon)aswellasSaraÅhlénBjörk,DanielBarcarolo,JanOttodeKat,ChristofferLythcke-Elberling,Jan-ChristophNapierskiandAixaPérez(allMærskMc-KinneyMøllerCenterforZeroCarbonShipping).TheWorldBankteamwouldliketoexpressitsappreciationtoNicolasPeltier,BinyamRejaandRichardMartinHumphreysattheWorldBankfortheirexpertguidanceandconstructivesuggestionsduringthedevelopmentofthisreport.TheteamisparticularlygratefultoSmritiAnundofRRDGOCreativeandJonathanDavidaroftheWorldBankfortheirdedicationtothevisualcommunicationdesignofthiswork.SpecialthankstoSimonaSulikovaoftheWorldBankforherinstantfeedbackduringthedevelopmentofthisreport.FundingforthisreportwasprovidedbytheWorldBank’sTransportGlobalPracticeandPROBLUE,anumbrellamulti-donortrustfund,administeredbytheWorldBankthatsupportsthesustainableandintegrateddevelopmentofmarineandcoastalresourcesinhealthyoceans.DistributingCarbonRevenuesfromShipping6AbbreviationsCBDR-RC.......................................CommonbutDifferentiatedResponsibilitiesandRespectiveCapabilitiesCO2................................................CarbonDioxideDNI.................................................DisproportionatelyNegativeImpactsGCF................................................GreenClimateFundGDP................................................GrossDomesticProductGHG...............................................GreenhouseGasGT..................................................GrossTonnageIMO................................................InternationalMaritimeOrganizationIPCC..............................................IntergovernmentalPanelonClimateChangeISWG-GHG....................................IntersessionalWorkingGrouponReductionofGHGEmissionsfromShipsLDCs...............................................LeastDevelopedCountriesLLDCs.............................................LandlockedDevelopingCountriesMEPC............................................MarineEnvironmentProtectionCommitteeSIDS..............................................SmallIslandDevelopingStatesUNCTAD.......................................UnitedNationsConferenceonTradeandDevelopmentUNFCCC.......................................UnitedNationsFrameworkConventiononClimateChangeDistributingCarbonRevenuesfromShipping7ExecutivesummaryCarbonpricingininternationalshippingcanhelpreduceGHGemissionsandgeneratesignificantcarbonrevenues.Manyshippingstakeholdersareadvocatingfortheadoptionofarevenue-raisingmarket-basedmeasureaspartofabasketofmeasurestoreduceGHGemissionsfromships.Suchmeasurescouldtaketheformofacarbonlevy,includingdifferentlevydesignssuchasfeebates,oranemissionstradingscheme.Modelingestimatesindicatethatamarket-basedmeasureininternationalshippingcouldraisebetween$1trillionand$3.7trillionby2050.Thiswouldcorrespondtoanannualaverageof$40billionto$60billionbetween2025and2050.AsIMOstakeholdersaredeliberatinghowcarbonrevenuescouldbeused,threenotableuseoptionsappearmostalignedwithkeyconsiderations.SubmissionstotheIMOMarineEnvironmentProtectionCommittee(MEPC)andtheIntersessionalWorkingGrouponReductionofGHGEmissionsfromShips(ISWG-GHG)discusshowcarbonrevenuescouldbeused,managed,andgoverned.PreviousWorldBankanalysisdistinguishedsevenpotentialcarbonrevenueuseoptionsandassessedtheiralignmentwiththeInitialIMOGHGStrategy,selectedprinciples,anddesirablefeatures.Usingcarbonrevenuestodecarbonizeshipping,enhancemaritimetransportinfrastructureandcapacity,andsupportbroaderclimateaimsappearedmostalignedcomparedtoalternativespendingoptions.Whilethefirsttwooptionsdirectlyrelatetomaritimetransport,financingbroaderclimateaims,bycontrast,wouldimplyspendingfundsbeyondmaritimetransport.Thisreportdiscusseshowthesethreekeyuseoptionsforcarbonrevenuescanbeconsideredwithinadistributionframeworkthataimstomaximizeclimateoutcomesandsupportanequitabletransition.Whilearevenue-raisingmarket-basedmeasurecanyieldsignificantGHGemissionsreductions,itcanalsohelpaddresstheequityconcernsofmanyIMOMemberStates.Inthatlight,andbuildingonpreviousanalysis,thisreportunpacksthefollowingquestions:i)Shouldspendingrevenuesbeyondmaritimetransportbefurtherconsidered?ii)Whichcountrygroupsshouldbeabletoaccesscarbonrevenues?Thereportalsodevelopsadistributionframeworkthatcandeliverbothonmaximumclimateambitionandtheneedforanequitabletransition.BackgroundTheInternationalMaritimeOrganization(IMO),thespecializedUnitedNationsagencyresponsibleforinternationalshipping,aimstoreducegreenhousegas(GHG)emissionsfromtheshippingsector.InternationalshippingaccountsforapproximatelythreepercentofglobalGHGemissions.TheInitialIMOGHGStrategy,adoptedin2018,aimstopeakGHGemissionsfrominternationalshippingassoonaspossible,reducethembyatleast50percentby2050overthe2008levels,whilepursuingeffortstophasethemoutonapathwayconsistentwiththeParisAgreementtemperaturegoals.MoreambitiousGHGreductiontargetsarebeingdiscussedforinclusionintherevisedstrategy,whichisexpectedtobefinalizedinJuly2023.TheIMOiscurrentlynegotiatingthepolicymeasuresthatmustbeadoptedtomeetGHGemissionsreductiontargets.Achievingthesector’sclimatetargetsrequiresapolicyenvironmentthatmaximizesenergyefficiency,supportstheuptakeofzero-carbonbunkerfuelsandtechnologies,andmakesthemcost-competitivewithfossil-basedfuels.InlinewiththeInitialIMOGHGStrategy,climatenegotiationsattheIMOarefocusedonidentifyingadditionalmeasures(“mid-termmeasures”)toreduceGHGemissionsfromships.Suchmeasurescouldmaterializeastechnicalstandardsormarket-basedmeasureslikecarbonpricinginstruments.DistributingCarbonRevenuesfromShipping8KeyfindingsofthereportAsignificantshareofcarbonrevenuesneedstobechanneledtosupportshipping’sdecarbonization.Decarbonizinginternationalshippingwillrequiretrillionsofdollarsininvestments.Tocoverthesecoststoacertainextent,mobilizeadditionalprivateandpublicfinance,andachievetippingpointsasquicklyaspossible,carbonrevenuesshouldbeusedtofinance,scaleup,andacceleratethedecarbonizationofinternationalshipping.Maximizingclimateoutcomescallsforfinancingclimateactionbeyondmaritimetransport.Usingashareofcarbonrevenuestosupportclimateactionmorebroadlycandeliverevengreaterclimateoutcomesoverallasitisunlikelythatthemostcost-effectiveopportunitiestomitigateoradapttoclimatechangewillallrelatetomaritimetransportalone.Thereis,therefore,aclimate-relatedcasetouseashareofcarbonrevenuesbeyondmaritimetransport.3412Anequitabletransitioncanbefacilitatedbyspendingcarbonrevenuesbeyondmaritimetransport.Spendingcarbonrevenuesexclusivelyonmaritimetransportislikelytolimitsomedevelopingcountries’accesstocarbonrevenues.Somedevelopingcountries,includingmanysmallislanddevelopingstates(SIDS)andleastdevelopedcountries(LDCs),aswellaslandlockeddevelopingcountries(LLDCs)havelimitedopportunitiestospendcarbonrevenuesonmaritimetransport.Therefore,usingcarbonrevenuesexclusivelyformaritimetransport-relatedspendingappearstobeatoddswithsupportinganequitabletransition.Prioritizingdevelopingcountriesasprimaryrecipientsofcarbonrevenuespromotesamoreequitableoutcome.Developingcountriestendtobemorevulnerabletoclimaterisks,havelesscapacitytoaddressthem,andhavehistoricallycontributedlesstoclimatechangethanmanydevelopedcountries.Makingdevelopingcountriestheprimaryrecipientsofcarbonrevenuescanhelpclosethefinancinggapbetweencurrentclimatefinanceflowsandtheirclimatefinancingneeds.Inaddition,carbonrevenuescanhelpaddresspotentialdisproportionatelynegativeimpactsonStatescausedbyimplementingaclimatepolicymeasureininternationalshipping.Therefore,prioritizingdevelopingcountriesasprimaryrecipientsofcarbonrevenuescouldpromoteamoreequitableoutcome.Besides,consideringdevelopedcountriesascomplementaryrecipientsofcarbonrevenuescanfurtheraccelerateinternationalshipping’sdecarbonization.DistributingCarbonRevenuesfromShipping956ReservingashareofcarbonrevenuesforSIDSandLDCsstrengthenstheirabilitytoaccessandusetheserevenues.GiventhefrequentlyreportedcapacityconstraintsofmanySIDSandLDCstopreparecompetitivefundingproposalsandtheirvulnerabilitytoclimatechange,areservedshareofcarbonrevenueswouldbeanadvantage.Thiswillshieldthemfromcompetitionwithcountriesthatfacelowerbarrierstoaccessingclimatefinanceorarelessvulnerabletoclimatechange.Arevenuedistributionframeworkbuiltaroundthreeleversandthreefundingwindowscaneffectivelydeliverclimateandequitybenefitsforcountries.Thisreportdiscussesapossibledistributionframeworkforactivelymanagedcarbonrevenuesfrominternationalshippingthataimstomaximizeclimateoutcomesandtosupportanequitabletransition.DrawinglessonsfromclimatefinanceandaccountingforkeyconsiderationsoftheIMOdebate,suchaframeworkcanbebuiltaroundthreeleversandthreefundingwindows.Recipients,useoptionsandfinancingtermsareleverswhichcanbeadjustedtoaddressclimateandequityconsiderations.Thethreefundingwindowsdifferintheiraccessandusemodalitiestoaccountforvaryingdevelopmentandclimatecircumstancesacrossgroupsofcountries.FigureE.1:PossibledistributionframeworkforcarbonrevenuesfrominternationalshippingWhichcountriescanaccesscarbonrevenues,forwhatpurposes,onwhatterms?StringentRelaxedFundingwindowsCarbonrevenuestoDecarbonizeshippingEnhancemaritimetransportinfrastructureandcapacitySupportbroaderclimateaimsFinancingtermsWindowAWindowBWindowCRecipientsDevelopedcountriesDevelopingcountriesSIDSandLDCsSource:WorldBankDistributingCarbonRevenuesfromShipping10Introduction1Thisreportdiscusseshowadistributionframeworkforcarbonrevenuesfrominternationalshippingcanintegrateequityconsiderationsandmaximizeclimateoutcomes.DistributingCarbonRevenuesfromShipping11IntroductionInternationalshippingaccountsforasignificantandgrowingshareofglobalgreenhousegas(GHG)emissions.Internationalmaritimetransportisthebackboneofinternationaltrade,asmorethan80percentofglobaltradebyvolumeistransportedbysea(UNCTAD2022a).Assuch,internationalshippingcanplayasignificantroleingreeningtheenergysupplychainbycarryingzero-carbonfuels,greentechnologies,andrelatedcomponentsfromproducerstoendconsumers.Atthesametime,shippingaccountsforasignificantandgrowingshareofglobalanthropogenicGHGemissions(Faberetal.2020).WhileinternationalshippingcontributedaroundthreepercentofthetotalGHGemissionsin2018,thelatestscenarioanalysessuggestthatcarbonemissionsalonewillgrowby90percent-130percentby2050overthe2008levels(Faberetal.2020).In2018,theInternationalMaritimeOrganization(IMO)adoptedtargetstoreduceGHGemissionsfrominternationalshipping.ThesetargetsareembeddedintheInitialIMOStrategyonReductionofGHGEmissionsfromShips(InitialIMOGHGStrategy)(IMO2018).Amongotherthings,theInitialIMOGHGStrategyaimstopeakGHGemissionsfrominternationalshippingassoonaspossible,reducethembyatleast50percentby2050overthe2008levels,whilepursuingeffortstophasethemoutonapathwayconsistentwiththeParisAgreementtemperaturegoals.Since2018,anincreasingnumberofstakeholdersattheIMO1havecalledformoreambitiousGHGreductiontargets.IMOMemberStateshaverecognizedtheneedtostrengthenthelevelofambitionintherevisedstrategy(IMO2021),whichisscheduledforadoptionatthe80thsessionoftheIMO’sMarineEnvironmentProtectionCommittee(MEPC)inJuly2023.IMOstakeholdersarediscussingthepolicymeasuresthatneedtobeadoptedtomeettheGHGmitigationtargets.AchievingthesectoralGHGmitigationtargetsrequirescreatingapolicyenvironmentthatcanhelpmakezero-carbonbunkerfuelsandtechnologiesavailableandcost-competitivewithfossil-basedfuelsandtechnologies.BasedonthetimelineforeseenbytheInitialIMOGHGStrategy,IMOnegotiationsarecurrentlyfocusingonidentifyingadditionalmeasurestobefinalizedandagreedbetween2023and2030.Thesearecommonlyreferredtoas“mid-termmeasures”.Amongothers,mid-termmeasurescouldincludearevenue-raisingmarket-basedmeasure.Manyshippingstakeholders(forexample,IMOMemberStates,theClimateVulnerableForum,industryandcivilsocietyrepresentatives)supporttheadoptionofarevenue-raisingmarket-basedmeasure2aspartofthebasketofmid-termmeasurestoreduceGHGemissionsfromships(IMO2023;CVF2021).Arevenue-raisingmarket-basedmeasurecouldtaketheformofacarbonlevy,includingdifferentlevydesignssuchasfeebates,ortheformofanemissionstradingschemewhereemissionsallowancesaresold(insteadofallocatedforfree).31By“IMOstakeholders,”thereportreferstothemembershipoftheIMO,whichcurrentlyhas175MemberStates,threeAssociateMembers,66intergovernmentalorganizationswithobserverstatus,and88internationalnon-governmentalorganizationswithconsultativestatus.2Market-basedmeasuresarealsooftenreferredtoaseconomicmeasuresorinstruments.3Thisreportfocusesonmarket-basedmeasuresthatputanexplicitpriceonGHGemissions.Leviesortaxesonfossilfuelsthatdonottargettheemissions,orthecarboncontentoffuelsdirectlyarenotdiscussedhere.OnthedifferencebetweenexplicitandimplicitcarbonpricesseeDominioni(2022).01ShippingaccountsforapproximatelythreepercentofglobalanthropogenicGHGemissions.DistributingCarbonRevenuesfromShipping12Arevenue-raisingmarket-basedmeasurewouldincentivizereductionsinGHGemissionsininternationalshipping,whileraisingcarbonrevenues.Thekeyroleofamarket-basedmeasureforinternationalshippingistoincentivizereductionsinGHGemissionsinshipping.InstrumentsthatputanexplicitpriceonGHGemissionscanbeakeycomponentofthepolicymixthatdrivesthedecarbonizationofinternationalshippingcost-effectively.Accordingtoseveralstudies,theyhavethepotentialtostimulatetheproductionanduptakeofalternativefuelsandpromoteimprovementsintechnicalandoperationalmeasuresonvessels(ITF2022;Parryetal.2018).InadditiontoyieldingGHGemissionsabatements,carbon-pricinginstrumentscanraiseconsiderablerevenues.Estimatesindicatethatamarket-basedmeasureininternationalshippingcouldraiseupto$3.7trillionby2050,dependingonassumptionsrelatedtothecarbonpriceandtheemissionsreductiontrajectory,amongothers(Baresicetal.2022;MærskMc-KinneyMøllerCenterforZeroCarbonShipping2021a).Thiscorrespondstoanannualaverageof$40billionto$60billionbetween2025and2050incollectedcarbonrevenues(Dominionietal.2022).Box1.1providesmoreinformationonthepossiblelevelofacarbonpriceandthepotentialamountofrevenuesgenerated.Acarbonpriceininternationalshippingcangenerate$40-60billionannually.DistributingCarbonRevenuesfromShipping13Box1.1:PotentiallevelofacarbonpriceandtheamountofrevenuesgeneratedSeveralstudieshaveprovidedestimatesofthecarbonpricelevelneededforinternationalshippingtodeliveraspecificmitigationtargetandquantifythetotal,annual,oraveragecarbonrevenuesraised.•Buildingondifferentscenariosandtechno-economicmodelingconductedbySmithetal.(2019),Baresicetal.(2022)findthatmeetingtheminimummitigationtargetoftheInitialIMOGHGStrategyrequiresimplementinganaveragecarbonpriceof$173pertonofcarbon.Tofullydecarbonizeshippingby2050,theaveragecarbonpricewouldneedtobeapproximately$191pertonofcarbon.However,Baresicetal.(2022)proposethatthesecarbonpricescouldbelowerifrevenuesgeneratedbyacarbonpricingmeasureare‘recycled’tofurthersupportthedecarbonizationofshipping,forexample,bysubsidizingthedeploymentofzero-carbonfuelsandtechnologies.Dependingonthescenarioandthelevelofrevenuerecycling,theaverageamountofrevenuecollectedwouldrangebetween$41billionand$105billionperannum,totalingbetween$1trillionand$2.6trillionby2050(Baresicetal.2022).•TheMærskMc-KinneyMøllerCenterforZeroCarbonShipping(2021b)illustratesanearmarkandreturncarbonlevysystem,coupledwithaglobalbanonfossil-fueledvesselsoncemostofthefleethastransitionedtoalternativebunkerfuels.Here,thecarbonlevywouldonlyneedtobelargeenoughtocoverthedifferenceinfuelcostsincurredbythesectoroveritsfossilalternativetotransitiontozeroemissionsby2050.Tocompensatethefirstmoverswhentheybegintotransition,alevycanbesequentiallyphasedin,startingatlowlevelsthatwillgraduallyriseasmoreshipsstartusingalternative,moreexpensive,lower-carbonfuels.Acarbonpricerangeof$50-$150permetrictonofcarbondioxide(CO2)equivalentwouldbeneededundersuchascheme.Further,theauthorssuggestimplementingalevyhigherthanthecumulativeadditionalcostofthesectortodecarbonize,whichwouldresultinabufferoffundstosupportdevelopingcountriesandfinancethenecessaryinfrastructure,vesselretrofits,andresearchanddevelopment•ResearchconductedbyTrafiguraandTexasA&MUniversitysuggeststhatacarbonlevyof$250to$300permetrictonofCO2equivalentonmarinebunkerfuelsisneededtomakezero-andlow-carbonfuelseconomicallyviable.Thecalculationofthelevelofthecarbonlevyisbasedonalifecycleassessmentofvariousfuels,whichincludesbothwell-to-tankandtank-to-propelleremissions(Trafigura2020).OtherstudieshavetestedaselectedcarbonpricelevelagainstitsGHGmitigationpotential.•Parryetal.(2018)modelthatacarbontaxrisingfrom$75pertonofCO2in2030to$150pertonin2040wouldreduceCO2emissionsbelowbusiness-as-usuallevelsbynearly15percentin2030andby25percentin2040.Estimatesforthecorrespondingrevenuesraisedaregivenfortwoyears:$76billionin2030and$155billionin2040.•Lagouvardou,Psaraftis,andZis(2022)investigatethepotentialofacarbonlevyinachievingshort-termCO2emissionsreductionsthroughslowsteaminginthetankermarket.Theanalysisfindsthat,dependingonthescenario,acarbonlevyrangingfrom$150to$400permetrictonofCO2canleadtospeedreductionsand,thus,resultinCO2emissioncutsofupto43percentintheshortterm.Itisnotedthatinthelongterm,alevycanimprovethecost-competitivenessofenergy-savingtechnologiesandalternativefuelsandgatherrevenues,whichwillfurtherenhancetheviabilityandscalabilityofsuchtechnologiesandfuels.DistributingCarbonRevenuesfromShipping14ManyIMOstakeholdersarealreadyconsideringhowsuchcarbonrevenuescouldbeused,managed,andgoverned.SeveralsubmissionstoMEPCandISWG-GHGproposeinitialideasoutlininghowthesecarbonrevenuescouldbeusedandwhattheirmanagementandgovernancecouldlooklike.Ideally,theseconsiderationswouldhappeninparalleltothegeneraldeliberationsaboutwhatformorformsofmid-termmeasuresarebesttodecarbonizethesector.Thisisforatleasttworeasons:1.Thestrategicuseofcarbonrevenuescanaccelerateandreducethecostofshipping’sdecarbonization(seesection3.1)2.Carbonrevenues—andtheirmanagementandgovernance—arerelevantforaddressingequity-relatedconcernsintheenergytransitionofthesector(Dominionietal.2022).Forthesereasons,theselectionanddesignofmid-termmeasurestodecarbonizeshippingshouldconsidertherevenuesthatcouldberaisedthroughamarket-basedmeasure.Theanalysispresentedinthisreportfocusesontheuseofcarbonrevenuesthatwouldbeactivelymanagedbyafund.Apassivecarbonrevenueusedoesnotrequireactivemanagementofcarbonrevenuesbecauserevenuesaredisbursedfollowingpredeterminedrulesthatleavenodiscretiontoimplementingentities.Whilepassivemanagementuses,suchasfeebateschemes,couldcontributetothedecarbonizationofinternationalshippingandincorporateequityconsiderations,theyarenotdiscussedinthisreport.Instead,thereportfocusesontheactivemanagementofcarbonrevenues,wherebyprojectsandprogramsfinancedareselectedthroughacompetitivebiddingprocesstoafund(whetherexistingornovel).Undersuchaprocess,projectproposalsaresubmittedandassessedaccordingtothepoliciesandcriteriaofthefund.Thisisacommonapproachadoptedinclimatefinanceastheprocesshelpsinselectingprojectsandprogramsthatareexpectedtoalignmorecloselywiththeexpectationsofthefund.Thereportfocusesongovernmentsasrecipientsofcarbonrevenues.PreviousWorldBankresearchfindsthatgovernmentsarethemostsuitablerecipientsofcarbonrevenuesfrominternationalshipping(seechapter4).Nevertheless,actorsfromtheprivatesectorcouldstillreceivecarbonrevenuesifthishelpstoyieldgreaterclimateoutcomes.Theycouldbecomerecipientsofcarbonrevenueseitherunderafeebateschemeorthroughthebiddingprocess(eitherdirectlyorthroughgovernmentsifthelatteractasintermediaries).Chapter2IntroduceskeycarbonrevenueuseoptionsidentifiedinpreviousWorldBankresearchandoutlineshowtheyrelatedirectlytoorgobeyondmaritimetransport.Thischapterprovidesexamplesofpossibleareasofinvestmentforeachkeycarbonrevenueuse.Chapter3Analyzeswhetherusingcarbonrevenuesexclusivelyformaritimetransport-relatedspendingislikelytomaximizeclimateoutcomesandsupportanequitabletransition.Itexplainshowkeycarbonrevenueuseoptionscancontributetoachievingthistwingoal.Chapter4Discusseswhichcountriescouldreceivecarbonrevenuesfrominternationalshippingandhowprioritizingrecipientscouldcontributetoaneffectiveandequitableenergytransitionofthesector.Chapter5Outlinesapossibledistributionframeworkforcarbonrevenuesfrominternationalshipping.Thisframeworkaimstoachievemaximumclimateoutcomesandsupportanequitabletransition.Chapter6Concludesandtranslatesthefindingsintokeymessagesforpolicymakers.DistributingCarbonRevenuesfromShipping15Highlightingkeyoptionstospendcarbonrevenues2Chapter2introduceskeycarbonrevenueuseoptionsidentifiedinpreviousWorldBankresearchandoutlineshowtheyrelatedirectlytoorgobeyondmaritimetransport.Thischapterprovidesexamplesofpossibleareasofinvestmentforeachkeycarbonrevenueuse.DistributingCarbonRevenuesfromShipping16HighlightingkeyoptionstospendcarbonrevenuesPreviousanalysisbytheWorldBankconsideredseveralpotentialcarbonrevenueuseoptionsandassessedtheiralignmentwiththeInitialIMOGHGStrategyaswellasselectedprinciplesanddesirablefeatures.Inparticular,Dominionietal.(2022)consideredthefollowingsixactivecarbonrevenueuseoptionsalongsidearevenue-neutralfeebatescheme:1.decarbonizingshipping2.enhancingmaritimetransportinfrastructureandcapacity3.supportingbroaderclimateaims4.achievingwiderdevelopmentgoals5.financingthegeneralfiscalbudget6.coveringadministrativeandenforcementcostsofthemarket-basedmeasureTheanalysisconsideredthefollowingprinciplesduetotheirinclusionintheInitialIMOGHGStrategy4orrelevancetotheongoingnegotiationsattheIMO.•AddressingtheneedtobecognizantoftheprincipleofCommonbutDifferentiatedResponsibilitiesandRespectiveCapabilities(CBDR-RC).TheCBDR-RCprinciplesetsoutthecommonresponsibilityofallcountriestoaddressclimatechangewhileacknowledgingthatsomecountrieshavecontributedlesstoclimatechangeandhavelesscapacitytoaddressit.Suchfactorsaretobeaccountedforindeterminingtheresponsibilityofeachcountrytoactonclimatechange(Rajamani2016).•AddressingtheneedtoconsidertheimpactsonStates,includingdevelopingcountries,inparticularonsmallislanddevelopingstates(SIDS)andleastdevelopedcountries(LDCs).MeasuresimplementedtoreduceGHGemissionsfrominternationalshippingcanhavenegative(andpositive)impactsoncountries,forinstance,intermsofexportopportunitiesorfoodsafety.OneoftheguidingprinciplesoftheInitialIMOGHGStrategyistoconsidertheimpactsofmeasuresonStates,includingdevelopingcountries,inparticularSIDSandLDCs.Inthiscontext,theInitialIMOGHGStrategycallsforassessingandconsideringtheimpactsofameasureonStatesbeforeitsadoption.Hereagain,particularattentionistobepaidtotheneedsofdevelopingcountries,especiallySIDSandLDCs.Consequently,disproportionatelynegativeimpacts(DNI)shouldbeassessedandaddressed,asappropriate.4ThreeguidingprinciplesexplicitlymentionedintheInitialIMOGHGStrategywerenotconsideredinthisanalysis.Twoofthem—theneedtobecognizantoftheprinciplesofnon-discriminationandofnomorefavourabletreatment,andtherequirementforallshipstogivefullandcompleteeffect,regardlessofflag,toimplementingmandatorymeasures—relatetotheimplementationofmeasures.Thethird—theneedforevidence-baseddecision-makingbalancedwiththeprecautionaryapproach—isaboutproceduralmattersrelatedtoIMOdecision-making.Assuch,thesethreeguidingprinciplesarenotconsidereddirectlyrelevanttothepotentialusesofcarbonrevenuesgeneratedbyapotentialmarket-basedmeasureappliedtointernationalshippingandwere,therefore,notconsideredintheanalysis.02DistributingCarbonRevenuesfromShipping17•TheprincipleofHighestPossibleAmbition.TheprincipleofHighestPossibleAmbitionwasintroducedintheParisAgreementin2015.Itsetstheexpectationthatpartieswillsetandpursuemitigationtargetsatthehighestlevelwithintheircapabilities(Rajamani2016).