Marine Policy 138 (2022) 104989

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Marine Policy
journal homepage: www.elsevier.com/locate/marpol

Full length article

Carbon Emission Trading Scheme in the shipping sector: Drivers,

challenges, and impacts
Min Wu a, Kevin X. Li b, Yi Xiao c, Kum Fai Yuen a, *
a
School of Civil and Environmental Engineering, Nanyang Technological University, Singapore
b
Ocean College, Zhejiang University, Zhejiang, China
c
International School of Business & Finance, Sun Yat-Sen University, Zhuhai, China

A R T I C L E I N F O A B S T R A C T

Keywords: The aim of this study is to review, identify and synthesise the drivers, challenges and impacts of implementing a
Carbon Emissions Trading Scheme Carbon ETS in the shipping sector. PRISMA is adopted to review relevant articles selected from Scopus and Web
Carbon trading of Science databases. The review uncovers three categories of drivers, seven categories of challenges, and two
Carbon reduction
categories of impacts. The drivers are (1) limitations of existing technical and operational solutions; (2) promise
International shipping
of market-based solutions; and (3) attitudes of stakeholders. Challenges are about (1) geographical coverage; (2)
Climate change
sectoral coverage; (3) free emissions quota percentage and the carbon trading price; (4) conflict between com­
mon but differentiated responsibilities and equal treatment; (5) management difficulties; (6) jurisdiction under
international law; and (7) opposition from the shipping sector. Impacts are (1) environmental and economic
impacts and (2) optimal abatement strategy. This study offers some implications and recommendations for
relevant stakeholders on implementing carbon ETS.

1. Introduction
Shipping, a major source of global anthropogenic CO2 emissions
(accounting for about 2.2%), had historically been, more or less,
excluded from the global measures such as the Paris Climate Agreement
and the Kyoto Protocol to control climate change [1–3]. This exclusion
can be explained by the “Freedom of the Seas” doctrine, limited data
availability, flowability and decentralization, and the complex organi­
zational nature of international shipping [4–6]. However, these privi­
leges and immunities may soon be a thing of the past.
Due to rising environmental pressure, the International Maritime
Organization (IMO) has devoted to limiting and reducing carbon emis­
sions from the shipping sector since the early 2000 s [3]. In 2003, IMO
adopted Resolution A.963 (23), recommending a guideline including
technical, operational, and market-based solutions. These solutions
were developed by the Marine Environment Protection Committee
(MEPC) to reorient international shipping towards a low carbon tra­
jectory [7]. Since then, a series of technical and operational measures
have been taken. However, in recent years, the effectiveness of both
technical and operational solutions is limited. For example, the Energy
Efficiency Design Index (EEDI), a typical technical measure introduced
by the IMO, turned out to be less useful than initially thought because
ship operators can meet the EEDI requirement just by using derated
engines with less power instead of investing in technical advances [8].
The same applies to operational solutions. For example, “slow steam­
ing”, the most popular operation measure, has very limited potential of
further reducing carbon emissions given that most ocean-going ships
have reduced their speed between 15 and 18 knots [9]. Subsequently,
calls for expanding market-based measures, which can effectively pro­
mote emissions reduction by internalizing the external costs in the
shipping industry, have gained momentum [10,11].
The Carbon Emissions Trading Scheme (ETS) is a form of market-
based measures which should have been applied to regulate the ship­
ping sector but was not due to its complexities and administrative
burden [6]. Nowadays, increasing regional emission trading schemes
are considering the inclusion of the shipping sector into their schemes.
They include the EU ETS and China ETS. In July 2021, the EU released
its updated green deal, called "Fit for 55", a key proposal of which is to
progressively extend the EU ETS to the maritime sector from 2023 to
2025 [12]. In comparison, China tends to be a little bit more conser­
vative. China is observing how Europe’s expected inclusion of shipping
in the ETS plays out before deciding whether to do the same [13]. These
countries’ tendency to revise their Carbon ETS has attracted renewed
attention and research on the application of Carbon ETS in the shipping

* Corresponding author.
E-mail address: kumfai.yuen@ntu.edu.sg (K.F. Yuen).

https://doi.org/10.1016/j.marpol.2022.104989
Received 21 December 2021; Received in revised form 22 January 2022; Accepted 2 February 2022
Available online 10 February 2022
0308-597X/© 2022 Elsevier Ltd. All rights reserved.
M. Wu et al.
Fig. 1. Flow chart for the systematic review.
sector [13,14]. With such growth in research, it is now timely to review
the literature on Carbon ETS in the shipping sector. This article selects
and reviews manuscripts from Scopus database and Web of Science
database by using the PRISMA guidelines. The review classifies existing
research into three themes: (1) drivers, (2) challenges, and (3) impacts.
Accordingly, they investigate (1) what are the drivers of applying a
Carbon ETS, (2) what challenges may arise, and (3) what are the con­
sequences if a Carbon ETS is adopted in the shipping sector. This study
contributes to the literature by finding answers to the above questions
and addressing the challenges that would be encountered in different
phases of implementing a Carbon ETS. It also offers some implications
for policy makers and other entities (e.g., shipping owners, shipping
operators, and ports) involved in the shipping sector. For policy makers,
this paper would help them determine the key tasks that are needed to
prioritize and complete implementing a Carbon ETS in the shipping
sector. For other entitles involved, they could benefit by planning an
optimal abatement strategy to avoid last-minute panic.
The remainder of this review is organized as follows. In Section 2, the
review methodology is introduced, and the entire selection process is
presented. In Section 3, a Carbon ETS is defined, highlighting the
different types and the comparison with a carbon tax. In Section 4, the
results are organized into drivers, challenges, and impacts. In Section 5,
2
Marine Policy 138 (2022) 104989
the conclusions and recommendations for future research are provided.
2. Review methodology
To improve the transparency and accuracy of reporting of the review,
the Preferred Reporting Items for Systematic Reviews and Meta-
Analyses (PRISMA) guidelines were adopted [15]. PRISMA is a sys­
tematic review approach, which can help researchers select the most
relevant manuscripts for their study by referring to the 27-item checklist
and the four-phase flow diagram [16]. The four-phase flow diagram
displaying the selection process of manuscripts in this review is shown in
Fig. 1. Accordingly, the remainder of this section is also divided into four
parts according to the flow diagram: (1) Identification, (2) Screening, (3)
Eligibility, and (4) Included.
2.1. Identification
In the first phase, related academic documents are captured from
databases by conducting a multi-layer search technique to their title,
abstract, and keywords. For databases, Scopus and Web of Science are
chosen because they are the largest and most famous databases to date
[17]. Scopus is an abstract and citation database belonging to Elsevier, a
M. Wu et al. Marine Policy 138 (2022) 104989

