Climate agreements in the international shipping sector

This paper examines carbon pricing in the international shipping sector, considering that the benefits from shipping trade and the willingness to pay (WTP) for reducing carbon emissions vary among countries. Given each country’s WTP for reducing carbon emissions, we derive optimal carbon pricing for three different cooperation scenarios and numerically illustrate their welfare effects for shipping trade between five major trading blocs (treated as countries). Full global cooperation provides a benchmark for the analysis. The focus of this study is on self-enforcing bilateral agreements, where we analyze two types of agreement: one with an equal allocation of tax revenues and one with a flexible allocation of tax revenues. We show what drives cooperation and how shipping trade volumes and shipping technologies respond to the agreements. Self-enforcing bilateral agreements between the five trading blocs could reduce emissions by three to seventeen percent compared to a baseline scenario with no emission reduction policies in place. The reduction in emissions is the result of a reduction of the volume of trade and implementation of abatement technologies. The high carbon abatement costs in shipping remain the main limitation for larger emission reductions.