•ThePolluterPaysprinciple.ThePolluterPaysprinciplehasalonghistoryinenvironmentallawandpolicy.Thoughtherearedifferinginterpretationsofitsmeaning,aprominentinterpretationholdsthattheagentresponsibleforapollutingactivityshouldberesponsibleforthecostsofpreventingandcontrollingpollution(Heine,Faure,andDominioni2020).Theanalysisalsoassessedthealignmentofpotentialcarbonrevenueuseoptionswithadditionaldesirablefeatures.Theseincludethepotentialclimateanddevelopmentbenefitsofeachcarbonrevenueuseoption,theneedforactivemanagement,andtheirpoliticalfeasibilityfromanindustryperspective.TheanalysisrevealedthatsomecarbonrevenueuseoptionsappearmorealignedwiththeInitialIMOGHGStrategy,selectedprinciples,anddesirablefeatures.Theseare:1.decarbonizingshipping2.enhancingmaritimetransportinfrastructureandcapacity3.supportingbroaderclimateaims(Dominionietal.2022)Figure2.1showsalltherevenueuseoptionsanalyzedthatrequireactivemanagementandhighlightsthethreeuseoptionsmostalignedwiththeInitialIMOGHGStrategy,selectedprinciples,anddesirablefeatures.AchievewiderdevelopmentgoalsFinancethegeneralﬁscalbudgetCoveradministrativeandenforcementcostsEnhancemaritimeinfrastructureandcapacityDecarbonizeshippingSupportbroaderclimateaimsMaritimetransportBeyondmaritimetransportCarbonrevenueuseoptionsSource:WorldBankFigure2.1:CarbonrevenueuseoptionsDistributingCarbonRevenuesfromShipping18OfthethreeuseoptionsidentifiedasmostalignedwiththeInitialIMOGHGStrategy,selectedprinciples,anddesirablefeatures,tworelatedirectlytomaritimetransport.Thesetwooptionsaredecarbonizingshippingandenhancingmaritimetransportinfrastructureandcapacity.Thethirdaligneduseoptionissupportingbroaderclimateaims,whichcanrefertospendingbeyondmaritimetransport.ExamplesofcarbonrevenueuseFleetupgradesandrenewalZero-carbonbunkerfuelsandinfrastructuresupportClimatechangemitigationClimatechangeadaptationMaritimetransportinfrastructureandserviceenhancementCapacityandskillsdevelopmentMaritimetransportBeyondmaritimetransportCarbonrevenuestoEnhancemaritimetransportinfrastructureandcapacityDecarbonizeshippingSupportbroaderclimateaimsSource:WorldBankFigure2.2:KeycarbonrevenueuseoptionsandexamplesDistributingCarbonRevenuesfromShipping19Table2.1providespossibleexamplesforeachoftheserevenueuseoptions.Forinstance,decarbonizingshippingencompassesawiderangeofpossiblerevenueuses,includingvessel-relatedinvestments(forexample,inzero-carbonenginesorenergyefficiencytechnologies),land-basedinvestments(suchasintheproductionanddistributionofzero-carbonbunkerfuels5),andresearchanddevelopment(forinstance,inzero-carbontechnologies).Theothermaritimetransport-relateduseoptionisenhancingmaritimetransportinfrastructureandcapacity.Thisencompassesclimate-relatedinvestments,suchasenhancingports’resiliencetosealevelriseortrainingseafarerstousezero-carbonfuelsandtechnologies,butalsonon-strictlyclimate-relatedinvestmentsinmaritimetransport,suchasthroughputefficiency,digitalization,andport-hinterlandinterfaceimprovements.Therevenueuseoptionsupportingbroaderclimateaimsencompassesclimate-relatedinvestmentspartiallyorfullyunrelatedtomaritimetransport.Suchinvestmentscould,forexample,strengthencountries’capacitytoadapttoclimatechangebyreducingflooding,draught,orcoastalerosionrisks,orincreasetheiroverallabilitytomitigateclimatechangebyfinancingtheproductionofrenewableenergyfornon-shippinguseorthepreservationorexpansionofcarbonsinks(suchasforests,wetlands).5Thesearealternativemarinefuels,whichresultinverylow,andultimatelyzero,GHGsacrosstheirentirelifecycle-fromproductiontodistributionandcombustion.SeeEnglertetal.(2021)Table2.1:KeycarbonrevenueuseoptionsandspecificexamplesCarbonrevenuestoExamplesDecarbonizeshippingFleetupgradesandrenewal:zero-carbonenginesandpropulsionsystems;on-boardenergyefficiencytechnologies;researchanddevelopmentZero-carbonbunkerfuelsandinfrastructuresupport:fuelproduction(includingupstreamrenewableenergy),storage,distribution,anduse;shorepowerconnection;researchanddevelopmentEnhancemaritimetransportinfrastructureandcapacityMaritimetransportinfrastructureandservicesenhancement:portupgrades,adaptation,anddigitalization;tradeandtransportfacilitation;port-hinterlandinterfaceimprovementsCapacityandskillsdevelopment:technicalcooperationandcapacity-buildingprograms;educationandtrainingprogramsSupportbroaderclimateaimsClimatechangemitigation:renewablepowergeneration,storage,anddistributionfornon-shippinguse;carbonsinksClimatechangeadaptation:resilienceandprotectionagainstextremeweatherevents,coastalerosion,sealevelrise,andagriculturaldamage;adaptationofagricultureandfoodsystems;developmentofearlywarninganddisasterresponsesystemsPreviousWorldBankresearchanalyzedthepotentialfordifferentcarbonrevenueuseoptionstoaddressDNI.Box2.1discussesthepotentialtoaddressDNIbyspendingcarbonrevenuesondecarbonizingshipping,enhancingmaritimetransportinfrastructureandcapacity,andsupportingbroaderclimateaims.Source:WorldBankDistributingCarbonRevenuesfromShipping20Box2.1AddressingdisproportionatelynegativeimpactsonStatesAlthoughtheterm“equitabletransition”hasnotyetbeendefined,thereisageneralunderstandingthatitincludestheneedtoaddressDNIonStates,asappropriate.TheInitialIMOGHGStrategyrequiresthattheimpactsofIMOclimatepolicymeasuresonStatesbeassessedandtakenintoaccountbeforetheyareadopted(IMO2018).Theycouldincludeimpactsontransportdependencyandcosts,foodsecurity,andsocio-economicprogressanddevelopment.TheInitialIMOGHGStrategyfurtherstatesthat“disproportionatelynegativeimpactsshouldbeassessedandaddressed,asappropriate”(IMO2018).Inlinewiththisrequirement,acomprehensiveimpactassessmentofacombinedIMOshort-termmeasurewasconducted.ItrevealedthattheaggregateglobalimpactsofthemeasureonmaritimelogisticscostscouldbeconsideredsmallrelativetothetypicalmarketvariabilityoffreightratesUNCTAD(2021).Comparedtothelonger-termimpactofotherdisruptions(forexample,pandemics,climatechangefactors),theglobalimpactongrossdomesticproduct(GDP)andtradeflowscouldalsobeconsideredsmall.However,UNCTAD(2021)alsofoundthatdevelopingcoastalcountries,includingSIDSandLDCswouldexperienceabiggerdeclineintheirGDP,import,andexportflowscomparedtodevelopedcoastalcountries,whilelandlockedcountriescouldexpectarelativelylowernegativeimpact.Consideringtheresourceconstraintsofsomedevelopingcountries,includingSIDSandLDCs,UNCTAD(2021a)expectsthatsomecountrieswouldlikelyrequiresupporttomitigateincreasedmaritimecostsandtoalleviateconsequentnegativeimpactsontheirrealincomeandtradeflows.UnrelatedtotheIMOnegotiations,UNCTAD(2021b)hasalsosimulatedtheimpactoftherecentsurgeincontainerfreightratesandfoundthatSIDSwillexperiencethehighestandlandlockeddevelopingcountries(LLDCs)thelowestpercentageofimportandconsumerpriceincreases.TherearetwomainmethodstoaddressDNIthroughcarbonrevenueuse:1.CarbonrevenuescouldbeusedtoavoidDNIbeforeitoccurs.Maritimetransport-relatedspendingiswell-suitedtoavoidingDNI,atleastpartially.UsingcarbonrevenuesondecarbonizingshippingcanhelpachieveGHGmitigationtargetswithlessstringentpolicies.This,inturn,canreducenegativeimpactsonStates(Dominionietal.2022).Enhancingmaritimetransportinfrastructureandcapacitycanalsohelpreducethenegativeimpactsofshipping’sdecarbonizationoncountries.Forinstance,increasingportefficiencycanreducetransportcostsandtherefore,offsetatleastsomeoftheincreaseintransportcostsduetotheimplementationofclimatepoliciesforinternationalshipping(ECDGCLIMA2021).Similarly,improvingport-hinterlanddistributionsystemscoulddecreasetransportcostsinglobalshippingnetworks,giventhatport-hinterlandtransportcostsarecurrentlythemostsignificantcostfactoringlobalfreighttransportchains(Halim,Kwakkel,andTavasszy2016).2.CarbonrevenuescanbechanneledtocountriesaffectedbyDNIwithoutavoidingDNIdirectly.ThisapproachcouldbeusedinconjunctionwithspendingtoavoidDNI;forinstance,ifavoidingsomeDNIisimpossibleortooexpensive.AllthreecarbonrevenuesuseoptionsmostalignedwiththeInitialIMOGHGStrategy,selectedprinciples,anddesirablefeatures,can,inprinciple,helpremedyDNI—withoutavoidingDNIdirectly—ifrecipientsofcarbonrevenuesarecountriesaffectedbyDNI(Dominionietal.2022).DistributingCarbonRevenuesfromShipping21Spendingcarbonrevenuesonmaritimetransportandbeyond3Chapter3analyzeswhetherusingcarbonrevenuesexclusivelyformaritimetransport-relatedspendingislikelytomaximizeclimateoutcomesandsupportanequitabletransition.Thischapterexplainshowkeycarbonrevenueuseoptionscancontributetoachievingthistwingoal.DistributingCarbonRevenuesfromShipping22SpendingcarbonrevenuesonmaritimetransportandbeyondThischapterdiscusseswhetherusingcarbonrevenuesexclusivelytofinanceprojectsandprogramsrelatedtomaritimetransportislikelytoachievetwoimportantobjectives:maximizingclimateoutcomesandsupportinganequitabletransition.Maximizingclimateoutcomes(achievingthegreatestpossibleGHGreductionsandclimateadaptationbenefitsfortheavailablecarbonrevenues)isimportantbecausecurrentclimatefinanceflowsarecriticallyinsufficienttomeetdevelopingcountries’needs(ClimatePolicyInitiative2021;IPCC2022a;WorldBank2020).Thereis,therefore,astrongcasetoensurethatnewsourcesofclimatefinancearechanneledtoareaswheretheycandeliverthegreatestclimateoutcomesandhelpclosethefinancinggap.Atthesametime,manyshippingstakeholdershavecalledforanequitableenergytransitionofinternationalshippingandtheInitialIMOGHGStrategyincludesguidingprinciplesrelatedtoequity(chapter2andsection3.2).Onthisbasis,thischapterconsiderswhetherusingcarbonrevenuesexclusivelytofinanceprojectsandprogramsrelatedtomaritimetransportislikelytomaximizeclimateoutcomesandsupportanequitabletransition.Theanalysisfocusesonthethreecarbonrevenueuseoptionsidentifiedinchapter2asmostalignedwiththeInitialIMOGHGStrategy,selectedprinciples,anddesirablefeatures.Itconsiderswhetherspendingcarbonrevenuesexclusivelyondecarbonizingshippingandenhancingmaritimetransportinfrastructureandcapacityislikelytoyieldmaximumclimateoutcomesandatthesametime,supportanequitabletransitioncomparedtothealternativeofspendingashareofthesecarbonrevenuesonsupportingbroaderclimateaimstoo.Section3.1analyseswhetherspendingcarbonrevenuesexclusivelyonmaritimetransportislikelytoachievemaximumclimateoutcomes.Section3.2complementsthisanalysisbyfocusingonwhetherspendingcarbonrevenuesonlyonmaritimetransportprojectsandprogramswillalsosupportanequitabletransition.03SeveraltrillionsofdollarswillbeneededtodecarbonizeshippinginlinewiththeParisAgreementtemperaturetargets.Carbonrevenuescancoversomeoftheseinvestments.DistributingCarbonRevenuesfromShipping233.1MaximizingclimateoutcomesSignificantinvestmentsareneededtodecarbonizemaritimetransport.Krantz,Søgaard,andSmith(2020)estimatethatcapitalinvestmentsofbetween$1trillionand$1.9trillionwillbeneededbetween2030and2050toreduceGHGemissionsby50percentor100percentby2050.Theseestimatesassumethatammoniawillbetheprimaryzero-carbonfuelchoice.Thescaleofinvestmentsdependsnotonlyonthedecarbonizationtrajectorybutalsoontheproductionmethodusedtoproduceammonia.Approximately87percentofthetotalinvestmentsareneededforland-basedinfrastructureandproductionfacilitiesforlow-carbonfuels(halfofwhichwouldgotowardhydrogenproductionandtheotherhalftowardammoniasynthesis,storage,anddistribution).Theremaining13percentoftheestimatedinvestmentneedsrelatetoshipsandinclude,forexample,themachineryandonboardstorageforshipstorunonammonia,andenergyefficiencytechnologies.Whiletheseestimatesforhydrogenproduction,ammoniasynthesis,bunkeringinfrastructure,andshipenhancementsarealreadysignificantontheirown,additionalinvestmentsinrenewablepowergenerationwillbeneededtoprovidethenecessaryenergytoproducezero-carbonbunkerfuels.Hortonetal.