Table 1 Table 2
Search keywords and results of Scopus. Search keywords and results (before setting limits) of Web of Science.
Layer Search Keywords Results Set Results Search operators and wildcards
b c d
no Add Add Add #1 1803 TI= (“Carbon trad*” or (“Carbon” and “Emission trad*”) or
limita subject document language (“Emission market*” and “Carbon”) or “Carbon market* ” or
area type limit limit “Carbon pric* ” or (“Trad*” and “Carbon credit*”) or (“Trad*”
limit and “Carbon allowance*”))
#2 5640 AB= (“Carbon trad*” or (“Carbon” and “Emission trad*”) or
First TITLE-ABS-KEY 9527 8661 8365 8019
(“Emission market*” and “Carbon”) or “Carbon market* ” or
(“Carbon trad*” or
“Carbon pric* ” or (“Trad*” and “Carbon credit*”) or (“Trad*”
(“Carbon” and
and “Carbon allowance*”))
“Emission trad*”) or
#3 2084 AK= (“Carbon trad*” or (“Carbon” and “Emission trad*”) or
(“Emission market*”
(“Emission market*” and “Carbon”) or “Carbon market* ” or
and “Carbon”) or
“Carbon pric* ” or (“Trad*” and “Carbon credit*”) or (“Trad*”
“Carbon market*” or
and “Carbon allowance*”))
“Carbon pric*” or
#4 136 KP= (“Carbon trad*” or (“Carbon” and “Emission trad*”) or
(“Trad*” and
(“Emission market*” and “Carbon”) or “Carbon market* ” or
“Carbon credit*”) or
“Carbon pric* ” or (“Trad*” and “Carbon credit*”) or (“Trad*”
(“Trad*” and
and “Carbon allowance*”))
“Carbon
#5 3963466 TI= (“Maritime” or “Ship*” or “Port*” or “Cruis*”)
allowance*”))
#6 8298259 AB= (“Maritime” or “Ship*” or “Port*” or “Cruis*”)
Second TITLE-ABS-KEY 502 464 450 438
#7 133245 AK= (“Maritime” or “Ship*” or “Port*” or “Cruis*”)
(“Carbon trad*” or
#8 60678 KP= (“Maritime” or “Ship*” or “Port*” or “Cruis*”)
(“Carbon” and
#9 349 (#1 OR #2 OR #3 OR #4) AND (#5 OR #6 OR #7 OR #8)
“Emission trad*”) or
(“Emission market*” Notes: TI=Title AB=Abstract AK=Author Keywords KP=Keyword Plus.
and “Carbon”) or
“Carbon market*” or
“Carbon pric*” or
Table 3
(“Trad*” and
“Carbon credit*”) or
Search results (after setting limits) of Web of Science.
(“Trad*” and Combining Results
“Carbon Sets
allowance*”)) AND no Add subject Add document Add language
TITLE-ABS-KEY limit area limit type limit limit
(“Maritime” or #9 349 348 331 295
“Ship*” or “Port*”
or “Cruis*”)
a
Number of manuscripts before setting limits. concerning carbon trading market are retrieved. The simple size reduced
b
Number of manuscripts after setting limits on subject area. to 8019 after adding limits on subject area, document type and lan­
c
Number of manuscripts after setting limits on subject area and document guage. However, the simple size is still too large for “Identification” and
type. includes many academic literatures irrelevant to this review which fo­
d
Number of manuscripts after setting limits on subject area, document type, cuses on the carbon trading market in the shipping industry. Hence, the
and language. second-layer search, which adds the keywords related to the shipping
industry, is performed. After limiting the subject area, document type
world’s leading publishing company incorporating peer-reviewed liter­ and language, 438 manuscripts are captured.
ature in scientific, technical, and medical content [18] while Web of Tables 2 and 3 display search keywords and results of Web of Sci­
Science is an interdisciplinary database managed by Thomson Reuters. It ence. Due to the differences on retrieval methods, the search process of it
is used in this identification phase to complement Scopus because it may seem a little different from that of Scopus. However, in fact, the
enables a deeper search of publications and offers the most in-depth logic behind the two selection processes is essentially the same. As the
citation by source [17]. advanced search in Web of Science allows forming and combining
As for the multi-layer search, search keywords and search process of search sets, four sets (i.e., #1, #2, #3, and #4) are defined to integrate
these two search engines (i.e., Scopus and Web of Science) are presented academic documents related to carbon trading market by searching their
in detail respectively. Table 1 shows the two-layer search structure Title, Abstract, Author Keywords, and Keyword Plus respectively. While
developed for Scopus. The first layer defines the search keywords related Set #5, Set #6, Set #7, and Set #8 are designed to capture manuscripts
to the carbon trading market and the second layer adds the keywords concerning the shipping industry, search operators and wildcards for all
concerned with the shipping industry. Asterisk is used as a truncation the eight sets are presented in Table 2. Thereafter, a Boolean expression
symbol to search and retrieve all forms of a keyword with the same root is applied to define Set #9 which consists of academic literature dis­
but alternate endings [19]. For example, “trad* ” can capture keywords cussing the carbon trading market in the shipping industry. Before
such as “trade”, “trades”, “trading” “trader” and “traders”. setting limits on subject area, document type, and language, Set #9
Further, to improve the efficiency and quality of the selection pro­ covers 349 manuscripts. The number decreased to 295 after limiting the
cess, some limits are adopted on subject area, document type, and lan­ subject area (i.e., science technology and social sciences), document
guage. For subject area, only manuscripts from “Environmental type (i.e., Article, Meeting, and Review) and language (i.e., English).
Science”, “Energy”, “Engineering”, “Social Sciences”, “Economics, As shown in Fig. 1, the total academic literatures gathered from
Econometrics and Finance”, “Business, Management and Accounting”, Scopus and Web of Science are 438 and 295 respectively. After removing
“Earth and Planetary Sciences”, “Decision Sciences”, and “Psychology” duplicates, the size of the sample decreased to 503.
would be selected. As for document type, the results only cover aca­
demic literature belonging to Article, Conference Paper, Book Chapter, 2.2. Screening
Review, and Book. In addition, only manuscripts published in English
shall be considered in this review. In the screening phase, the 503 manuscripts gathered through
The search was implemented on 20 June 2021. As can be seen in “Identification” are first screened by their titles and abstracts to deter­
Table 1, after conducting the first-layer search, 9527 manuscripts mine their relevance with the topic of this review. After screening, 372

