Impacts of a Carbon Tax
Currently, the German government discusses the introduction of a prize for GHG emissions. This raises the question whether an internalization of the costs for emissions and the resulting prize increases for transport will result in lower demand and decreasing trade volumes. The prize government considers ranges between 50 and 60 EUR per ton Co2-eq. So, what might be its effect? To answer this question, it is important to examine how such a prize changes the costs of transportation. Below is a simplified calculation of the effect such an emissions prize would have for one container shipped from Shanghai (China) to Hamburg (Germany):
For a logistics service providing company, an additional cost of 112,43 EUR for one container shipped across this distance is substantial as it constitutes a prize increase of 10 to 20% based on confidential information from a logistics service providing company.
But how much would prizes increase for the end consumer? If we assume that the aforementioned container is used to ship jeans trousers, we can estimate that one container has a loading capacity of 14.000 pairs of jeans.[4] Based on all these assumptions, the transport costs of one pair of jeans will increase by less than one cent. So, the prize of one pair of jeans could increase by 0,01 EUR. It is doubtful that such a marginal prize increase will lead to a change in consumer behavior.
The Sulphur cap – a natural experiment
International transport using sea freight is about to undergo a change and this change can serve as sort of a natural experiment to understand, if additional (marginal) costs for transportation will lead to changes in consumer behavior. Below, I will explain how and why.
In 2020, the Sulphur cap will enter into effect. Traditionally, large container vessels run on heavy crude oil which contains 3,5% Sulphur. The Sulphur cap, introduced by the International Maritime Organization, prescribes that this proportion is not to exceed 0,5% from 2020 onwards. This new heavy crude oil is more expensive than the traditional one and from confidential conversation with logistics managers I know that the expectation is that prizes for container shipment across larger distances are expected to rise by up to 150 USD per container.
This prize increase is relatively similar to the one we looked at previously: 150 USD equals approx. 130 EUR and an additional cost of 130 EUR per container under the low Sulphur standard is similar to an additional cost of 112 EUR per container for associated GHG emissions.
Hence, the introduction of the cap will lead to an increase in transportation costs and we will be able to observe if and how this cost affects global trade. If there is no change, chances are that the carbon prize will leave matters unchanged. Hence, at least for international sea freight, political and managerial decision makers will be able to observe in 2020 what the effects may be.
Other Effects of the Sulphur Cap
The introduction of Sulphur cap was a major effort for the International Maritime Organization and political decision makers around the globe appreciate this achievement. Quite surprisingly, though, the public is barely informed about its implications for the environment and for society. Here is a modest attempt to contribute to alter this situation.
The implementation of the Sulphur cap is expected to result in a 75% reduction in SOx emissions from sea transportation. SOx emissions have substantial negative impact on human health. Research finds that the Sulphur may reduce premature deaths caused from shipping emissions from 403.000 to 266.300 per year (~66%)[5]:
Despite this achievement, the same study also reports that the Sulphur cap will probably aggravate rather than mitigate climate change. Sulphates from ship emissions reduce the radiative flux at Earth’s surface which results in a cooling effect. As emitted sulphates decrease, so will the cooling effect as the figure taken from the same research and reported below illustrates.[6][7]
[2] TEU = Twenty Foot Equivalent Unit, a capacity measure for conta
[4] Assuming one pair of jeans weighs 800 grams and assuming that the loading capacity of the container is 11,2 tons.
[5] Sofiev, Mikhail, James J. Winebrake, Lasse Johansson, Edward W. Carr, Marje Prank, Joana Soares, Julius Vira, et al. "Cleaner Fuels for Ships Provide Public Health Benefits with Climate Tradeoffs." Nature Communications 9, no. 1 (2018/02/06 2018): 406. Available at https://www.nature.com/articles/s41467-017-02774-9#Fig2, page 4.
[6] Sofiev, Mikhail, James J. Winebrake, Lasse Johansson, Edward W. Carr, Marje Prank, Joana Soares, Julius Vira, et al. "Cleaner Fuels for Ships Provide Public Health Benefits with Climate Tradeoffs." Nature Communications 9, no. 1 (2018/02/06 2018): 406. Available at https://www.nature.com/articles/s41467-017-02774-9#Fig2, page 6.
[7] Sofiev, Mikhail, James J. Winebrake, Lasse Johansson, Edward W. Carr, Marje Prank, Joana Soares, Julius Vira, et al. "Cleaner Fuels for Ships Provide Public Health Benefits with Climate Tradeoffs." Nature Communications 9, no. 1 (2018/02/06 2018): 406. Available at https://www.nature.com/articles/s41467-017-02774-9#Fig2, page 7.