(2022)investigatetheemissionsandadditionalcostimpactsofthreedifferentfuelandtechnologypathwayscharacterizedas:•earlypursuitofgreenammoniaandhydrogen•replacementoffossilfuelswithdrop-inliquidandgaseousbiofuels•maximumuptakeofenergyefficiencytechnologies,carboncaptureonboardvessels,andthegradualincreaseofgreenammoniaandmethanolThethreepathwaysareprojectedtoreducewell-to-wakeGHGemissionsfrominternationalshippingbyover70percentto100percentby2050,relativeto2008.Comparedtothebaselinescenario,implementingthethreepathwaysisprojectedtoresultinextracostsofapproximately$235billion,$489billion,and$181billion,respectively,spanning2020to2050.Thisincludesvesselcapitalcosts,fuelcosts,andotheroperatingcosts.Thereisacallthatthedecarbonizationofinternationalshippingshouldembraceanequitabletransitionthatleavesnocountrybehind.DistributingCarbonRevenuesfromShipping24Carbonrevenuesfrominternationalshippingcancoversomeoftheseinvestmentsandhelpcatalyzeadditionalresources,lowerabatementcosts,andaccelerateGHGemissionsreductionsinthesector.Carbonrevenuescanfinancepartoftheinvestmentsneededandhelpmobilizefurtherfinancialresourcesfromtheprivateandpublicsectors(ClimatePolicyInitiative2021;WorldBank2020;UNCTAD2014a).Thereby,theycanunlockthelarge-scaleinvestmentsneededtodecarbonizeshipping.Combiningacarbonpriceonfossil-basedbunkerfuelswithpublicfinancialsupportforzero-carbonbunkerfuelsandtechnologiescanhelpaddresssomeoftheprevalentmarketbarriersandfailuresthathindertheenergytransition.Theserelate,forinstance,tothetraditionalchicken-and-eggdilemmawhereshipowners,ontheonehand,maymakeinvestmentsinzero-carbonvesselsonlywhentheadequateinfrastructureforzero-carbonbunkerfuelsisinplace,andports,ontheotherhand,mayonlywanttoinvestinsuchinfrastructureoncethedemandforthesefuelscanbecrediblydemonstrated.Publicsectorfinancingcansupportthedevelopmentofsuchinfrastructureandreducerisksforfirstmovers(WorldBank2019).Ifsuchmarketfailuresandbarriersareaddressed,lessstringentpoliciesmaybeneededtoreduceGHGemissions.Thiscantranslatetoloweroveralldecarbonizationcosts.Strategicspendingofcarbonrevenuesondecarbonizingshippingcanalsohelpachievecrucialtippingpointsintheproduction,distribution,anddeploymentofzero-carbonbunkerfuels.Reachingthesetippingpointsislikelytorequire,amongotherthings,narrowingorclosingthepricegapbetweenzero-carbonbunkerfuelsandheavyfueloil(HFO),buildingbunkeringinfrastructureforzero-carbonbunkerfuels,enablingshipyardstobuildvesselsthatrunonzero-carbonbunkerfuels,andmakingimprovementstozero-carbonbunker-fuelengines(Meldrumetal.2023).Therefore,investinginzero-carbonbunkerfuelsandtechnologiesrepresents—nexttomaximizingenergyefficiency—thekeyspendingoptiontosupportinternationalshipping’stransitiontoabsolutezeroGHGemissions.Usingcarbonrevenuestosupportthedecarbonizationofinternationalshippingislikelytogarnerfurtherindustrysupport.Earmarkingcarbonrevenuescanincreasethepoliticalacceptabilityofcarbonpricingamongconcernedstakeholders(WorldBank2019).Similarly,spendingcarbonrevenuesondecarbonizingshippingcanhelpgarnerindustrysupport.Eventually,thisgreatersupportcanenabletheimplementationofamoreambitiouscarbonpricinginstrumentandacceleratethedecarbonizationprocessofthesector.However,spendingcarbonrevenuesbeyondmaritimetransportislikelytoyieldevenmoresignificantclimateoutcomesthaniftheirusewasrestrictedtomaritimetransportonly.Usingcarbonrevenuesformaritimetransport-relatedspendingmaynotproducethehighestpossibleclimatebenefitsassomeofthemostcost-effectiveoptionstofightclimatechangearelikelytobeunconnectedtomaritimetransport.Thisrelatestopotentialinvestmentsinclimatechangemitigationandadaptation.Usingcarbonrevenuesbeyondmaritimetransportcanalsodeliversynergieswithshipping’sdecarbonizationandvice-versa.Spendingcarbonrevenuesbeyondmaritimetransportcanalsohelpdecarbonizeinternationalshipping.Forinstance,recentresearchshowsthatachievingtippingpointsintheproductionofgreenammoniaasacriticalfeedstockforthefertilizerindustrycanunlocksignificantdecarbonizationopportunitiestothebenefitoftheshippingsector(Grüning,König,andMenzel2021).Positivespillovereffectscanalsobeexpectedintheotherdirection,meaningthatinvestmentsinshipping’sdecarbonizationcanalsohelpothersectorsdecarbonize.Investmentsinzero-carbonbunkerfuelproduction,forexamplearelikelytocreateeconomiesofscaleintheproductionofzero-carbonfuelsforothersectors(AshandCarpenter-Lomax2020;Carpenter-Lomaxetal.2021).Thereare,therefore,potentialwin-winsituationsfortheshippingsectorandothersectorsinusingcarbonrevenuesonprojectsandprogramsrelatedtomaritimetransportandbeyond.DistributingCarbonRevenuesfromShipping253.2SupportinganequitabletransitionManyrecentsubmissionsandinterventionsatISWG-GHG14,MEPC79,andearliermeetingssupporttheviewthatthedecarbonizationofinternationalshippingshouldbejustand/orequitable.RecentsubmissionsandnegotiationsatMEPCandISWG-GHGhaveoftenreferredtotheneedtoachieveajustand/orequitabletransitionininternationalshipping,withmanyalsoadvocatinginfavorofleavingnostatebehind.6Inthiscontext,thissectionanalyzeswhetherspendingcarbonrevenuesfromshippingexclusivelyonmaritimetransport-relatedprojectsandprogramswillalsosupportanequitabletransition.Inparticular,theanalysisfocusesonwhetherusingcarbonrevenuestofinancemaritimetransport-relatedprojectsorprogramsalwaysprovidessufficientspendingopportunitiesindevelopingcountries,especiallyinthosethat:•havecontributedlesstoclimatechange•havelesscapacitytoaddressclimatechange•aremorelikelytobesubjecttoDNIsTable2.1identifieddifferentexamplesoffundingactivitiesthatcouldfallundertherevenueuseoptionsfordecarbonizingshippingandenhancingmaritimetransportinfrastructureandcapacity.Theseareprimarilyfleetupgradesandrenewal;zero-carbonbunkerfuelsandinfrastructuresupport;maritimetransportinfrastructureandservicesenhancement;andcapacityandskillsdevelopment.ThefollowingsectionswillexaminetowhatextenttheseinvestmentopportunitieswouldbeavailableinSIDS,LDCs,andotherdevelopingcountries.3.2.1FleetupgradesandrenewalFinancingfleetupgradesandrenewalislikelytoprovidesignificantinvestmentopportunitiesinsomedevelopingcountries.Developingcountriesaccountforasignificantproportionoftheglobalmerchantfleetintermsofownership7andflagofregistrationandhaveahighshipbuildingcapacity.Developingcountriesmakeup78.5percentoftheglobalmerchantfleetbyflagofregistrationofvesselsof1,000grosstonnage(GT)andabove,and38.9percentoftheglobalmerchantfleetbyownershipofvesselsof100GTandabove(UNCTADstat2022a;UNCTADstat2022b).Theyalsobuilt46.8percentofmerchantshipsof100GTandabovein2021,thoughChinaaccountedforthevastmajorityofthisat44.2percent(UNCTADstat2022c).Therefore,financingfleetupgradesandrenewalcouldprovideconsiderableinvestmentopportunitiesinsomedevelopingcountries.6Foranoverviewofthetermsused,seeFijietal.(2023).7Thecountryofbeneficialownershipreferstothecountryinwhichthecompanywiththemaincommercialresponsibilityforthevesselislocated(UNCTADstat2022a).Thefiguresreportedinthistextrepresentthepercentageofthetotalfleetasmeasuredindeadweighttons(UNCTADstat2022a).Inprinciple,thecountryofbeneficialownershipcouldprovideaproxyforpotentialinvestmentsintoacountry’sfleet.However,asdiscussedinDominioni(2022),theownershipstructureofavesselisoftenblurredacrossmultipleinvestmentvehiclesandjurisdictions.Hence,ifcarbonrevenuesweredistributedtoshippingcompaniesdirectly,thecountryofownershipwouldbeanimperfectmetric.Distributingcarbonrevenuestogovernmentswouldcircumventthisissue.DistributingCarbonRevenuesfromShipping268SIDSaccountfor25percentandLDCsfor16percent.ThecombinedfigureaccountsforthefactthatsomecountriesarebothSIDSandLDCs.9Liberia(15percent),MarshallIslands(13percent),Singapore(6percent),Bahamas(3percent)10SIDSaccountforapproximately9percentandLDCsfor1percent.Figure3.1:Globalshareofflagregistration,vesselownershipandshipbuildingvolumebycountrygroupHowever,spendingopportunitiesarelikelytobelimitedinsomeSIDSandLDCs.Financingfleetupgradesandrenewaldoesnotprovidemanyspendingopportunitiesincountriesthathavesmallmerchantfleetsintermsofownershiporflagofregistration,orlowshipbuildingcapacity.ThisisthecaseformanySIDSandLDCs.Regardingflagofregistration,SIDSandLDCscollectivelyaccountforapproximately41percentoftheglobalmerchantfleetofvesselsof100GTandabove(UNCTADstat2022b).8However,justfourcountries9accountforapproximately37percentoftheglobalmerchantfleet,while60countriescollectivelymakeuplessthan1percent.Intermsofvesselownership,SIDSandLDCscollectivelyaccountforapproximately10percentoftheglobalmerchantfleetofvesselsof1,000grosstons(GT)andabove.10However,Singapore(≈6percent)andBermuda(≈3percent)accountforaround9percent,while63countriescollectivelymakeuptheremaining1percent(UNCTADstat2022a).Finally,regardingshipbuildingvolume,UNCTADstatonlyprovidesdataforsixSIDSandLDCs,andonlyBangladeshandSingaporeshowafigurejustabove0.Forthesereasons,manySIDSandLDCswouldhavelimited,orpossiblyno,large-scaleinvestmentopportunitiesforfleetupgradesandrenewal.Source:basedonWorldBankdataandUNCTADstat(2022a;2022b;2022c)DevelopedeconomiesDevelopingeconomiesexcl.SIDSandLDCsSIDSandLDCsFlagregistration21%38%41%Vesselownership60%32%10%Shipbuildingvolume53%47%0%DistributingCarbonRevenuesfromShipping27Opportunitiesforspendingcarbonrevenuesonfleetupgradesandrenewalarelikelytobelimitedinmanyotherdevelopingcountriesaswell.Forexample,46developingcountries(excludingSIDSandLDCs)collectivelyaccountforlessthan1percentofthefleetintermsofregistration(UNCTADstat2022b).Similarly,forownership,39developingcountries(excludingSIDSandLDCs)collectivelymakeuplessthan1percentoftheglobalfleet(UNCTADstat2022b).Forshipbuilding,ofthe26developingcountries(excludingSIDSandLDCs)forwhichUNCTADstatprovidesdata,onlytwoaccountformorethan1percentwhile23collectivelyaccountforlessthan1percentofshipsbuiltin2021(UNCTADstat2022c).ThispatternalsoholdsforLLDCs,whichcollectivelyaccountforonly0.1percentoftheglobalmerchantfleetintermsofflagregistrationandownershipandevenlessforshipbuildingvolume(UNCTADstat2022a;2022b;2022c).DistributingCarbonRevenuesfromShipping283.2.2Zero-carbonbunkerfuelsandinfrastructuresupportManydevelopingcountrieshavesignificantpotentialtosupplyzero-carbonbunkerfuels.RecentWorldBankanalysisexaminedthezero-carbonbunkerfuelproductionpotentialin218countriesunderthreescenariosrelatingtotheproductionofblue/greenhydrogenandammonia(Englertetal.2021).11Acrossthethreescenarios,low-andmiddle-incomecountriesaccountedforbetween29percentand41percentofthecountriesidentifiedashavinghighpotentialtoproducezero-carbonbunkerfuels.High-levelanalysesofBrazil,India,Mauritius,andMalaysiafoundthefourcountriescouldtogethersupplybetween13percentand47percentoftheglobaldemandforammoniaby2050(Englertetal.2021).12Thisshowsthattherearesignificantinvestmentopportunitiesindevelopingcountrieswell-positionedtosupplyzero-carbonbunkerfuels.Suchinvestmentsarealsolikelytocatalyzefurtherdevelopmentopportunities,suchascreatingeconomiesofscaletoproducezero-carbonfuelsforothersectors(AshandCarpenter-Lomax2020;Carpenter-Lomaxetal.2021).However,thereisariskthatsomecountriesmaynotfullyqualifytoreceivecarbonrevenuesiftheywereprimarilyusedtosupporttheproductionanddistributionofzero-carbonfuels.Amongthosecategorizedashavingahighpotentialtoproducesometypeofzero-carbonbunkerfuel,lessthanfivecountrieswereSIDSorLDCs.Dependingonthescenario,between0and16SIDSandLDCshavebeencategorizedashaving“promisingpotential,”andbetween21and77havebeencategorizedashaving“limitedpotentialorinsufficientdata.”Whilethelackofdataislikelytohavepreventedtheidentificationofpotentialinvestmentopportunitiesinseveralcountries,theoverallanalysisstillsuggeststhatcertainSIDSandLDCsmaynotnecessarilycountamongthefirstmoversforzero-carbonbunkerfuelproduction.11Bluehydrogen/ammoniareferstohydrogen/ammoniaproducedusingnaturalgaswithcarboncaptureandstorage,greenhydrogen/ammoniareferstohydrogen/ammoniaproducedusingrenewableenergysources(Englertetal.2021).12Brazilaccountedfor2percentto9percent;Indiafor10percentto27percent;Mauritiusfor0.3percentto0.5percent;andMalaysiafor1percentto10percent.DistributingCarbonRevenuesfromShipping293.2.3MaritimetransportinfrastructureandservicesenhancementSomedevelopingcountries,includingsomeLDCs,appeartohavelimited—ifany—opportunitiestomakesignificantinvestmentsinenhancingmaritimetransportinfrastructureandservices.AclearcaseinpointisLLDCs,astheydonothavedirectaccesstotheseaandaresometimeslocatedfarfromanycoast.Notethatmorethanone-thirdofLDCs(17outof46)arealsoLLDCs.Restrictingcarbonrevenueusetomaritimetransport-relatedspendingcouldseverelylimitopportunitiestousecarbonrevenuesinthesecountries,challengingthegoalofsupportinganequitabletransition.Certaindevelopingcountrieswouldalsobedisadvantagediftheycouldonlyaccesscarbonrevenuesformaritimetransport-relatedspending.Figure3.2illustratesthattheconsiderationsrelatedtoLLDCsdonotonlyapplytoLDCs,butalsotoseveraldevelopingcountries.Therefore,thesedevelopingcountriesarelikelytostruggletoaccesscarbonrevenuesiftheirusewererestrictedtomaritimetransport-relatedspending.13TwoLLDCswereomittedfromthisfigureasthesecountriesareclassifiedasdevelopedeconomies:theRepublicofMoldovaandNorthMacedonia.Source:UNCTADstat(2023)Figure3.2:Landlockeddevelopingcountriesandtheirdevelopmentstatus130%20%40%60%80%100%1713LeastdevelopedcountriesOtherdevelopingcountriesLLDCsarelikelytobedisadvantagedbymaritimetransport-relatedspending,evenifthisisbroadlyinterpretedtoincludehinterlandinfrastructure.Inprinciple,maritimetransportinfrastructurecouldincludehinterlandinfrastructurethatconnectsLLDCstoseaportsinneighboringcountries.ResearchindicatesthatsuchinvestmentscanreducetransportcostsforLLDCsand,thereby,unlockuntappeddevelopmentopportunities(UNCTAD2013;UNESCAP2020).ThereisapotentialavenueforusingcarbonrevenuesonmaritimetransportinfrastructuretobenefitLLDCs.However,thesecountriesarestilllikelytobedisadvantagedcomparedtocoastalstates.Forinstance,asignificantportionoftheinvestmentwouldbeusedforinfrastructureinneighboringcountries.Theactualtradebenefitsoftheseinvestmentsmayalsobesubjecttocooperationeffortsundertakenbytheneighboringcountry.While,ultimately,LLDCsneedtoassesswhethersuchpotentialinvestmentsinneighboringcountriesareofinterest,thereisanargumentthatLLDCsmaynotnecessarilyhavethesamelevelofcontrolanddecision-makingpowerovercarbonrevenuesunderthisuseoption,comparedtocoastalstates.DistributingCarbonRevenuesfromShipping3014Forarecentanalysisonnaturalhazardsforglobalportinfrastructureandrelatedtradelosses,seeVerschuuretal.(2023)3.2.4CapacityandskillsdevelopmentOpportunitiestoinvestintheupskillingofthemaritimeworkforcecanbelimitedinsomecountries,includinginmanySIDSandLDCs.Forthedecarbonizationoftheshippingsectortobesafeandsuccessful,aconsiderableleveloftrainingandupskillingwillberequiredforthemaritimeworkforce(Kaspersenetal.2022;MaritimeJustTransitionTaskForce2022).Carbonrevenuescouldbeusedtofinancethesetrainingandupskillingmeasurestosupportthedecarbonizationofshipping;however,opportunitiesforcountriestodosoarecurrentlyunevenlydistributed.AccordingtoUNCTADdata,sevencountriesprovidealmost52percentoftheglobalmaritimeworkforce(UNCTADstat2022d).SIDSandLDCscombinedcurrentlysupplyabout8percent.Individually,manyofthesecountriessupplylessthan0.02percent.Thissuggeststhatthereareveryfewopportunitiestoinvestintheupskillingoftheexistingmaritimeworkforceinthesecountries.Yet,theremaybeopportunitiesforcountriestobuilduporexpandtheirmaritimeworkforce.Themaritimeworkforceencompassesawiderangeofoccupations(forexample,stevedoresorcraneoperators)asopposedtoseafaringalone.However,theseport-relatedoccupationsdependontheexistenceofdomesticportinfrastructure.Therefore,relatedinvestmentopportunitieswouldstillbelimitedinmanycountries.Eveninsomecoastalstates,theremaybelimitedopportunitiesforportinfrastructureenhancements.Inpractice,thereisgreatvariationamongcoastalcountriesintermsofthenumberofportsandportcapacity.Whilesomedevelopingcountrieshavemanyports,someofsignificantsize,manyothers—includingsomeSIDSandLDCs—arehometolessthanfiveorevenonlyoneport,withmanyoftheseportsbeingsmall(MarineVesselTraffic2023).Inthatcontext,carbonrevenuesfromshippingcouldbeusedtoimprovetheirportinfrastructureandincreaseportefficiency,effectiveness,andperformance.Forinstance,portinfrastructureinmanySIDScouldbenefitfromimprovementsindockloadings,additionalstorageandwarehousingspace,andseparationofcargoandpassengerservicefacilities(Adeotietal.2020;UNCTAD2014b)14,oralsofromrisk-mitigatingclimatechangeadaptationmeasures(VanHoutvenetal.2022).Existingliterature(Clark,Dollar,andMicco2004;MiccoandPerez2002;Wilmsmeier,Hoffmann,andSanchez2006)indicatesthatimprovingportinfrastructureandperformancecanlowermaritimetransportcosts.AsSIDSandLDCsfacehighertransportcoststhantheworldaverage(Rojonetal.2021;UNCTAD2017)andbecausethesecouldincreasefurtherfromtheintroductionofadditionalIMOclimatepolicymeasures(Rojonetal.2021),theinvestmentscouldhelpaddressthepotentialDNIsofsuchmeasures.Newportscouldalsobefinancedinthesecountriesifthereisaviablebusinessanddevelopmentcasefordoingso.However,evenaccountingforsuchinvestments,opportunitiestoupgradeexistingmaritimetransportinfrastructurecanappearlimitedinthesecountriescomparedtocountrieswithmuchlargerport—andmaritimetransport-related—infrastructure.DistributingCarbonRevenuesfromShipping313.2.5Broaderclimateaims:mitigationandadaptationSupportingbroaderclimateaimscouldunlocksignificantinvestmentopportunitiesindevelopingcountries—includingSIDS,LDCs,andLLDCs.Allowingcarbonrevenuestobeusedtosupportclimatechangemitigationandadaptationprojectsorprogramscanunlocksubstantialinvestmentopportunitiesincountriesthatdonothavesignificantspendingoptionsrelatedtomaritimetransport.Thereareplentyofopportunitiestofinanciallysupportclimatechangemitigationinmanydevelopingcountries,includingSIDSandLDCs.Manyofthesecountrieshaveampleinvestmentopportunitiesinclimatechangemitigationsolutions,suchasinrenewableenergy(beyondtheproductionofzero-carbonbunkerfuels)(IPCC2022a;UNCTAD2017b),agriculture(Roeetal.2021),ornature-basedsolutionslikecarbonsinks(Bertrametal.2021;Roeetal.2021).Forinstance,theIntergovernmentalPanelonClimateChange(IPCC)(2022a)hashighlightedtheneedforinvestmentsinlow-incomecountriesinAfrica—whichoftenhavesignificantrenewableenergypotential—topreventthemfromlocking-infossilfuelinfrastructureandemittinglargevolumesofGHGastheydevelop.Thus,broadeningcarbonrevenueuseoptionscouldallowforlarge-scalemitigationactionsinthesecountriesandsupporttheirdevelopmentintolow-andzero-carboneconomies.Similarly,therearesignificantspendingopportunitiesinclimatechangeadaptationthatdonotrelatetomaritimetransport.Investmentopportunitiesrelatedtoclimateadaptationvaryacrosscountriesandareunlikelytoreferexclusivelytomaritimetransportspending.Keyareasrequiringinvestmentsforadaptationincludeimprovingtheresilienceofinfrastructure,agriculturalmethods,wateruseandmanagement,healthsystems,andcoastaldefenses(GlobalCommissiononAdaptation2022;IPCC2022b).Thelossofmarine,coastal,andterrestrialbiodiversityandecosystemservices,thedestructionofsettlementsandinfrastructure,andeconomicdeclinehavebeenidentifiedasmajorclimaterisks(IPCC2022b).Enhancingmaritimetransportinfrastructuremayhelpmitigatesomeoftheserisksbutconsideringawiderrangeofinterventionscoulddelivermoreurgentlyneededadaptationbenefitsinmanyofthesecountries.DistributingCarbonRevenuesfromShipping323.3ConclusionWhilethereisastrongcasetouseasignificantshareofcarbonrevenuestodecarbonizeshipping,usingasharetosupportbroaderclimateaimscouldhelpachievemaximumclimateoutcomes.Usingcarbonrevenuesondecarbonizingshippingcanclearlyhelpnarrowthegapbetweenthepriceoffossil-basedbunkerfuelsandzero-carbonbunkerfuels,expeditingcrucialtippingpointsinthedeploymentofthelatter.However,usingashareofcarbonrevenuestosupportclimateactionmorebroadlycandelivergreaterclimateoutcomesoverall,asthemostcost-effectivespendingopportunitiesonclimatechangemitigationandadaptationarenotalllikelytobeconfinedtomaritimetransport.Usingcarbonrevenuesexclusivelyformaritimetransport-relatedspendingislikelytolimitsomecountries’abilitytotakefulladvantageofthesecarbonrevenues.Thismayapplyparticularlytocountriesthathavecontributedlesstoclimatechange,havelesscapacitytoaddressit,oraremorelikelytobesubjecttoDNIs.Here,dataindicatesthatspendingopportunitiesonfleetupgradesandrenewal,zero-carbonbunkerfuelsandinfrastructuresupport,maritimetransportinfrastructureandservicesenhancement,andcapacityandskillsdevelopmentappearlimitedinsomedevelopingcountries,particularlyinSIDS,LDCs,andLLDCs.Thus,usingashareofcarbonrevenuestogobeyondexclusivemaritimetransport-relatedspendingtofinancebroaderclimateaimsinthesecountries—bothintermsofmitigationandadaptation—couldhelpsupportanequitabletransition.DistributingCarbonRevenuesfromShipping33Prioritizingcarbonrevenuerecipients4Chapter4discusseswhichcountriescouldreceivecarbonrevenuesfrominternationalshippingandhowprioritizingrecipientscouldcontributetoaneffectiveandequitableenergytransitionofthesector.DistributingCarbonRevenuesfromShipping34PrioritizingcarbonrevenuerecipientsThischapterdiscusseswhichgroupsofcountrygovernmentscouldberecipientsofpotentialcarbonrevenuesfrominternationalshipping.Thefocusisongovernmentsbecauseaddressingequityconsiderationscanbemoreeasilyachievedwhenasignificantshareofcarbonrevenuesisdistributedtogovernments(Dominionietal.2022).Thatisbecausetherelationshipbetweenacompanyandaparticularcountryoftenremainsblurred.Thiscanespeciallybethecaseintheinternationalshippingsector,wherevesselownership,theship’sregisteredflag,tradingroutescovered,andcharteringarrangementsmayindicatearelationshipbetweenavesselandmultiplecountries(Dominionietal.2022).Itis,therefore,easiertocontrolandkeeptrackoftheflowofcarbonrevenuestocountries,inwhichcasegovernmentswouldbethemainrecipients.Targetinggovernmentsasrecipientscanalsohelpmaximizeclimateoutcomes,forinstance,bysupportinggreenpublicsectorinvestments(IFC2011).Whilethefollowingdiscussionfocusesongovernments,thereisalsoanargumentthatashareofcarbonrevenuescouldbedistributedtotheprivatesector.Avalidcasecouldexistifthishelpedachievemaximumclimateoutcomes(Dominionietal.2022).Inthatcontext,theprivatesectorcouldpotentiallyaccesscarbonrevenueseitherdirectly(throughafeebateschemeorafundwithdirectaccess)orindirectly(throughgovernmentsasintermediaries).04DistributingCarbonRevenuesfromShipping354.1DevelopingcountriesasprimaryrecipientsGovernmentsofdevelopingcountriescouldbetheprimaryrecipientsofcarbonrevenuesfrominternationalshipping.Usually,internationalpublicclimatefinanceisdirectedtowarddevelopingcountriesoraselectionthereof.Therearevariousreasonstochannelinternationalpublicclimatefinance—includingcarbonrevenuesfromshipping—primarilytodevelopingcountries.Forinstance,equity-relatedconsiderationscallforspendingcarbonrevenuesfromshippingprimarilyindevelopingcountries,astheytendtobemoreexposedtoclimaterisks,havelesscapacitytoaddresstheserisks,andhavehistoricallycontributedlesstoclimatechangethanmanydevelopedcountries.Inaddition,asdiscussedinchapter3,thereisalargegapbetweenthecurrentclimatefinanceflowsandtheneedforinvestmentsinclimatechangeadaptationandmitigationinmanydevelopingcountries.Thehighercostofcapitalforlow-carboninvestments15inmanydevelopingcountriescandiscourageclimate-relatedinvestments,eveninareasthataremostinneed.Usingcarbonrevenuesindevelopingcountriescanhelpaddresstheseissuesbymakingadditionalresourcesdirectlyavailableandcatalyzingadditionalpublicandprivateinvestments.Thedistributionofcarbonrevenuestocountriesshouldconsidertheneedtomaximizeclimateoutcomesandaddressequityconcerns.VariousdocumentssubmittedtoIMOmeetings(forexample,Argentinaetal.2022;Austriaetal.2022;ICS2022;Japan2021;MarshallIslandandSolomonIslands2021;Norway2022)considerthatpotentialcarbonrevenuesfrominternationalshippingwouldbeeitherwhollyorpartially16distributedbyanovelfund.Ifthiswasthecase,theactualdistributionofcarbonrevenuestoindividualcountrieswoulddependonthespecificselectioncriteriaadoptedbythefundforprojectorprogramproposals.Selectioncriteriacurrentlyadoptedbythemajorclimatefundsaimtobalancetheneedtoachievemaximumclimateoutcomeswithanequitabledistributionofclimatefinance(Dominionietal.2022).Forinstance,thedistributionofclimatefinanceoftenaccountsfortheclimatechangemitigationoradaptationimpactofpotentialinvestments,theircost-effectiveness,andtherecipients’vulnerabilitytoclimatechange.Developingcountriescanoftenscorehighlyinthesecriteria.15Thecostofcapitaltendstobehigherinmanydevelopingcountriesduetounderdevelopedfinancialmarketsandotherlocalfactors—suchasmoreuncertainpolicyframeworksandlowerbusinessconfidence(Amelietal.2021)16Partialdistributionwouldimplyalsotakingadvantageofpassiverevenueusesuchasthroughafeebatescheme.DistributingCarbonRevenuesfromShipping364.2AdditionalsupportforselecteddevelopingcountrieslikeSIDSandLDCsExperiencefromclimatefinancesuggeststhattheadoptionofselectioncriteriathataimtoachieveanequitabledistributionofclimatefinanceisofteninsufficienttoguaranteeequitableaccesstoclimatefinance.Thisisespeciallytrueforthemostclimate-vulnerablecountriessuchasSIDSandLDCs.Manyofthesecountrieshavelimitedhumanresourcesandtechnicalexpertise.Thiscansignificantlyconstraintheirabilitytodevelopandimplementprojectorprogramproposalsthatarelikelytosucceedinbids(IEU2020;IEU2022;OECD2022;UN-OHRLLS2022).Furthermore,somedevelopingcountries,includingmanySIDSandLDCs,facedifficultiesregardingaccessing,generating,andanalyzingclimatedata(Gallagher2021;IEU2020;IEU2022;UN-OHRLLS2022).Insufficientdatacanbeamajorbarriertoaccessingclimatefinancewhenitisrequiredtoprovethe“climaterationale”ofpotentialprojects.Toleveltheplayingfield,itiscommonpracticeamongclimatefundstoincludeanallocationfloorforcountriesfacinggreaterbarrierstoaccessclimatefinance.Allocationfloorsguaranteeashareorabsoluteamountoffundingfortheselectedcountries.Thisistoreducethecompetitionbetweenthesedisadvantagedcountriesandcountriesthatdonotfacesimilarbarrierstoaccessingclimatefinance(Polycarpetal.2013).Allocationfloorscanalsoensurethatclimatefinanceisdirectedtowardcountriesthataremostvulnerabletoclimatechange.Forinstance,theGreenClimateFund(GCF)hasatargettodistribute50percentofitsfundingtoclimatechangeadaptation,and50percentofthisadaptationfundingisreservedforcountriesparticularlyvulnerabletoclimatechange,includingSIDS,LDCs,andAfricancountries(GCF2022).Consequently,ashareofcarbonrevenuesfrominternationalshippingcouldbereservedforagroupofcountriesthatfacegreaterbarrierstoaccessingclimatefinanceoraremorevulnerabletoclimatechange.ThisgrouporthesegroupsofcountriesshouldincludeSIDSandLDCswhooftenhavedifficultiesaccessingclimatefinanceorareparticularlyvulnerabletoclimatechange.Experiencewithandlessonslearnedfromexistingfundscanprovidevaluableguidanceonwhichcountriesfacepersistentobstaclesingainingaccesstotheavailableclimatefinance.Inaddition,toavoidconcentratedspendinginafewspecificcountries,someclimatefundsalsoadoptfundingceilingsforindividualcountries.Fundingceilingsfixamaximumamountoffundingthateachcountrycanreceive(expressedinpercentageorabsoluteamount)overadefinedfundingcycle.Fundingceilingshavebecomeafeatureofanumberofmajorclimatefunds(IEU2022).TheAdaptationFund,forexample,hasaceilingof$20millionpercountry(AdaptationFund2022).DistributingCarbonRevenuesfromShipping374.3DevelopedcountriesascomplementaryrecipientsTosupportinternationalshipping’srapiddecarbonization,theremayalsobeacasetoallowdevelopedcountriestoaccesssomeofthecarbonrevenues.Whiletheabovediscussionhasnotedacaseformakingdevelopingcountries,SIDS,andLDCstheprimaryrecipientsofcarbonrevenuesfrominternationalshipping,therecouldbesomemeritingrantingdevelopedcountriesaccesstosomeofthesecarbonrevenues.Forexample,carbonrevenuescouldencourageshipping’sdecarbonizationbysupportingfleetupgradesandrenewalandacceleratingtheproduction,distribution,anddeploymentofzero-carbonbunkerfuelsandtechnologiesinSIDS,LDCs,otherdevelopingcountries,anddevelopedcountries.Allowingdevelopedcountriestobidforfundingforshippingdecarbonizationactivitiescouldpotentiallynarrowthecompetitivenessgapbetweenzero-carbonandconventionalfossil-basedbunkerfuelsandreachtippingpointsfasterthanifzero-carbonbunkerfuelsweresupportedonlyindevelopingcountries,SIDS,andLDCs.Bymakingthenecessaryinfrastructureavailableglobally,fuelcostsandassociatedtradecostincreasescouldbeminimized.Inaddition,theearlyadoptionofzero-carbonbunkerfuelsandtechnologiesintheinitialphaseofshipping’senergytransitionwillbeimportanttoreducetechnologicaluncertainty,createmarketsforfuelandtechnologyproviders,andencouragefurtherinvestments(Mäkitieetal.2022).Supportingallcountriesinshipping’sdecarbonization—especiallyintheinitialphase—cancreatepositivefeedbackloopholes.Notonlycouldsuchwidespreadsupportreducebarrierstofurtherfuelandtechnologyuptake,itisalsogenerallyassociatedwithcostreductions(IPCC2022a;Mäkitieetal.2022).Relatedtothetransitiontoamoresustainableenergysystem,IPCC(2022a)findsthat“costreductionsfacilitateadoption,whichgeneratesopportunitiesforfurthercostreductionsthroughaprocessoflearningbydoing”.Thispointstothepossibilityofpositivefeedbackloops,whichcanresultineconomiesofscale,drivingdownthecostsofzero-carbonenergy,fuels,andtechnologies.Ifsucheffectscanbeinducedintheinitialphasesofshipping’senergytransition,theycanlowerthecostsofthedecarbonizationtrajectory,andthereby,reduceunintendedimpactsontransportandtradecosts.Allowingallcountriestoaccesscarbonrevenuescouldhelpensurethatzero-carbonbunkerfuelsareavailableworldwide.Duetotheindivisiblenatureofseabornetradebetweendevelopedanddevelopingcountries,theavailabilityofzero-carbonbunkerfuelsmustbeensuredgloballytoenableinternationalshippingtodecarbonizefullyandrapidly.Thedevelopmentoftherelevantinfrastructureonagloballevelcouldbesupportedbyallowingallcountriestobidforcarbonrevenuestodecarbonizeshipping.Differentfinancingtermscouldbeappliedfordevelopedanddevelopingcountries.Ifsomecarbonrevenuesweremadeavailabletodevelopedcountriestosupportandacceleratethedecarbonizationofinternationalshipping,equityconcernscouldbeaddressedtoacertainextentbyapplyingdifferentfinancingtermsfordevelopedanddevelopingcountries.Suchoptionstodifferentiatefinancingtermsarefurtherdiscussedinsection5.1.3.DistributingCarbonRevenuesfromShipping384.4ConclusionWhileallcountriesmayberecipientsofcarbonrevenues,thereisastrongcasetomakedevelopingcountriestheprimaryrecipientsandprovidespecialsupporttoselecteddevelopingcountrieslikeSIDSandLDCs.GiventhefrequentlyreportedconstraintsofmanySIDSandLDCstodevelopandimplementcompetitivefundingproposals,thesegroupsofcountriesandotherdevelopingcountriesthatfacesimilarbarriersorareparticularlyvulnerabletoclimatechangewouldsignificantlybenefitfromacertaindegreeofshieldingagainstcompetitionwithothercountries,suchasintheformofareservedshareofcarbonrevenues.Consideringdevelopedcountriesascomplementaryrecipientsofcarbonrevenuescouldhelpaccelerateinternationalshipping’sdecarbonizationatthefastestspeedpossiblegiventheurgencyoftheclimatecrisisandtheimperativetofullyphaseoutthesector’sGHGemissionsasquicklyaspossible.DistributingCarbonRevenuesfromShipping39Developingadistributionframework5Chapter5outlinesapossibledistributionframeworkforcarbonrevenuesfrominternationalshipping.Thisframeworkaimstoachievemaximumclimateoutcomesandsupportanequitabletransition.DistributingCarbonRevenuesfromShipping40DevelopingadistributionframeworkThischapterbuildsontheprecedinganalysisandintroducesapossibledistributionframeworkforcarbonrevenuesfrominternationalshipping—aconceptualblueprint,whichaimstoachievemaximumclimateoutcomesandsupportanequitabletransition.Thissuggestedframeworkiscomposedofthreefundingwindowsandthreelevers.Theactivelymanagedcarbonrevenuescanbeaccessedviathesethreedifferentfundingwindows,referredtoasWindowA,WindowB,andWindowC.Thethreelevers—therecipientlever,theuselever,andthefinancingtermslever—operationalizewhichcountriescanaccesswhichfundingwindow,forwhatcarbonrevenueuse,andonwhatfinancingterms.ThesuggestedframeworkisdepictedinFigure5.1andwillbeunpackedinsections5.1and5.2.05Figure5.1:PossibledistributionframeworkforcarbonrevenuesfrominternationalshippingWhichcountriescanaccesscarbonrevenues,forwhatpurposes,onwhatterms?StringentRelaxedFundingwindowsCarbonrevenuestoDecarbonizeshippingEnhancemaritimetransportinfrastructureandcapacitySupportbroaderclimateaimsFinancingtermsWindowAWindowBWindowCRecipientsDevelopedcountriesDevelopingcountriesSIDSandLDCsSource:WorldBankDistributingCarbonRevenuesfromShipping415.1ThreeleverstooperationalizethedistributionframeworkThreeleverscanoperationalizethedistributionframework.Theseleversareimportantforachievingoptimalclimateoutcomesandpromotinganequitabletransition.Furtheranalysesmayconsideroperational-levelaspectssuchasselectioncriteriaofprojectorprogramproposalsanddetailedaccessmodalities.5.1.1RecipientleverTherecipientleverdefineswhichgroupsofcountriescouldaccesseachfundingwindowofcarbonrevenues.Basedontheanalysispresentedinchapter4,thedistributionframeworkdistinguishesthreegroupsofcountries.Eachgroupofcountriescanaccessadifferentsetoffundingwindows(seeFigure5.1):•SIDSandLDCs,whichoftenfacegreaterbarriersinaccessingclimatefinancewhilstalsobeingthemostvulnerabletoclimatechange,couldhaveexclusiveaccesstofundinginWindowA.Additionally,SIDSandLDCswouldalsohaveaccesstoWindowsBandC—meaningthesecountrieswouldhaveaccessto100percentoftheactivelymanagedcarbonrevenues.TheexclusiveaccesstoWindowAistoreducecompetitionwithothercountriesthatmaybenefitfromgreaterhumanresourcesandtechnicalcapacityandensurethatcountriesmostvulnerabletoclimatechangeareguaranteedashareofcarbonrevenues.