3
M. Wu et al. Marine Policy 138 (2022) 104989

Table 4 Table 5
Records excluded in the screening and eligibility phase. Descriptive statistics (n = 28).
Phase Reasons Number of records Characteristics n
excluded
Year of publication
Screening No abstract available 1 2021 (as of 20 June 2021) 2
Irrelevant to carbon trading market 5 2020 2
Irrelevant to shipping industry 361 2019 8
Irrelevant to carbon trading market & shipping 5 2018 4
industry 2015 3
Sum 372 2014 2
Eligibility Irrelevant to carbon trading market 6 2013 1
Irrelevant to shipping industry 18 2012 1
Study energy-intensive companies excluding 13 2011 4
shipping industry 2009 1
Study carbon capture, storage, or transportation 12 Document type
Study energy system 9 Article 22
Study carbon tax but not carbon trading market 8 Conference paper 3
Study transportation sector excluding water 4 Review 2
transport Book chapter 1
Just mention carbon trading market as a 8 Source title
background without further discussion Transportation Research Part D: Transport and Environment 3
Carbon pricing refers to other instruments but 3 Climate Policy 2
not carbon trading market Environmental Science and Policy 2
Full text is not available 18 Journal of Cleaner Production 2
Language is not English 2 Sustainability (Switzerland) 2
Duplicates 2 Othersa 17
Sum 103 Publisher
Total Sum 475 Elsevier 12
Taylor & Francis 3
Oxford University Press 2
records are excluded. Among them, one record is eliminated for “No Springer 2
Brill 2
abstract available”, five records are removed for being “Irrelevant to
MDPI 2
carbon trading market”, 361 records are excluded for being “Irrelevant Othersa (i.e., Coastal Education Research Foundation, EDP Sciences, IOP 5
to shipping industry”, and five records are removed for being “Irrelevant Publishing, Maney Publishing & Penn State University Press)
to carbon trading market & shipping industry” (See Table 4). Hence, 131 Impact factor (Clarivate Analytics)
manuscripts are retained after the screening. Yes 24
No 4
Method
2.3. Eligibility Optimisation 9
Scenario analysis 5
“Eligibility” can be seen as a second layer of screening. However, the Document analysis 3
Simulation 3
full text rather than title and abstracts is screened for each record. In this
Correlational analysis 2
phase, 103 records are excluded for 12 main reasons. They are (1) Cost effectiveness analysis 2
irrelevant to carbon trading market, (2) irrelevant to shipping industry, Othersa (i.e., Game theory, Interview, Root Cause Analysis & Stochastic 4
(3) studying energy-intensive companies excluding shipping industry, programming)
(4) studying carbon capture, storage, or transportation, (5) studying a
Sub-characteristics with a frequency of one are aggregated.
energy system, (6) studying carbon tax but not carbon trading market,
(7) studying transportation sector excluding water transport, (8) quantitative synthesis could also be called meta-analysis. Meta-analysis,
mentioning carbon trading market as a background without further according to Deeks JJ [20], refers to the statistical integration of results
discussion, (9) covering carbon pricing with reference to other in­ of included studies.
struments but not the carbon trading market, (10) not available for All 28 manuscripts are listed in chronological order in Appendix A.
downloads, (11) not in English, and (12) duplicates. The number of The descriptive statistics of the 28 documents are exhibited in Table 5. It
records eliminated for each reason are displayed in Table 4. should be noted that most manuscripts were published in 2019 (n = 8),
which might result from IMO’s increasing attention toward GHG emis­
2.4. Included sions reduction measures.1 Half the number of manuscripts (n = 4) were
published in both 2011 and 2018. Further, it is observed that the number
Last, the size of the sample reduced to 28 (See Fig. 1). It is an amount of manuscripts published in the last two years (i.e., 2020 and 2021) is
which is deemed to be feasible for the researchers to conduct both limited (n = 2), which does not necessarily indicate decreasing interest
qualitative and quantitative synthesis. In a systematic review, the

1
From 1 January 2019, fuel oil consumption data of ships of 5000 gross
tonnage and above (representing approximately 85% of GHG emissions from
ships) were required to be collected and submitted to IMO; In May 2019, MEPC
74 was held and it approved amendments to MARPOL Annex VI, initiated the
Fourth IMO GHG Study, adopted resolution MEPC.323(74), identified a pro­
cedure for assessing impacts on States of candidate measures for reduction of
GHG emissions from ships, and established a multi-donor trust fund for GHG
("GHG TC-Trust Fund"). In November 2019, the sixth meeting of the Interses­
sional Working Group on Reduction of GHG Emissions from Ships was held.For
more details, visit: https://www.imo.org/en/OurWork/Environment/Pages/
GHG-Emissions.aspx.

4
M. Wu et al.
Fig. 2. Emissions Trading Scheme vs. Carbon Emission Trading Scheme. 1 Fluorinated gases (F-gases) include hydrofluorocarbons (HFCs), perfluorocarbons (PFCs),
sulfur hexafluoride (SF6) and nitrogen trifluoride (NF3).
toward the carbon trading market in the shipping industry but may be
due to the COVID-19 pandemic. As for document type, most of them are
articles (n = 22). A smaller number of these documents are classified
under Conference paper (n = 3), Review (n = 2), and Book chapter
(n = 1).
Regarding the source title, three of them are published in Trans­
portation Research Part D: Transport and Environment, and two in Climate
Policy, Environmental Science and Policy, Journal of Cleaner Production,
and Sustainability (Switzerland) separately. The rest are published in
other sources with a frequency of one. They are Annals of Operations
Research, E3S Web of Conferences, Economic Policy, Energy Policy, Envi­
ronmental Innovation and Societal Transitions, International Journal of
Marine and Coastal Law, IOP Conference Series: Earth and Environmental
Science, Journal of Coastal Research, Journal of Environmental Law, Jour­
nal of World Investment & Trade, Marine Pollution Bulletin, Maritime Policy
& Management, Procedia Manufacturing, Sustainable Shipping: A Cross-
Disciplinary View, Transportation Journal, Transportation Letters, and
Transportation Research, Part A: Policy and Practice. All manuscripts from
these sources, expect Sustainable Shipping: A Cross-Disciplinary View,
which is a book, have been through peer review, upholding their quality,
validity, and relevance.
Most of the academic documents are published by highly regarded
academic journal publishers such as Elsevier (n = 12), Taylor & Francis
(n = 3), Oxford University Press (n = 2), and Springer (n = 2), which
guarantees the credibility of these manuscripts. Furthermore, almost all
manuscripts (n = 24), with the exception of three conference papers and
one book chapter, have been granted an Clarivate Analytics impact
factor, further emphasizing the reliability and quality of the search
process introduced above.
As for the research method used by these manuscripts, optimisation
is the one that appears most often (n = 9). The second common method
is scenario analysis (n = 5). This is followed by document analysis
(n = 3), simulation (n = 3), correlational analysis (n = 2), and cost
effectiveness analysis (n = 2). Another four methods (i.e., Game theory,
Interview, Root Cause Analysis and Stochastic programming) are
employed with a frequency of one.
Next, this paper will focus on the 28 documents dealing with the
carbon trading market in the shipping industry.
3. What is a carbon emission trading scheme?
3.1. Definition
Before defining Carbon Emission Trading Scheme, we introduce the
5
Marine Policy 138 (2022) 104989
Emissions Trading Scheme (ETS). Emissions Trading Scheme (ETS), also
called “cap-and-trade scheme”, is a market-based approach used to
reduce greenhouse gas (GHG) emissions by providing economic in­
centives for firms, corporations, and other entities [21–23]. In this
scheme, emissions are freely traded just like any other commercial
commodity and are assigned a price determined by supply versus de­
mand [24,25]. A “cap” or a “limit” on the total emissions is set by a
political decision. Then the cap is divided into carbon emission quotas,
essentially the right to emit a specific volume of GHG, which shall be
allocated to involved entities free of charge or through an auction [22,
26,27]. If an entity emits less than its quotas, it can sell its leftover al­
lowances. Conversely, if an entity emits more than its quotas, it is
obliged to buy allowances from others in the carbon market [4,28]. In
ETS, it is the profit and its potential to rise or fall, but not the traditional
threat of penalties, which motivates the entities involved to reduce
emissions [22]. Hence, ETS is considered a type of flexible,
cost-effective, and promising environmental regulation since it makes
the most of the market and is adaptive to a range of different socio­
economic settings [29]. As of 2021, 17 GHG ETSs have been imple­
mented and put into operation in 35 countries, 12 states and 7 cities,
such as China, Europe, South Korea, and New Zealand [22,30].
However, there are many types of GHGs which would affect the
quality and efficiency of the ETSs. After all, setting and operating a
specific emissions trading market for each GHG is not an easy task. Thus,
an assumption of creating one Carbon Emission Trading Scheme, which
covert all GHGs as standard multiples of carbon dioxide, came into ex­
istence (See Fig. 2). In Fig. 2, the GHG is defined by the 2011 amend­
ments to the Kyoto Protocol [23] and the United Nations Framework
Convention on Climate Change (UNFCCC) [31]. In Carbon ETS, all GHGs
are converted into CO2 equivalents, making it possible to trade and settle
emission quotas across countries, regions, and sectors, with the least
financial impact on businesses [32]. Regrettably, a global Carbon
Emission Trading Scheme, covering all countries, regions and sectors
has not been found. In fact, the existing schemes only include a limited
scope of emissions in a specific area. For instance, the China National
Emission Trading Scheme (CNETS), the world’s largest ETS established
in 2021, only curb emissions of CO2 from the heating and power sectors
[33,34]. On the other hand, the European Union Emissions Trading
Scheme (EU ETS), the first large Emissions Trading Scheme all over the
world, covers CO2, Nitrous oxide, Perfluorocarbons emissions from the
power, oil refineries, combustion plants and airline sectors [22,35].
M. Wu et al. Marine Policy 138 (2022) 104989

