The proposed carbon tax for shipping in Japan represents a global shift.

With its carbon tax proposal, Japan may be on the verge of making history. Because the country has the world's third largest shipping industry, the carbon tax would be a significant policy shift for many businesses.

In June, the International Maritime Organisation's (IMO) environmental protection committee will consider the Japanese proposal. At the COP26 conference in November 2021, the global shipping industry committed to achieving net zero emissions by 2050.

However, the impact of the Japanese proposal could result in higher costs for businesses at a time when many countries are experiencing rising inflation. Industry groups and tax experts, on the other hand, dispute the cost impact.

The International Chamber of Shipping (ICS) has submitted research to the International Maritime Organization (IMO) demonstrating that higher carbon emission costs will not increase cargo shipping costs. There may be a price range within which the industry can operate without passing the cost on to consumers.

"A carbon price for shipping of between around $50 and $100 per CO2 tonne emitted would have a minimal impact on the price of delivered cargo," said Simon Bennett, the ICS's deputy secretary general.

"Reducing CO2 emissions is enlightened self-interest for shipping companies as fuel consumption is by far their greatest cost," Bennett said. "If they want to stay in business and to comply with global regulatory requirements, ships will have to reduce and ultimately eradicate all CO2 emissions."

To close the price gap between conventional and zero-carbon fuels, the ICS supports a carbon price. This could mean that high-carbon fuels and low-carbon alternatives compete on an equal footing.

The Japanese shipping industry, meanwhile, has yet to respond to the proposal. The Japanese Shipowners' Association (JSA), according to industry sources, is taking a "wait and see" approach to the proposal.

The $56 per tonne CO2 carbon tax proposed by Japan may not be high enough to raise prices. This could indicate that the carbon tax is ineffective, and $56 per tonne is only a starting point.

"If the intention of the tax is to bring down emissions, the tax needs to be so high that the shipping companies cannot just absorb it but will have to pass it on the customers," said Gorrissen Federspiel tax director Jesper Howes.

"Otherwise, it will not be effective in the sense it will not create an incentive to invest in green technology," Howes explained.

Companies that can invest in green technology, on the other hand, will have a competitive advantage if the tax is high enough to encourage them to do so. Without this incentive, businesses may not reduce their CO2 emissions.

Design, not just good intentions, is the key to good policymaking. If policymakers fail to design the carbon tax regime to act as a strong incentive, the headline rate of $56 per tonne could be implemented badly.

"A carbon levy can be designed in a way that channels revenues into supporting climate vulnerable countries with the impacts of climate change, as well supporting the uptake of zero-emissions fuels and technologies for shipping," said Aoife O'Leary, CEO of Opportunity Green.

"It is no longer a question of whether a levy will be imposed but rather whether that levy will be ambitious enough to make a difference to climate change," O'Leary said.

A majority of IMO member states, including all EU countries and even countries that have long opposed such measures, such as Brazil and China, support carbon taxes on shipping. Japan is catching up to the rest of the world in terms of technology.

The danger of getting the carbon tax wrong, according to O'Leary, is that it will result in "an administrative burden for business without driving the change that will allow them to survive long-term." The largest corporations will be best equipped to bear this burden.

"There is already a wide range of regulations and compliance obligations for international shipping companies. I do not foresee that this will be much different from what they are already handling today," Howes said.

For many businesses already dealing with rising energy costs, the prospect of a carbon tax is frightening. Shipping companies may be forced to switch to low-carbon fuel quickly to save money, but there will be no quick transition to alternative energy.

Change on this scale is costly, and the companies with the most resources to invest in green energy stand to benefit. "First movers within the field of green shipping technology are likely to gain a significant competitive advantage," Howes said.

"This may be challenging if the companies are not in a financial situation where they can make these investments," Howes said. "They will soon find themselves in a position where their vessels are outdated and more expensive for the customers compared with newer and greener vessels."

Climate initiatives are becoming more important than ever before, and the shipping industry must adapt. However, carbon taxes will have winners and losers, as the short-term costs of finding alternative fuels may reap long-term benefits.

By fLEXI tEAM