How does emission allowance allocation affect shipowners’ selection of emission reduction technologies?

Abstract

The Emission Trading Scheme (ETS) typically allocates free emission allowances through Grandfathering or Benchmarking. However, since 2024, international shipping has not benefited from free allocation in EU ETS. Limited research exists on the implication of this change compared to typical free allocation policies. Shipowners now face the challenge of balancing abatement costs by adjusting speeds and selecting emission reduction technologies to maximize profits. This research employs economic models and simulations to compare policies' effects on shipowners' decisions. Findings reveal that Grandfathering based on historical emissions effectively reduces emissions but may hinder the adoption of efficient emission reduction technology at certain allowance price levels. Benchmarking, linked to current output, promotes the technology adoption but is less emission-efficient than Grandfathering. Non-free allocation in EU ETS, while cost-neutral for technology adoption, impedes the adoption of costlier, low-carbon technologies. This research demonstrates that adaptive policymaking is critical in evolving markets and technology landscape.