Table 6 emissions by internalizing the external costs (i.e., paying for the CO2 or
Ten proposed Market-based Measures submitted to the IMO. CO2 equivalents that are emitted) [37].
Proposed Market-based Measures Proposers MEPC To date, 10 proposed Market-based Measures have been submitted to
No. the IMO (See Table 6). It is noted that a carbon tax and a Carbon ETS are
International Fund for GHG emissions Cyprus, Denmark, the MEPC the two most important types of Market-based Measures [38,39]. Under
from ships (GHG Fund) Marshall Islands, Nigeria 60/4/8 a carbon tax, a tax rate is set on the emissions of GHGs. That is, emitters
and IPTA have to pay extra for each ton of emissions they emit, normally shown as
Leveraged Incentive Scheme (LIS) Japan MEPC a higher price of fossil fuels [40,41].
60/4/37
Port State Levy Jamaica MEPC
The key similarities between a Carbon ETS and a Carbon Tax are they
60/4/40 both (1) promote emissions reduction with financial incentives, (2)
Ship Efficiency and Credit Trading United Sates MEPC encourage involved entities to invest in new low-carbon technologies,
(SECT) 60/4/12 and (3) generate government revenue which can be utilized in produc­
Vessel Efficiency System (VES) World Shipping Council MEPC
tive ways [42]. The main difference is that the Carbon ETS pre-defined
60/4/39
Global Emission Trading System (ETS) Norway MEPC the emission reduction outcome while the Carbon Tax pre-defined the
for international shipping 61/4/22 carbon tax. In other words, the former limits the overall level of emis­
Global Emissions Trading System (ETS) United Kingdom MEPC sions whilst the latter charges emitters but doesn’t set a cap on how
for international shipping 60/4/26 much they can emit [43].
Emissions Trading System (ETS) for France MEPC
International Shipping 60/4/41
Market-Based Instruments: a penalty Bahamas MEPC 4. Applying a Carbon ETS in the shipping sector: drivers,
on trade and development 60/4/10 challenges, and impacts
Rebate Mechanism (RM) for a market- IUCN MEPC
based instrument for international 60/4/55
This section presents and discusses three different phases (i.e.,
shipping
drivers, challenges, and impacts) of applying a Carbon ETS in the
Source: IMO. Market-Based Measures. Available online: https://www.imo. shipping industry. As shown in Fig. 3, all manuscripts (1) discussing the
org/en/OurWork/Environment/Pages/Market-Based-Measures.aspx drivers of involving the shipping sector into a Carbon ETS are cat­
egorised under “Drivers”, (2) summarizing the implementation and
3.2. Comparison with alternative market-based measures: a carbon tax or regulatory challenges of this application are listed in the subcategory-
a Carbon ETS? “Challenges”, and (3) assessing the potential effects of a Carbon ETS for
shipping are classified into “Impacts”. Given that some articles refer to
Various definitions of market-based measures exist. In this paper, the more than one phases, they might appear in two or even three
definition given by the Organization for Economic Cooperation & subcategories.
Development [36] is used. Market-based measures seek to tackle the
market failure of "environmental externalities" by (1) collecting taxes or 4.1. Drivers: what are the drivers of applying a Carbon ETS?
charges on processes or products to incorporate the external cost of
production or consumption activities, or (2) creating property rights and 4.1.1. Limitations of technical and operational solutions
establishing a proxy market to regulate the use of environmental ser­ On 5 December 2003, the International Maritime Organization
vices. In the context of the shipping industry, this can be simply read as: (IMO) adopted Resolution A.963 (23), which stresses that, to achieve the
creating financial incentives for the shipping operators, shipping objective of reducing GHG emissions from international shipping, the
owners, ports, or other entities in the shipping industry to reduce main task of the Marine Environment Protection Committee (MEPC) is

Fig. 3. Categorization of research on Carbon ETS in shipping.

