Ship-owner Response to Carbon Taxes: Industry and Environmental Implications

Abstract

We consider the effects of a maritime bunker levy on ship-owner profits, trade, and emissions. Standard and augmented gravity models are employed using data from 2016 to estimate the impact of a change in transit time and transit cost on grain and soybean trade flows and on vessel speed. Results for a bunker levy of 50 USD/tonne of fuel, or less, stress that it will not trigger a change in the optimal speed of the vessel which is contrary to most theoretical models that predict an increase in fuel costs will always lead to a reduction in speed and carbon emissions. For markets where the shipowners pass the tax on to final consumers, it is also optimal to keep the same speed (and transit time) as long as the tax is equal to, or less than, 100 USD/tonne. Bunker levies exceeding 100 USD/tonne may be needed to reduce carbon when trade flows are sensitive to trade costs and transport time, as may be the case for many agricultural commodities.

Keywords: agricultural trade, bunker levy, carbon tax, environmental policy, maritime economics, gravity model

JEL Classification: D22, F18, H23, Q17, R41