•Allotherdevelopingcountries,whicharenotSIDSorLDCs,wouldbeabletobidunderWindowsBandC,meaningthattheywouldbeabletomakebidsforlessthan100percentofthecarbonrevenuesactivelymanaged(100percentminusallfundsavailableunderWindowA).•DevelopedcountriescouldhaveaccessonlytofundsavailableunderWindowC—meaningthattheyhaveaccesstoarestrictedportionofactivelymanagedcarbonrevenues,unlikeSIDSandLDCs,whichcanbidforWindowsAandBaswell,andotherdevelopingcountries,whichcanalsobidforfundsunderWindowB.Threelevers—recipients,use,andfinancingterms—operationalizewhichcountriescanaccesswhichfundingwindow,forwhatcarbonrevenueuse,andonwhatfinancingterms.DistributingCarbonRevenuesfromShipping425.1.2UseleverTheuseleverdefineshowcarbonrevenuesineachsharecouldbespentamongtherevenueuseoptionsmostalignedwiththeInitialIMOGHGStrategy,selectedprinciples,anddesirablefeatures.Thesehavebeenidentifiedinchapter2asdecarbonizingshipping;enhancingmaritimetransportinfrastructureandcapacity;andsupportingbroaderclimateaims(seeFigure2.2)(referchapter2forfurtherdetails.)Differentcountriescouldaccesscarbonrevenuesfordifferentusestoachievemaximumclimateoutcomesandsupportanequitabletransition.Theanalysispresentedinsection3.1highlightedtheneedforusingcarbonrevenuestofinancetheenergytransitionofinternationalshippingbutalsothebenefitsofyieldinggreaterclimatebenefitswhenusingashareofcarbonrevenuestosupportbroaderclimateaims.Financingbroaderclimateaimscanalsosupportanequitabletransition,asspendingoptionsrelatedtomaritimetransportarelikelytobelimitedinmanySIDSandLDCs,andsomeotherdevelopingcountries.Onthisbasis,apossiblewayforwardcouldbetoallowspendingon:•Decarbonizingshipping:Thiscarbonrevenueuseoptionscouldbeopentoallcountries(SIDS,LDCs,otherdevelopingcountries,anddevelopedcountries).Asdiscussedinsection4.3,internationalmaritimetransportrequiresglobalinvestmentsindecarbonizingshipping,andearlyadoptionofzero-carbontechnologiesandfuels,asthiscandrivetheircostsdown.Thereis,therefore,acasetoallowallcountriestoaccesscarbonrevenuestosupportthedecarbonizationofthesector.•Enhancingmaritimetransportinfrastructureandcapacity:ThiscarbonrevenueuseoptioncouldbeaccessedbySIDSandLDCs.Itcouldalsobemadeavailabletootherdevelopingcountrieswithlimitedopportunitiestospendondecarbonizingshipping.•Supportingbroaderclimateaims:ThisrevenueuseoptioncouldbeavailableforSIDSandLDCs.Asdiscussedinsection3.2,manySIDSandLDCsappeartohavelimitedopportunitiestospendonmaritimetransportprojectsorprograms.Thus,broadeningspendingopportunitiesforthesecountriescanhelpsupportanequitabletransition.Thisrevenueuseoptioncouldalsobemadeavailabletootherdevelopingcountrieswithlimitedopportunitiestospendoneitherdecarbonizingshippingorenhancingmaritimetransportinfrastructureandcapacity.DistributingCarbonRevenuesfromShipping435.1.3FinancingtermsleverThefinancingtermsleverdefineswhatfinancingconditionsmayapplytoeachgroupofcountrieswhentheyaccesscarbonrevenuesfrominternationalshippingthroughdifferentfinancialinstruments.Thetypeoffinancialinstrumentandthestringencyofitsconditionscouldvaryacrossgroupsofcountries,with,forinstance,morerelaxedconditionsforSIDSandLDCs,andmorestringentconditionsfordevelopedcountries(seeFigure5.1).Financingtermsmaybe“attached”toacountry,subjecttoapossibleperiodicalreview.Toaccountforvaryingcircumstancessuchasdebtcapacityandaccesstoprivatecapital,countrieseligibletobidforfundsfrommorethanonesharecouldpotentiallybesubjecttothesamerelaxedorstringentfinancingtermswhenbiddingforfundsfromothershares.Thesefinancingtermscouldbereviewedperiodicallytoaccommodatechangingcircumstances.Experiencefromclimatefinancecanbeleveragedtodevelopfinancingtermsthatapplytodifferentgroupsofcountries.Existingclimateanddevelopmentfinanceinstitutionsandfundshaveestablishedguidelinesandprinciplesforapplyingfinancingtermsaccountingforcountries’specificcircumstances.Theseguidelinesandprinciplesapplytodifferentfinancinginstruments(suchasgrantsvs.loans)and,sometimes,groupsofcountries(forinstance,middle-incomecountriesvs.low-incomecountries).17Figure5.2illustratesthenumberofcountriesperdevelopmentstatusandincomegroup.Consideringacountry’sincomestatuscanhelpinformtheapplicationoftermstothefinancinginstrumentavailabletoensuretheeconomicallyviableuseofrevenues.Experiencewithexistingcountryclassificationmethodologiescouldsupporttheoperationalizationofadistributionframework.17See,forinstance,GCF(2016);ClimateInvestmentFunds(2020)180160140120100NumbrofconomisDvlopdconomisHihincomUppr-middlincomLowr-middlincomLowincomDvlopinconomisDvlopinconomisxcl.SIDSndLDCsOnlSIDSSIDSndLDCsBothSIDSndLDCsOnlLDCs806040200Source:basedonWorldBankdataandUNCTADstat(2023)Figure5.2:EconomiesbydevelopmentstatusandincomegroupsDistributingCarbonRevenuesfromShipping4419Aguaranteefeereferstoasumpaidbytheborrowertotheguarantor.Grantsandconcessionalloansarefinancialinstrumentsthatreducethecostorprovideaccesstocapital.Carbonrevenuescouldbedisbursedthroughgrants,loans,oramixofthetwo.Grantsarenon-repayablefunds,thatcanhelpreducetheupfrontcapitalinvestment,andsupportcountrieswithlowdebtcapacity.Loans,ontheotherhand,arerepayablefundsandcanbemadeconcessionalbyofferingtheborrowerfinancingtermsthataremorefavorablethanthoseavailableinthefinancialmarket.18Someofthesetermsincludelowerinterestrates,reducedrequirementforcollaterals,extendedgraceperiods,orlongermaturity(IPCC2014).Differentcombinationsofthesetermscanapplytodifferentcountries.Guaranteesarefinancialinstrumentsthatreduceinvestmentrisks.Carbonrevenuesfrominternationalshippingcouldsupporttheavailabilityandreducethecostofguaranteesforprojectssupportedbythefund.Theseinstrumentscan,forinstance,taketheformofpoliticalriskinsuranceorcreditenhancementforprivateinvestorsorlenders.Theseguarantees,whichcanbeprovideddirectlyorchanneledthroughnationalgovernments,canreducetheoveralllendingcostsorincreasethecreditavailabletogovernments(IPCC2014).Thetermsoftheguaranteecouldvarypergroupofcountries;forinstance,SIDSandLDCscouldbeofferedlowerguaranteefees19oralongermaturityoftheguarantee.Co-financingrequirementscanalsovaryacrosscountries.Forexample,moredevelopedcountriesmayberequiredtoco-finance(toacertainpercentage)projectsorprogramsthatreceivecarbonrevenues,whileasimilarconditionmaynotapplytolessdevelopedcountries.18Ifapercentageofcarbonrevenuesisdistributedthroughloans,theinterestontheseinvestmentscouldhelpreplenishthefundorpayforthefund’soperatingexpenses.DistributingCarbonRevenuesfromShipping455.2.1WindowA:Exclusiveaccess,broaduseWindowAcouldbereservedforSIDSandLDCs.SIDSandLDCsoftenfacegreaterbarrierstoaccessingclimatefinanceandareparticularlyvulnerabletoclimatechange.Asmentionedabove,thisreservedshare,whichequalsanallocationfloorforthegroupofcountriesasawhole,wouldreducecompetitionwithcountriesthatdonotfacesimilarchallenges.Potentially,accesstoWindowAcouldalsobemadeavailabletootherdevelopingcountriesbasedon,forinstance,climatevulnerabilitycriteria.CarbonrevenuesfromthisWindowcouldbeusedfordecarbonizingshipping,enhancingmaritimetransportinfrastructureandcapacity,andsupportingbroaderclimateaims.ThereisadoublerationaleforusingcarbonrevenuesinthisWindowbeyondmaritimetransport-relatedspending.First,asdiscussedabove,manySIDSandLDCseligibletobidforfundsfromWindowAarelikelytohavelimitedopportunitiestousecarbonrevenuesformaritimetransport-relatedspending.Second,thisarrangementmayhelpachievemaximumclimateoutcomesasthefinancinggapbetweenclimatechangemitigationandadaptationneedsandthefinancialresourcesavailableinthesecountriesisoftenthemostsignificant(Soanesetal.2021;UNCTAD2022b;UN-OHRLLS2022).CountriesapplyingforcarbonrevenuesfromWindowAcouldenjoyaccesstothoserevenuesatrelaxedfinancingterms.Theserelaxedtermscouldcome,forexample,intheformofgrantsandwithnoco-financingrequirements.FinancingtermscouldvaryacrosscountriesthathaveaccesstoWindowA;forinstance,lower-incomecountriescouldhavelessstringentterms.5.2ThreefundingwindowstoaccesscarbonrevenuesCarbonrevenuescouldbeaccessedviathreededicatedfundingwindows.Theprevioussectiondiscussedhowthreelevers—recipients,use,andfinancingterms—candrivetheoperationalizationofadistributionframework.Thissectiondealswiththethreefundingwindowsthroughwhichcarbonrevenuescanbeaccessedandtheirinterdependencewiththepresentedlevers.Thisreportdoesnotdiscussthesizeofeachfundingwindowasashareoftotalavailablecarbonrevenues.Hence,fundingwindowsareillustratedatequalsizeforsimplification.DistributingCarbonRevenuesfromShipping465.2.2WindowB:Broaderaccess,narroweruseWindowBcouldbereservedforalldevelopingcountries.ThisincludescountriesthatwouldalreadyhaveaccesstoWindowAaswellasallotherdevelopingcountries.CarbonrevenuesinWindowBcouldbeusedprimarilyfordecarbonizingshipping.Thekeyrationaleforthiswouldbetoensurethatsufficientfundingisavailableindevelopingcountriestokickstarttheproduction,distribution,anddeploymentofzero-carbonbunkerfuels,andtonarrowthecostcompetitivenessgapwithconventionalfossil-basedbunkerfuels.Sincemanydevelopingcountriesarewell-positionedtoproducezero-carbonbunkerfuelsatscale,financingactivitiestodecarbonizeshippinginthesecountriesinatargetedwaycouldbekeytoreachingtippingpoints.However,forcountrieswithlimitedopportunitiestospendcarbonrevenuesondecarbonizingshippingalone,WindowBcouldbeextendedtoothercarbonrevenueuseoptions.Inthisrespect,therecanbetwoalternatives:•Gradualbroadening:Underthisarrangement,countrieswithfewopportunitiestospendondecarbonizingshippingwouldbeabletoaccesscarbonrevenuesforenhancingmaritimetransportinfrastructureandcapacity.Iftheyareunabletospendonenhancingmaritimetransportinfrastructureandcapacityeither,theycouldbeallowedtouseWindowBfundstosupportbroaderclimateaimsaswell.Therearetwopotentialrationalesforopeningtheoptiontosupportbroaderclimateaimsonlywhenthereisnoopportunitytospendonthetwofirstoptions:1.Investmentsinmaritimetransportinfrastructureandcapacitycouldactivelyhelpavoid,remedy,ormitigateDNIsofIMOclimatepolicymeasuresrelatedtotransportcosts.2.Usingcarbonrevenuesformaritimetransport-relatedspendingkeepscarbonrevenuesclosertothesectorandmay,therefore,bepoliticallymoreacceptabletovariousshippingandportsstakeholders.