6
M. Wu et al.
to develop a timetable to guide the application of technical, operational,
and market-based solutions for the shipping sector [7,44,45]. However,
due to the limitations of both technical and operational solutions, calls
for expanding market-based measures in the shipping industry have
gathered momentum in recent years [10,11].
To be specific, technical solutions refers to cutting the CO2 emissions
per ship per capacity-mile by encouraging the adaption of more energy-
efficient ship’s equipment [46]. The Energy Efficiency Design Index
(EEDI), as a typical technical measure introduced by the IMO at MEPC
62nd session in July 2011, originally aimed to, from the design phase,
promote technical improvements boosting the fuel efficiency of a ship
[44,46,47]. However, it turns out that this performance-based index
fails to achieve its own designed goal because ship operators can meet
the EEDI just by using derated engines with less power instead of
investing in technical advances [8]. Therefore, it can worsen the situa­
tion. Devanney [48] found that for very large crude carriers (VLCC),
complying with the EEDI can even lead to a small rise in CO2 emissions.
In addition, the fundamental principle and calculation of the EEDI in­
fluences shipyards to build larger ships because of a better fuel economy
and hence, a smaller EEDI [49]. Nevertheless, this may result in a new
set of problems: (1) energy waste due to partial load during a recession
(e.g., the global market after COVID-19), (2) concentrated pollution at
hub ports, and (3) crises in public health and biodiversity resulting from
ship breaking [44].
Besides the EEDI, some other technical solutions which, according to
Crist [50], can be classified into five categories (i.e., auxiliary power
systems, propulsion systems, engine & transmission technology, super­
structure aerodynamics, and hull shape) have emerged. However,
shipping, which is a technology-laggard sector, is always slow to react to
technical innovation [44]. Compared to taking actions rapidly, most
ship operators prefer to adopt a “wait-and-see” approach, which is their
decision of whether to apply a new technology depends on the feedback
of early adopters [51]. In other words, the motivation for ship operators
to invest in technical improvements is low because they do not want to
pay a high premium for new technologies whose investment returns
cannot be guaranteed [52]. Therefore, it is obviously unrealistic to rely
solely on a technical index or ship operators’ initiatives to promote
technical innovation and thus to reduce the CO2 emissions from the
shipping sector (or some other GHG emissions).
As for operational solutions, they are often related to ship’s operation
(e.g., speed optimization & reduction, enhanced network routing, hull
cleaning, and engine maintenance) and energy management (e.g.,
SEEMP) [6,44,45,52,53]. Among all major operation measures, speed
reduction, often referred to as “slow steaming” has proven to be the most
significant [6,44,54]. From 2007 to 2012, CO2 emissions from the
shipping industry dropped by around 10% due to “slow steaming” [55].
However, given that most ocean-going ships have reduced their speed
between 15 and 18 knots, the potential of further cutting emissions by
using “slow steaming” is very limited [9]. Besides, there are two major
concerns about “slow steaming”. One is speed reduction would inevi­
tably increase shipping time and thus operation cost (e.g., staff salaries),
but decrease punctuality [44]. Another is maintaining “slow steaming”
in the shipping boom is impractical and imprudent, which can seriously
affect a ship operator’s annual income [44].
Meanwhile, to improve energy management, the Ship Energy Effi­
ciency Management Plan (SEEMP) was issued by the IMO in the MAR­
POL Annex VI just along with the EEDI [6,45,47,56]. The SEEMP is a
scheme that provides ship specific measures that need to be imple­
mented for energy efficient operations. The SEEMP is a 4-step (i.e.,
planning, implementation, monitoring, and self-evaluation and
improvement) guideline that seeks to instruct shipping companies in
each step to help them manage their ships and thus improve the energy
efficiency [46,56,57]. However, the SEEMP is a voluntary guidance
rather than a compulsory rule which leaves a broad discretion for
implementation to shipping companies [57].
According to Bazari and Longva [58], by 2050, the total CO2
7
Marine Policy 138 (2022) 104989
emissions from international shipping will double the volume in 2007.
Therefore, to achieve the IMO 2030 and 2050 targets2 and help keep
global warming well below 2 ℃,3 simply relying on technical and
operational solutions would not be enough. Hence, switching to
market-based measures (e.g., a carbon tax or a Carbon ETS) shall
motivate the shipping operators, shipping owners, ports, or other en­
tities in the shipping industry to reduce emissions actively by internal­
izing the external costs [6,44,52].
4.1.2. Promise of market-based solutions
Studies have focused on the potential effects of market-based solu­
tions, especially the Carbon ETS and the carbon tax. Dessens, Anger,
Barker and Pyle [59] applied an E3MG model to evaluate the effects of
the Global Emissions Trading Scheme (GETS) on GHG emissions miti­
gation from 2000 to 2050, finding that around 65% of GHG emissions
from international shipping can be reduced by applying the scheme on
the shipping sector. Zhu, Yuen, Ge and Li [60] developed a stochastic
programming model to inspect the impact of an open maritime emis­
sions trading system (METS) on fleet deployment and CO2 emissions
reduction and estimated that CO2 emissions can be cut by at least 1.54%
and at most 3.38% per year, which significantly beyond the 0.88%
emissions-reduction target set by the shipping sector. Using an
agent-based model, Karslen, Papachristos and Rehmatulla [52]
demonstrated that, compared to introducing market-based solutions and
demonstration projects separately, a simultaneous introduction can lead
to a better emission-reduction result. According to a stakeholder survey
conducted by the EU Commission, among the potential carbon pricing
alternatives, the expansion of the existing EU ETS to marine transport is
the preferred carbon pricing option stated by stakeholders [61].
Even though the promise of market-based solutions has been proven
in many studies, which is the best, a carbon tax or a Carbon ETS, has not
been determined. Currently, a carbon tax seems to attract more attention
and support. Garcia, Foerster and Lin [6] systematically examined three
major measures of GHG emissions reduction (i.e., National Action Plans
(NAPs), market-based mechanisms and alternative fuels) proposed by
IMO and argued that a carbon tax is more efficient than a Carbon ETS.
Kim and Chang [62] discussed the effects of a carbon tax and a Carbon
ETS in an extended intermodal transportation network in Korea, indi­
cating that a Carbon ETS appears less effective than a carbon tax in
mitigating CO2 emissions. However, what must be clear is that all the
findings listed in this paragraph are based on the fact that simplified
models are used. As ETS is a much complicated scheme than a carbon
tax, the validity of the impact assessment remains questionable.
4.1.3. Attitudes of stakeholders
The necessity of introducing a Carbon ETS to the shipping sector also
reflects in the attitudes of stakeholders. As early as 2007, the European
Commission claimed that the IMO should take more aggressive action to
reduce the GHG emissions of the shipping sector. If the IMO and
UNFCCC processes could not, it would expand its GHG reduction
commitment regime (including the EU ETS) to the shipping industry
[63,64]. The international shipping industry then expressed that it
would take an active part in global effort to reduce CO2 emissions [65].
The IMO, or to be more specific, its MEPC, has introduced a range of
proposed market-based measures to promote applying a Carbon ETS to
the shipping industry (See details in Section 3.2).
2
Compared to 2008, IMO 2030 and 2050 targets involve reducing CO2
emissions per transport work by at least 40% by 2030, pursuing efforts towards
70% by 2050. For more details, please visit: https://www.imo.org/en/Medi
aCentre/HotTopics/Pages/Reducing-greenhouse-gas-emissions-from-ships.aspx
3
limiting global warming to well below 2 is the goal of the Paris Agreement,
