TCS Daily

Ship of Fuels

By Jan Arlid Snoen - December 29, 2003 12:00 AM

Critics of free trade argue that international trade volumes are too high, because companies or nations don't have to bear the full environmental costs of transporting goods. This argument is valid, but of little practical importance. The contributions from such "environmental free-riding" to the tremendous growth in international trade are insignificant.


At least in developed countries, environmental policy is to a large extent based on the Polluter Pays Principle. Both considerations of equity and economic efficiency support this principle. The cost is mostly borne in the form of direct regulations, and not taxes, emission charges, tradable quotas and other economic instruments so much loved by economists.


Of course this principle is not consistently applied. Sometimes regulation is excessive or taxes higher than any reasonable calculation of environmental costs -- European gasoline taxes being one prominent example. Very often it is difficult to determine environmental costs, especially when there is considerable controversy over the nature, scale or even existence of a problem. Climate change is the most important case in point.


Taking the IPCC and other mainstream opinions on the threat of climate change at face value, and accepting the Polluter Pays Principle, international transport poses a challenge. Some 95 percent of world goods trade is transported by sea. Shipping accounts for some 2 percent of total global emissions of carbon dioxide, about 7 percent of sulphur dioxide and 11-12 percent of nitrogen oxide emissions, which also contribute to acid rain. Air transport accounts for some 3.5 percent of climate change forcing, according to the IPCC. A large share of these emissions must be attributed to passenger freight, not cargo. These percentages are total emissions, including domestic transportation, so the share of international transport is somewhat lower.


Emissions from international shipping and air transport are much more lightly regulated than other sources, and for the time being also exempt from the Kyoto treaty. This is mainly because it has proven impossible to agree on global regulations, especially taxes. Without widespread agreement taxes would prove inefficient in a world where fuel bunkering could easily migrate to an untaxed jurisdiction.


If we believe in the climate threat, it is true that this absence of taxes or regulations pushes transport costs too low. How important is this? If a market in CO2 emission quotas were established, the quota price would be a good proxy for the environmental cost. Most economists estimate that the quota price would be in the neighbourhood of $20/ton of carbon. Such a price or tax would increase the cost of international shipping by some 3 percent, according to my calculations based on work done by Laurie Michaelis for the OECD.


Shipping rates have been on a downward slope for several decades, not least because of the introduction of efficient container ships. Some estimates suggest a fall of almost two-thirds since 1965, although there are reasons to believe that this is too high. This fall has been an important driver behind the large increase in world trade. Even if we add a tax to pay for sulphur dioxide and NOx emissions on top of the CO2 quota price, imposing the full environmental costs on international shipping, it would not significantly influence transport costs, only make a slight upward blip in the falling curve.


Moreover, transport costs are only a fraction of total import prices. For imports to the U.S., freight costs are some 4 percent of total import value. Even if we put the environmental costs at 10 percent of transport costs and transport costs at 5 percent of import costs, imposing full environmental costs would increase import prices by only half a percent. This is hardly enough to have much impact either on international trade or global emissions.


To put this into perspective, average import tariffs are 4 percent in developed countries and 12 percent in developing countries, and come on top of a number of other trade restrictions. In an ideal world, all trade restrictions and tariffs would be eliminated, and all polluters would bear their full environmental costs. In such a world, international trade would increase strongly.



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