•Instantbroadening:Underthisarrangement,countriesthatcannotspendondecarbonizingshippingwouldbeabletoaccesscarbonrevenuesforenhancingmaritimetransportinfrastructureandcapacityandsupportingbroaderclimateaimsrightaway.Themainrationaleforthisarrangementisthatspendingcarbonrevenuesonsupportingbroaderclimateaimscanyieldgreaterclimateoutcomes—bothintermsofmitigationandadaptation—thanispossiblewithenhancingmaritimetransportinfrastructureandcapacityalone.Besides,acountrywouldonlyhavetodemonstrateonceitslimitedopportunitiestospendondecarbonizingshipping—thisminimizestransactioncostsforboththecountryandtheentitymanagingthedistributionofcarbonrevenues.AcertainpercentageofWindowBcouldevenbemadeavailabletosupportbroaderclimateaimsforalldevelopingcountriestoachievemaximumclimateoutcomes.Ifsucha“sub-share”isincludedinWindowB,sufficientcarbonrevenuesshouldbemadeavailablefordecarbonizingshipping,whichisthemainaimofthisWindow.Afundingceilingforsupportingbroaderclimateaimscouldbeadoptedforthispurpose.ThefinancingtermsforfundsfromWindowBcouldvarypercountry.ThecountriesthatcanalsoapplyforfundsfromWindowAcouldenjoythesamerelaxedfinancingtermswhenaccessingfundsfromWindowB.Inturn,morestringentfinancingtermscouldapplytootherdevelopingcountries—potentiallywithfurthervariationswithinthisgroupbasedonincomelevels.DistributingCarbonRevenuesfromShipping475.2.3WindowC:Openaccess,narrowuseWindowCcouldbeaccessibletoallcountries.WindowCcouldbeaccessedbyallcountries,includingthosethathaveaccesstoWindowAandWindowB.ThisWindowcouldfocusexclusivelyondecarbonizingshipping.Thekeyrationaleforthiswindowistoenableinternationalshippingtofullydecarbonizeasquicklyaspossiblebyreachingcrucialtippingpointsthroughacollectiveworldwideeffort.Morestringentfinancingtermscouldapplytodevelopedcountriescomparedtodevelopingcountries.Whiledevelopedcountriescouldaccesscarbonrevenuesonmorestringentfinancingterms,morerelaxedtermscouldapplytodevelopingcountries,includingSIDSandLDCs.ThesemorerelaxedtermscouldbethesameasthoseapplicableifcountriesbidforfundsunderWindowAand/orB,meaningthatfinancingconditionscouldbe“attached”toacountryregardlessofthefundingwindowtheybidfor.Applyingmorestringentfinancingtermstodevelopedcountriesimpliesthattheycouldcontributemoretothereplenishmentofthefundthroughthepaymentofhigher(butstillbelowmarket)interestratesonloans.DistributingCarbonRevenuesfromShipping485.3PracticalwayforwardThissectiondiscussesthepotentialpracticalstepsforthedevelopmentofafundandconsiderspossibleadjustmentstothedistributionframeworkovertime.Inparticular,thesectionbuildsonexperiencefromthecreationofothermajorclimatefundsundertheUnitedNationsFrameworkConventiononClimateChange(UNFCCC).Thisisusedtoillustratepotentialstepsinthesettingupofanovelfundtodistributecarbonrevenuesfrominternationalshipping.Acommonwaytocreateanewfundthroughmultilateralnegotiationsistosetupatransitionalcommitteethatproposespotentialdesignsforthefundbasedontermsofreference.Thiswas,forinstance,theprocedurefollowedbytheUNFCCCtocreatetheGCFand,morerecently,isalsotheprocedureforeseenforthenewfundthatdealswiththeresponsetolossanddamage(UNFCCC2011;UNFCCC2022).Inbothcases,thecompositionofthetransitionalcommitteeincludesspecificnumbersofrepresentativesfromdevelopedanddevelopingcountries,withagreaternumberofdevelopingcountryrepresentatives,aswellasspecifiedgeographicalrepresentation.FollowingthedecisiontocreatetheGCFatthe16thConferenceofthePartiesin2010,thetransitionalcommitteemetfourtimesandheldthreeworkshopsthroughout2011.Itdivideditsworkintofourstreams:•scope,guidingprinciples,andcross-cuttingissues•governanceandinstitutionalarrangements•operationalmodalities•monitoringandevaluationAtechnicalsupportunitwascreatedtoassistthetransitionalcommitteewithitswork(UNFCCC2011;UNFCCC2022).Aftersettingupaninitialframeworktodistributecarbonrevenuesfrominternationalshipping,circumstancesandexperiencemayleadtorevisionsovertime.Periodicreviewsoftheframework,basedonitsoperation,canimproveitsperformance,andoptimizeitsfunctioningtoevolvingcircumstances.Countries’accesstofundingwindows,thefinancingtermsunderwhichtheycanapplyforfunding,andtheoptionsavailableforspendingmayneedtoberevisedovertimetoreflectchangesintheirsituation(forinstance,intermsofdevelopmentlevel,capacitytoaccessfunds,andspendingneeds).Inaddition,ifcarbonrevenuesinonefundingwindowremainedunspentforacertaintime,theycouldbeshiftedtoanotherfundingwindow.Includingthisfeatureinthedistributionframeworkcouldensurethatcarbonrevenuesareusedtoaddressclimatechangeinatimelymanner.DistributingCarbonRevenuesfromShipping495.4ConclusionThischapterintroducesapossibledistributionframeworkforactivelymanagedcarbonrevenuesfrominternationalshipping.Thedistributionframeworkcouldbebuiltaroundthreelevers:arecipientlever,auselever,andafinancingtermslever.Theframeworksuggestsmakingcarbonrevenuesaccessibleviathreededicatedfundingwindows.Eachwindowcouldbeaccessedbyselectedcountrygroupsandforspecificpurposes.Countriescouldaccesscarbonrevenuesondifferentfinancingterms,reflectingtheirvaryingcircumstances.DistributingCarbonRevenuesfromShipping50Conclusions6DistributingCarbonRevenuesfromShipping51ConclusionsThisresearchoutlineshowcarbonrevenuesfrominternationalshippingcouldbedistributedinawaythatmaximizesclimateoutcomesandsupportsanequitabletransition.Ithighlightsthatdecarbonizingshipping,enhancingmaritimetransportinfrastructureandcapacity,aswellassupportingbroaderclimateaimsrepresenttherevenueoptionsmostalignedwiththeInitialIMOGHGStrategy,selectedprinciples,anddesirablefeatures.Basedonclimateandequityconsiderations,itdiscussestheviabilityofspendingpotentialrevenuesbeyondmaritimetransportandthecountrygroupsthatshouldbeabletoaccessthoserevenues.Eventually,itproposesapossibledistributionframeworkconsideringkeyissuesoftheIMOdebateandleveragingbestpracticefrompreviousclimatefinance.Onthisbasis,thereportidentifiessixmainfindings:1.Asignificantshareofcarbonrevenuesneedstobechanneledtosupportshipping’sdecarbonization.Decarbonizinginternationalshippingwillrequiretrillionsofdollarsininvestments.Tocoverthesecoststoacertainextent,mobilizeadditionalprivateandpublicfinance,andachievetippingpointsasquicklyaspossible,carbonrevenuesshouldbeusedtofinance,scaleup,andacceleratethedecarbonizationofinternationalshipping.2.Maximizingclimateoutcomescallsforfinancingclimateactionbeyondmaritimetransport.Usingashareofcarbonrevenuestosupportclimateactionmorebroadlycandeliverevengreaterclimateoutcomesoverallasitisunlikelythatthemostcost-effectiveopportunitiestomitigateoradapttoclimatechangewillallrelatetomaritimetransportalone.Thereis,therefore,aclimate-relatedcasetouseashareofcarbonrevenuesbeyondmaritimetransport.3.Anequitabletransitioncanbefacilitatedbyspendingcarbonrevenuesbeyondmaritimetransport.Spendingcarbonrevenuesexclusivelyonmaritimetransportislikelytolimitsomedevelopingcountries’accesstocarbonrevenues.Somedevelopingcountries,includingmanySIDSandLDCs,aswellasLLDCshavelimitedopportunitiestospendcarbonrevenuesonmaritimetransport.Therefore,usingcarbonrevenuesexclusivelyformaritimetransport-relatedspendingappearstobeatoddswithsupportinganequitabletransition.4.Prioritizingdevelopingcountriesasprimaryrecipientsofcarbonrevenuespromotesamoreequitableoutcome.Developingcountriestendtobemorevulnerabletoclimaterisks,havelesscapacitytoaddressthem,andhavehistoricallycontributedlesstoclimatechangethanmanydevelopedcountries.Makingdevelopingcountriestheprimaryrecipientsofcarbonrevenuescanhelpclosethefinancinggapbetweencurrentclimatefinanceflowsandtheirclimatefinancingneeds.Inaddition,carbonrevenuescanhelpaddresspotentialDNIsonStatescausedbyimplementingaclimatepolicymeasureininternationalshipping.Therefore,prioritizingdevelopingcountriesasprimaryrecipientsofcarbonrevenuescouldpromoteamoreequitableoutcome.Besides,consideringdevelopedcountriesascomplementaryrecipientsofcarbonrevenuescanfurtheraccelerateinternationalshipping’sdecarbonization.5.ReservingashareofcarbonrevenuesforSIDS,LDCsstrengthenstheirabilitytoaccessandusetheserevenues.GiventhefrequentlyreportedcapacityconstraintsofmanySIDSandLDCstopreparecompetitivefundingproposalsandtheirvulnerabilitytoclimatechange,areservedshareofcarbonrevenueswouldbeanadvantage.Thiswillshieldthemfromcompetitionwithcountriesthatfacelowerbarrierstoaccessingclimatefinanceorarelessvulnerabletoclimatechange.06DistributingCarbonRevenuesfromShipping526.Arevenuedistributionframeworkbuiltaroundthreeleversandthreefundingwindowscaneffectivelydeliverclimateandequitybenefitsforcountries.DrawinglessonsfromclimatefinanceandaccountingforkeyconsiderationsoftheIMOdebate,suchaframeworkcanbebuiltaroundthreeleversandthreefundingwindows.Recipients,useoptionsandfinancingtermsareleverswhichcanbeadjustedtoaddressclimateandequityconsiderations.Thethreefundingwindowsdifferintheiraccessandusemodalitiestoaccountforvaryingdevelopmentandclimatecircumstancesacrossgroupsofcountries.Thisresearchdemonstrateshowthedistributionofcarbonrevenuesfrominternationalshippingcanbenefitfromleveragingexistingexperience.Insightsfromclimateanddevelopmentfinanceprovidevaluableinformationonlessonslearnedandbestpractices.Thesecanbeutilizedtodesignadistributionmechanismsuitabletomaritimetransport,IMOpolicymaking,andtheclimateactionimperative.Thedistributionframeworkpresentedinthisreportintroducesanewapproachtodistributecarbonrevenuesgeneratedfrominternationalshipping.AsthepolicydebateattheIMOanddecarbonizationeffortswithinmaritimetransportevolve,socantheframework.Theframeworkhastheflexibilitytoaddressquestionsrelatedtolegalimplementation,institutionalgovernance,andpracticalmanagement.Additionalresearchcanhelpfurtheradvancecertaindetailsoftheframeworktodistributecarbonrevenues.Akeyelementofthedistributionframeworkisthenotionalorrelativesizeofeachfundingwindow.Additionalresearchcaninformthediscussiononthismatterandhelpidentifyhowmuchadditionalpublicinternationalfinanceisneededtocatalyzesufficientprivateandpublicinvestmentstodecarbonizeinternationalshipping.OtherresearchthatcouldinformthesizingoffundingwindowsaretheextenttowhichStatesareimpactedbypolicymeasurestoreduceGHGemissionsfrominternationalshippingandtheestimatedcarbonrevenuesneededtoavoid,mitigateand/orremedyDNIs.Giventheurgencytoaddressclimatechange,theadoptionofaglobalpolicytoallowinternationalshippingtodecarbonizeeffectivelyandequitablyiscritical—theWorldBanksupportsthisprocess.TheIMOiscurrentlydeliberatingmid-termpolicymeasurestodeliverontheambitionlevelssetinitsInitialGHGStrategyandrevisedstrategy,inlinewiththeParisAgreement.Thedesignofthetechnicalandmarket-basedmeasuresoffersthesectortheuniqueopportunitytonotonlydecarbonizeeffectively,buttransitioninamannerthatunlockscross-sectoralsynergies,promotesdevelopment,andempowerspeople.TheWorldBanksupportspolicymakers,industry,andcivilsocietyinthepolicymakingprocessattheIMO.DistributingCarbonRevenuesfromShipping53Bibliography7DistributingCarbonRevenuesfromShipping54BibliographyAdaptationFund.2022.“ReportoftheSecretariatonInitialScreening/TechnicalReviewofProjectandProgrammeProposals.”AFB/PPRC.29/3.AdaptationFund.Adeoti,Toluwanimi,CarolinaFantini,GeoffreyMorgan,ScottThacker,PietroCeppi,JehanBhikhoo,NehaKumar,StevenCrosskey,andNickO’Regan.2020.“InfrastructureforSmallIslandDevelopingStates.”Copenhagen,Denmark:UnitedNationsOfficeforProjectServices.Ameli,Nadia,OlivierDessens,MatthewWinning,JenniferCronin,HuguesChenet,PaulDrummond,AlvaroCalzadilla,GabrialAnandarajah,andMichaelGrubb.2021.“HigherCostofFinanceExacerbatesaCli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