which is a legally binding international treaty on climate change. For more
details, please visit: https://unfccc.int/process-and-meetings/the-paris-
agreement/the-paris-agreement
M. Wu et al.
However, different from the international or regional organizations,
the regulated parties (i.e., shipping operators, shipping owners, and
ports) may be less welcoming to a Carbon ETS for shipping industry
since it may reduce their net income [45,52]. First, the International
Chamber of Shipping (ICS), which represents ship owners and ship op­
erators, advocates for a global carbon tax rather than a Carbon ETS to
avoid the volatility arising under an ETS [66]. Then, Mellin and Rydhed
[4] conducted interviews and a literature review to assess Swedish
ports’ attitudes towards different market-based measures and pointed
out that ports are least positive towards the ETS though they believed
that an ETS will be applied in shipping industry in the future. Engine
manufacturers also seem less keen towards a Carbon ETS since it does
not encourage investment in low-carbon fuels such as hydrogen and
ammonia [67]. Therefore, the greatest resistance might come from the
regulated parties mentioned above if a Carbon ETS was applied to in­
ternational shipping.
4.2. Challenges: what challenges may arise?
4.2.1. Global or regional
When considering the application of a Carbon ETS on the shipping
industry, it becomes clear that one main challenge to meet the goal is:
which level should this scheme be implemented? Global or regional? If
global, then international shipping will be treated as a sovereign state,
and the IMO will take full responsibility for this global trading scheme,
which avoids national apportionment of responsibility. If regional, the
responsibilities to cut emissions will have to be allocated to regions or
flag states [5]. Lately however, the EU has proposed a new allocation
method, which is allocating the responsibilities to cut emissions to
shipping companies rather than flag states or nations, in its green deal
and fit for climate neutrality by 2050 (i.e., EU "Fit for 55") [61]. In other
words, shipowners, managers, bareboat charterers, and other entities
responsible for the ISM code would be required to acquire and relinquish
ETS emission credits for each tonne of CO2 emissions [68].
Some researchers tend to support a global Carbon ETS to avoid
carbon leakage and decrease marginal abatement cost. Different from
most sectors, international shipping is a global sector in a competitive
market, with countless manufacturers, charterers, owners, operators,
and other stakeholders spreading all over the world [5,45,69]. There­
fore, a Carbon ETS with incomplete coverage in terms of regions or
countries will lead to carbon leakage through both the fossil fuel price
channel and the competitiveness channel. The price channel works
through demand and supply integration. Specifically, fossil fuel use and
subsequent carbon emissions will move from participating countries to
non-participating countries due to the significant difference in fuel price
between these two categories of countries. The competitiveness channel
refers to the reallocation of carbon-intensive activates from partici­
pating countries to non-participating countries [4,53]. To be specific,
ships may change their courses to avoid participating regions or apply a
speed differentiation strategy (i.e., increase sailing speed in
non-participating regions and decrease speed in participating regions)
[53,56]. Under a global Carbon ETS, there would be minimal scope for
the pollution transfer, which mainly results from the differences be­
tween participating and non-participating countries [70]. However,
there are also some researchers believing that carbon leakage will not be
a big issue for a regional Carbon ETS. A case study performed by
Transport & Environment in the Baltic Region shows that, at politically
realistic carbon pricing, the probability of carbon leakage is extremely
low and can be ignored [71].
Besides carbon leakage, a global scheme can also reduce marginal
abatement cost. The biggest advantage a Carbon ETS has when
competing with a carbon tax is being more market orientated. Therefore,
a global emission trading scheme can maximize this advantage by
maximizing the number of potential participants [53,72,73].
However, some scholars believe that a global Carbon ETS for ship­
ping is difficult to achieve, and a region scheme is, in the short-term, a
8
Marine Policy 138 (2022) 104989
more realistic goal. The difficulties lie not in the technical obstacles but
in political obstacles [70]. Specifically, a global scheme requires
“compatibility” of linked regions or nations which seems “beyond the
realms of possibility” because no matter how comprehensive the scheme
is, there will always be some regions or nations at a disadvantage [53].
4.2.2. Open or closed
Another main challenge is: should this emission trading scheme be
open or closed? According to Kå geson [36], Wang, Fu and Luo [37], and
Gu, Wallace and Wang [38], the Carbon Emission Trading Scheme can
be open or closed.
In an open system, carbon trading is allowed between different
sectors. For example, shipping operators can trade carbon emission
quotas with entities in other sectors, such as electricity, steel, cement/
building materials, and papermaking. In contrast, in a closed system,
emission trading can only take place within one sector. In other words,
shipping operator A can only trade carbon emission quotas with ship­
ping operator B or any other entities in the shipping sector [36,38]. A
significant difference between the two types of systems is that the price
of an emission quota in an open system is exogenous while, in the closed
one, the price is endogenous [37].
By now, an open ETS has gotten the support of more people. Unlike a
closed scheme, an open scheme can link the shipping sector with other
sectors. Therefore, carbon trading is no longer confined to the shipping
sector itself, but can be made with other sectors, which significantly
reduces the marginal cost of emission reduction in shipping sector [53,
72]. An open system also benefits market transparency, leading to a
market of fair competition [53].
However, some researchers prefer a closed ETS. For example, Haites
[70] argues that it may be better to regulate the shipping industry
separately because its compliance entities, enforcement mechanisms
and growth rates are quite different with other sectors. An open scheme
can be much more expensive and time consuming.
4.2.3. FEQP and CTP
Once the coverage of this carbon ETS (i.e., global or regional, open or
closed) has been identified, a new challenge will arise. That is how
should the free emissions quota percentage (FEQP) and the carbon
trading price (CTP) be determined? In other words, how emissions
permits are allocated, and what trading price for each unit of emission
permit is ideal [74]? So far, three central and radically different allo­
cation methods have been considered for the shipping sector. They are
benchmarking, grandfathering and auction [45]. Each method has its
own pros and cons. Benchmarking, which allocates permits based on
performance indicators, does well in rewarding efficient abatement ac­
tivities and can more easily take on new entrants, but would inevitably
discriminate against some shipping categories [53,75]. Grandfathering,
which allocates permits proportionally to past emissions, is helpful in
increasing the political feasibility of a Carbon ETS, but it needs to
reserve space for new entrants and tends to reward historically high
emitters [75,76]. Auction can eliminate any discriminative problems
and generate funding which could be utilized to promote mitigation
efforts [53,70,77]. However, it is quite difficult to determine an
appropriate auction percentage and sustain an active primary market for
permit transactions [53,75]. Besides, the high variability in some ship­
ping categories can occasionally cause ships to sail across the partici­
pating regions (if a regional ETS is implemented), further increasing the
complexity of the auction market [53]. Unfortunately, up till now, there
is no consensus on which allocation method or which combination of
these methods should be used in the Carbon ETS for international
shipping. Due to the latest update to EU’s green deal (i.e., "Fit for 55"),
