Policy Research Working Paper 8695 Understanding the Economic Impacts of Greenhouse Gas Mitigation Policies on Shipping What Is the State of the Art of Current Modeling Approaches Ronald A. Halim Tristan Smith Dominik Englert Climate Change Global Theme January 2019 WPS8695 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure AuthorizedProduced by the Research Support Team Abstract The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the cutive Directors of the World Bank or the governments they represent. Policy Research Working Paper 8695 The International Maritime Organization’s initial strategy on reduction of greenhouse gas emissions from ships stip- ulates that the international shipping sector should assess the impacts on states prior to adoption of the mitigation measures included in the strategy. This assessment should be undertaken as a matter of urgency, and disproportion- ately negative impacts should be assessed and addressed as appropriate. This paper aims to contribute to this discussion by reviewing the state-of-the-art research on the economic impacts of greenhouse gas mitigation measures on states, using model-based analysis. Specifically, the paper i iden- tifies four areas of economic impacts and their relationships, ii compiles the latest findings on the estimated magni- tudes of these impacts, and iii presents relevant modeling approaches along with best practices for selecting and apply- ing these approaches in impact assessments. The paper concludes that introducing greenhouse gas mit - igation measures, such as carbon prices applied to bunker fuels in the range of 10 to 50 USD/ton of carbon dioxide, might increase maritime transport costs by 0.4 percent to 16 percent. However, this would only marginally increase the import prices of goods by less than 1 percent. For transport choices, the increased cost of maritime transport induced by greenhouse gas mitigation measures might only slightly reduce the share of maritime transport, by 0.16 per- cent globally. Furthermore, a global carbon tax applied to all transport modes might stimulate a shift toward maritime transport from all other modes. The impacts of a carbon price in the range of 10 to 90 USD/ton of carbon dioxide on national economies are expected to be modest −0.002 percent to −1 percent of GDP. This paper is a product of the Climate Change Global Theme. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http//www.worldbank.org/research. The authors may be contacted at denglertworldbank.org. Understanding the Economic Impacts of Greenhouse Gas Mitigation Policies on Shipping What Is the State of the Art of Current Modeling Approaches Ronald A. Halim Tristan Smith Dominik Englert Keywords International Maritime Organization IMO, initial Strategy, greenhouse gas GHG, emissions, reduction, mitigation measures, international, maritime, transport, shipping, modeling, modelling, models, economic impacts, costs, choices, prices, trade, trade flows, gross domestic product, market-based measures, carbon pricing, carbon tax JEL C00, F17, F18, R13, R15, R41, R48 Version 24 January 2019, v1.1 Related documents An cutive summary of this paper which has been developed for policy-makers in international maritime transport can be found online http//documents.worldbank.org/curated/en/718061546900387225/ or http//tiny.cc/econ-model-ship-c-sum Acknowledgments This paper was prepared by Ronald A. Halim 1 , with valuable contributions from Tristan Smith 2University College London, UCL and Dominik Englert 3World Bank Group, WBG. This work was carried out on behalf of the World Bank Group under a joint collaboration with the OECD International Transport Forum OECD ITF and the University College London. The paper has been initiated in the context of the maritime workstream of the Carbon Pricing Leadership Coalition CPLC, a voluntary initiative hosted by the World Bank. It represents the output of the OECD-ITF Vivid Economics, 2010, or import prices of goods Vivid Economics, 2010, whereas other models are focused on the impact on transport activities ITF/OECD, 2017, and future trade flows Avetisyan, 2018; Cristea et al., 2013; Lee et al., 2013; Sheng et al., 2018. As a result, these models are often constrained in their ability to describe broader changes in interlinked systems. Multidisciplinary approaches are often required to study the comprehensive economic impacts of mitigation measures. An unexplored aspect of the application of these models is their suitability for answering policy questions on the economic impacts of GHG mitigation measures on international trade and shipping. In this context, knowledge on the available modeling approaches and their advantages and disadvantages is valuable to policy makers who would like to conduct effective and efficient impact assessments of GHG mitigation measures. 1.3 Objectives of this paper This paper presents a review of model-based studies with the aim of understanding the economic impacts of GHG mitigation measures on States. Literature was reviewed that analyzes different economic impacts of GHG mitigation measures and compiled an overview of the impacts across relevant systems. The focus was set on four types of impacts that are primarily related to economic perance of States i Transport costs; ii Transport choices; iii Import prices of goods; and iv Trade flows and economies of States. The economic impacts considered in this paper can be used to cover seven of the eight specific aspects of impact noted in the Strategy the paper did not cover “6 disaster response”. Figure 1 provides a mapping between economic impacts considered in this paper and the those listed in the Strategy. Figure 1 Mapping between economic impacts considered in this paper and eight aspects of impact assessment in the Strategy 2 Furthermore, a categorization was established for different types of models based on the scope of system responses included in the modeling rcises. This paper’s contribution is threefold First, with regard to GHG mitigation measures it identifies potential areas and mechanisms of economic impacts on the economies of States. Second, it compiles the latest findings on economic impacts of GHG mitigation measures based on the existing literature. Third, it presents state-of-the-art modeling approaches, their theoretical and practical advantages and limitations, and best practices for each. 2. Potential impacts of GHG mitigation measures 2.1 Linkages between GHG mitigation policies and economies of States The interdependencies between transport and trade systems have been widely recognized and studied. International shipping has for centuries played a critical role in international trade and its growth. By implication, changes in transport policies or other interventions in the transport market, like GHG mitigation measures, will likely be felt through international trade systems and the economies of States. GHG mitigation measure affect the economies of States through a causal chain First, the GHG mitigation measure will lead to higher ship running costs for carriers, be it through higher fuel prices due to a levy or other market mechanism or higher capital costs as carriers invest in new technologies and vessels or other solutions that reduce emissions. These higher ship running costs will lead to higher transport costs for the client also referred to as transport prices for the shipper. Most literature on freight transport defines transport costs as monetary expenses for the firms or shippers to transport goods from their origin to their destination. This means that transport costs include costs of running certain modes of transport air, rail, road, waterways, and maritime; other costs that occur due to intermodal transport operations, such as handling costs; additional tariffs linked to certain transport policy measures, such as road pricing and tolls; and time value of the commodities. Higher ship running costs may not pass immediately to the shipper, depending on market structures, trade balances, or possible cross-subsidies. In the long term, though, it can safely be assumed that higher ship running costs will lead to higher transport costs. Second, higher transport costs will change shippers’ modal, route, and port selection. This might also eventually impact the demand for maritime transport. For instance, when the application of a GHG mitigation measure results in an increase in maritime transport costs, shippers might find it worthwhile to consider switching from maritime to potentially cheaper alternative modes of transport, like road or rail. This is especially true when other modes might offer shorter travel time, which is attractive for high-value and time-sensitive products. It is worth noting that other modes of transport tend to have higher GHG emissions per ton-km than shipping, thus, to some extent, counteracting some of the intended impacts of the mitigation measure. Furthermore, increased transport costs could induce changes in the routes of shipping companies; they may adapt their port rotation schedules to minimize the total transport costs incurred. The analysis of impacts of transport policies such as GHG mitigation measures on shipper’s transport choices typically draws on transport modeling approaches. Third, the increase in transport costs, when substantial, may increase import prices of goods, since transport costs are a component of commodities’ market price. This increase in import prices is generally not proportional to increase in transport costs given import prices depend on several other factors, such as the share of maritime transport costs in product prices and the ability of importers to transfer costs to the consumers cost pass-through rate.