grandfathering is adopted. To be specific, ETS would be gradually
introduced to shipping beginning in 2023, when ship owners would be
required to surrender enough CO2 permits to cover 20% of their emis­
sions. This would increase to 45% in 2024 and 70% in 2025, and finally
100% in 2026 [12].
M. Wu et al.
Normally, the initial carbon emission permits can be divided into two
parts: an uncompensated part for free and a compensated part by auc­
tion [78]. In practice, the first two methods (i.e., benchmarking, and
grandfathering) are normally used for the uncompensated allocation
while the last method (i.e., auction) is used for the compensated allo­
cation [75]. Generally, the lower FEQP is set, which means a bigger
auction part and a smaller free part, the higher the CTP would be. Ac­
cording to Huang, Shi, Wu, Hu and Zhao [45], ships would face a
squeeze on their profits when the FEQP gets lower, or the auction per­
centage gets higher. In reality, low FEQP shall lead to a CTP that is too
high to be accepted. However, a lower FEQP (i.e., a higher auction
percentage) also means a higher efficiency of CO2 emissions reduction.
Therefore, there is a trade-off between the efficiency and the
acceptability.
4.2.4. Common but differentiated responsibilities and equal treatment
The conflict between the UNFCCC’s principle of “common but
differentiated responsibility” (CBDR) and the maritime principle of “no
more favourable treatment” (NMFT) impedes the progress of involving
international shipping into a Carbon ETS [5,26]. The first principle al­
lows different countries to take different measures to reduce emissions
according to their stage of economic development. While the second one
requires a fair and consistent treatment for all participating countries,
regardless of the gap between developed and developing countries [5,
26]. To mediate the conflict between these two principles, two options
have been considered. One option is regarding the shipping sector
(actually: IMO) as a as a separate contracting party of the post-Kyoto
Protocol and setting a sector-wide reduction goal. Another option is
differentiating commitments for Annex-I and non-Annex-I countries
according to ship route or size rather than flag state [53]. Presently, EU
ETS has expanded its scope to not only intra-EU voyages but also foreign
voyages that begin or end in the EU [12].
4.2.5. Management: monitoring, reporting and verification
Even if all the fundamental elements of a Carbon ETS, which are (1)
the coverage, (2) allocation methods, and (3) “common but differenti­
ated responsibility” have been identified, some challenges specific to the
shipping industry still need to be tackled. The first one is about man­
agement. The management of an ETS for international shipping can be a
big challenge, particularly with regards to monitoring, reporting and
verification (MRV) [26].
For a long time, International shipping and aviation have been
excluded from the emission trading scheme because their emissions are
emitted to international waters and airspace, making it difficult to
include them into a regional ETS [5]. However, in recent years, more
regional ETSs have covered aviation but still excluded shipping, such as
EU ETS, Korea ETS and China ETS.4 What caused such a big difference?
The main reason is that, different from aviation, shipping is short of data
on global ships’ movements and emissions, which further increases the
difficulty of emission estimation, FEQP setting, reporting, and enforce­
ment [26]. In addition, in the shipping sector, the relatively large
number of participants with widely dispersed ownership of fossil fuel is
making it difficult for policy makers to determine where to offer in­
centives of fuel saving [5,73]. The complex organizational nature is a
major barrier for shipping to be involved in the emission trading scheme
[5]. Garcia, Foerster and Lin [6] compare the complexities and admin­
istrative burden relating to a Carbon ETS and a carbon tax and conclude
that the former is much more administratively complex and much
harder to achieve. To ensure all emissions reduction are recorded
correctly, consistently and timely, and to avoid double counting, theft
and fraud, the MRV system should be based on a globally agreed
4
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL. For
more details, please visit: https://ec.europa.eu/info/sites/default/files/revisi
on-eu-ets_with-annex_en_0.pdf
9
Marine Policy 138 (2022) 104989
baseline.
4.2.6. Jurisdiction under international law
The second challenge unique to shipping’s carbon ETS is about the
jurisdiction under international law. That is to what extent a port state
has jurisdiction to command and urge obligations for foreign ships to
give up permits for emissions that have taken place beyond their own
territory [26]? Two solutions have been proposed to answer this law
question. One is depending on the states’ explicit prescriptive jurisdic­
tion. Another is highlighting a port state’s right to set up conditions and
rules of accessing its ports.
4.2.7. Opposition from the shipping sector
The last, but certainly not the least challenge of extending the
emission trading scheme to international shipping is the opposition
coming from the shipping sector. The shipping sector claims that it plays
a key role in spurring global economic growth and should be excluded
from the emission trading scheme. Otherwise, the global economy and
global trade networks are likely to be negatively affected [5]. Due to the
doctrine - “Freedom of the Seas” - the shipping sector, has for too long
been, more or less, excluded from international agreements and regu­
lations. This doctrine effectively restricts an individual country from
regulating ships globally [4,79]. Therefore, in order to successfully
involve the shipping sector in the Carbon ETS, the opposition from the
shipping sector must be clearly recognized and carefully responded.
4.3. Impacts: what effects would that have?
4.3.1. Environmental and economic impacts
Applying a Carbon ETS in the shipping sector may have both envi­
ronmental and economic impacts. Given the expansion of a Carbon ETS
to the shipping industry is still a proposal or a plan, all impacts
mentioned below are based on simulated scenarios.
First, on environmental impacts, Wang, Norstad, Fagerholt and
Christiansen [80] argue that an ETS can help a typical tramp ship reduce
CO2 emissions by an average of around 17.8% based on 16 instances.
Zhu, Yuen, Ge and Li [60] develop a stochastic programming model and
12 scenarios to investigate the impact of maritime emissions trading
system (METS) on CO2 emissions reduction and the results show that, by
employing a METS, the CO2 emissions can be reduced by about 1.54%−
3.38%. The studies by Dessens, Anger, Barker and Pyle [59], Huang, Shi,
Wu, Hu and Zhao [45], Dai, Hu, Wang, Shi and Ding [81] and Halim,
Kirstein, Merk and Martinez [82] also prove that applying a Carbon ETS
to shipping would help reduce the CO2 emissions and tackle climate
change. Some researchers have also questioned the effectiveness of the
Carbon ETS. For example, Gu, Wallace and Wang [56], by conducting
computational study based on an optimization model, indicate that in
the short term, the application of METS cannot really reduce CO2
emissions. Zhong, Hu and Yip [83] also point out that to achieve better
abatement results, the FEQP should be set lower enough. A too loose
policy (i.e., too high FEQP and low CTP) cannot create enough in­
centives for emissions reduction.
Second, on economic impacts, for entities involved in the shipping
sector (e.g., shipping operators, shipping owners and ports), imple­
menting a Carbon ETS would increase their abatement costs and thereby
hurt their profits. For instance, Wang, Norstad, Fagerholt and Chris­
tiansen [80] suggest that the imposition of a Carbon ETS may cause
fossil fuel prices to increase. If fuel price climbs from $200 to $600 per
tonne, the total profits of a tramp ship would be decreased by an average
of around 38.5%. Another research conducted for the container ships
and dry bulk ships by Wang, Fu and Luo [84] draws similar conclusions.
Nevertheless, the introduction of a Carbon ETS can also motivate the
operators to save fuels and thereby reduce their fuel costs, which makes
the assessment of economic impacts more complicated [80,85,86].
M. Wu et al. Marine Policy 138 (2022) 104989

Table A1
Categories of reviewed literature.
Literature Drivers Challenges Impacts

D1 D2 D3 C1 C2 C3 C4 C5 C6 C7 I1 I2

Bows-Larkin[5] √ √ √ √
Chang, Huang and Hsieh[89]
Dai, Yang and Li[74] √ √
Dai, Hu, Wang, Shi and Ding[81] √
Dessens, Anger, Barker and Pyle[59] √ √
Garcia, Foerster and Lin[6] √ √ √
Gu, Wallace and Wang[56] √ √ √
Guo, Kuang and Luo[87] √
Haites[70] √ √ √
Halim, Kirstein, Merk and Martinez[82] √
Hof, den Elzen and Beltran[77] √
Huang, Shi, Wu, Hu and Zhao[45] √ √ √ √ √ √
Kabadurmus and Erdogan[88] √
Karslen, Papachristos and Rehmatulla[52] √ √
Keen, Parry and Strand[73] √ √
Kim and Chang[62] √ √
Leal-Arcas[63] √
Mellin and Rydhed[4] √ √ √
Miola, Marra and Ciuffo[53] √ √ √ √
Ringbom[26] √ √ √
Wan, El Makhloufi, Chen and Tang[44] √
Wang, Fu and Luo[84] √
Wang, Ren, Bian and Jia[86] √ √
Wang, Norstad, Fagerholt and Christiansen[80] √
Yang, Cai, Wei and Huang[85] √
Zhong, Hu and Yip[83] √ √
Zhou, Jia, Guo and Li[78] √
Zhu, Yuen, Ge and Li[60] √ √ √

4.3.2. Optimal abatement strategy
Some studies focus on the optimal strategy formulation under the
emission trading scheme. In these studies, optimization is widely used.
In ETS-scenarios, entities in shipping sector can comply with the carbon
emissions reduction requirements by: (1) reducing emissions through
investment, or (2) trading permits in the market. Guo, Kuang and Luo
[87] develop a decision-making model for ports and conclude that, for
ports, increasing abatement investment to achieve emissions reduction
is a better choice. Implementing a METS can also affect a fleet’s
deployment strategies. Specifically, operators are more likely to increase
the percentage of energy-carbon-efficient ships in their fleets [60]. To
investigate the optimal abetment strategy of containerships, Huang, Shi,
Wu, Hu and Zhao [45] compare different technical and operational CO2
emissions reduction solutions under an METS. Some other researchers,
like Zhong, Hu and Yip [83], Dai, Yang and Li [74], Kim and Chang [62],
Kabadurmus and Erdogan [88], and Wang, Ren, Bian and Jia [86], also
provide some insights in the optimal reduction strategy for entities in the
shipping sector under a Carbon ETS.
5. Conclusion
Although the prospect of involving the shipping sector into a Carbon
ETS is still being examined, existing research focuses on the drivers,
challenges, and impacts of this promising market-based measure. In this
study, 28 manuscripts are selected by using the PRISMA guidelines.
Then all manuscripts are classified into three categories: (1) drivers, (2)
challenges, and (3) impacts to investigate (1) what are the drivers of
applying a Carbon ETS, (2) what challenges may arise, and (3) what
effects would that have if a Carbon ETS is adopted in the shipping sector.
This review shows that despite objections from some stakeholders, the
limitations of technical & operational solutions and the advantages of
the market-based solutions make the Carbon ETS a promising measure
to reduce the CO2 emissions from international shipping in the future.
However, the conflict between Common but Differentiated Re­
sponsibilities and Equal Treatment, the jurisdiction under international
law, the complex organizational nature, and the limited data available of
international shipping are making it quite difficult to design a Carbon
ETS for the global shipping sector. Only if these challenges specific to
shipping have been resolved, could the more general challenges (i.e.,
Global or Regional, Open or Closed, and FEQP and CTP) be solved and a
comprehensive Carbon ETS be implemented for the shipping sector.
Even though this review involves some studies focusing on the envi­
ronmental & economic impacts and the optimal abatement strategy
under a Carbon ETS, most of them are estimated under simulated sce­
narios. In order to obtain more accurate results, more high-quality data
and more advanced forecasting tools should be utilized in the future
studies.
Based on the above all, there are some implications and recom­
mendations for policy makers, shipping owners, shipping operators,
ports, and other stakeholders. For policy makers, a comprehensive data
collection infrastructure and system should be developed to provide
high-quality data both for the initial scheme design and the follow-up
management. IMO, the United Nations specialized agency dealing
with shipping emissions must coordinate among its more than 170
members to avoid multiple, overlapping, regional Carbon ETSs and the
onerous obligations and disputes that follows. Meanwhile, various
countries and local governments should pay close attention to other
national schemes (e.g., the EU ETS and China ETS) to avoid costly and
time-consuming compliance resulting from multiple regimes. For ship­
ping owners, shipping operators, and ports, an optimal abatement
strategy should be planned ahead, to ensure that the company remains
sustainable with healthy profit even under a Carbon ETS.
For future research, some recommendations are also provided. The
priority is to mediate the conflict between common but differentiated
responsibilities and equal treatment. Even though some solutions have
been proposed, a complete guideline for their implementation has not
been provided. If IMO was to be regarded as a separate contracting party
of the post-Kyoto Protocol, some measures must be designed to help
developing countries fulfil their obligations under the carbon ETS. If
differentiating commitments were to be developed for Annex-I and non-
Annex-I countries based on ship route rather than flag state, then a
detailed classification of the world’s shipping routes is required. Second,

10
M. Wu et al.
future research should continue to seek out the best practice of man­
agement. A complete and efficient system must be developed to monitor,
report and verify global ships’ movement and emissions. Therefore,
researchers might consider designing a protocol to collect, standardize
and match the large amounts of data generated by sensor technologies
used on board. Third, some legal issues also worth studying, such as the
jurisdiction under international law.
In addition to the above three aspects specific to shipping, some
general issues need to be addressed. One is the geographical coverage. In
the future, more studies are required to discuss and compare these two
alternatives (i.e., global, or regional). If the scheme is implemented on a
global scale, then specific rules ensuring the fair distribution of emission
permits among different countries or regions need to be drawn up. If on a
regional scale, then carbon leakage should be considered and avoided.
Regarding sectoral coverage (i.e., open of closed), future research may
focus on the comparison of the costs and efficiency of these two options.
Another is the free emissions quota percentage (FEQP) and the carbon
trading price (CTP). The determination of the FEQP and the CTP is a big
challenge which remains unresolved. Researchers can continue to
improve the traditional allocation methods - benchmarking, grand­
fathering and auction - or turn to develop new efficient methods.
Finally, attention should also be paid to addressing oppositions from
the shipping sector. Instead of ignoring these oppositions, future
research should assess the environmental and economic impacts and
design optimal abatement strategy under scenarios much closer to re­
ality. Most existing research are conducted based on a number of strict
assumptions and thereby cannot provide appropriate guidance for
shipping owners, shipping operators, ports, and other stakeholders to
remain sustainable under a Carbon ETS.
CRediT authorship contribution statement
Kum Fai Yuen: Conceptualization, Methodology, Supervision,
Project administration. Min Wu: Investigation, Data curation, Writing –
original draft, Writing − review & editing. Kevin Li: Resources, Writing
– original draft, Writing – review & editing. Yi Xiao: Writing – original
draft, Writing – review & editing.
Appendix A
See Appendix Table A1.
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