Workshop – Incentive Schemes
Research and Development 2002-2005
Norwegian Shipowners’ Association
0. The Workshop
Distribution: Free distribution after adoption by MAREN Steering Committee
Time/Place: 2002-06-11 09.00, Høvik, Norway
Present: Please refer to attached list of attendees
List of attendees
Copies of Presentations
The Norwegian Shipowners’ Association (NSA) has recently initiated a new Research
and Development Programme called MAREN (Maritime Environmental Research and
Development Programme 2002-2005). One of the projects under MAREN involves an
investigation the use of Incentive Schemes for the improvement of environmental
performance. The project aims at producing a proposition for an incentive scheme
from the Norwegian shipping community.
A first step in the process was decided to be a Workshop concerning Incentive
Schemes. The workshop was intended to reveal the attitude of the Norwegian
shipping community towards the concept of incentive schemes as a tool in
environmental policymaking. The workshop was planned and arranged by Det Norske
Veritas as independent consultants for NSA.
Incentive schemes can be a useful tool in implementing environmental improvements.
The key element is the principle of making investments in environmental
improvements economically viable. Incentive schemes also ensures another important
principle is followed, namely cost-effectiveness. Incentive schemes promote
environmental performance outwith the minimum requirements laid down in
Shipowners can receive a refund or decrease costs according to their environmental
performance. Incentive schemes, as opposed to legislative measures, are voluntary
and hence offer a choice for the shipowner. It makes the implementation of
environmental policies cost effective for shipowners and the society as a whole, by
ensuring the limited funds available are put to work where the gain is greatest.
The incentive mechanisms forming the basis of the incentive schemes can be divided
into two broad groups: Financial incentives, offering direct monetary compensation
for costs incurred as environmental measures are implemented, can include tax
rebates, subsidies, differentiated contracts and emission trading. Market incentives,
improving the position of a company in the market, can include the introduction
environmental management principles and subsequent environmental certification,
voluntary environmental class notations and inspection schemes, and are all aimed at
creating goodwill amongst customers. Passengers, cargo owners and the society at
large get a better impression of the company in question. The market incentives
thereby also create higher profits as a secondary result.
Incentive schemes aim at ensuring that investments in environmentally friendly
measures are made possible, and hence that shipowners choose to conduct their
business in a more environmentally sound manner.
The Workshop was opened by Terje Gløersen, Director of the Norwegian
Shipowners’ Association, who also informed about the MAREN research initiative in
general. Aage Bjørn Andersen of DNV chaired the Workshop.
Three Experts were invited to present ideas and examples in order to prepare the
participants for the discussion, and to give everyone a certain overview of the subject.
The following speakers were invited:
- Atle Fretheim, Norwegian Ministry of Environment
- Siri Pettersen Strandenes, Centre for International Economics and Shipping,
Norwegian School of Economics and Business Administration
- Bertil Arvidsson, Swedish Shipowners’ Association
2.1. The use of Incentive Schemes for efficient implementation of
environmental policies - Atle Fretheim
The presentation concerned the range of instruments available to the environmental
authorities and legislators.
Instruments are the tools which the authorities have on hand to influence people’s
conduct. They are used to make sure that environmental policies are carried out
according to a time schedule and at the lowest possible cost. Efficient tools also create
a dynamic efficiency where further environmental and financial benefit is created.
Authorities categorise their instruments into a) administrative and b) financial tools.
Administrative tools include legislation, voluntary agreements between authorities
and trade organisations, information campaigns, and physical means (such as traffic
barriers). Financial tools include environmental fees, monetal deposits, subsidies and
Choosing the right tool to attain a particular environmental goal is a complicated
process. One important “rule of thumb” is that the goal itself determines the tool; If a
certain chemical is to be completely ruled out by a certain date, a voluntary agreement
will not suffice, only a total ban will make sure the goal is reached. Another issue to
consider is where the environmental policy originates. An international policy laid
down by IMO or the EU will have to be implemented in the same manner for all
countries affected. A third issue can be the nature of the environmental aspect in
consideration; Whether effects are easy to measure, whether the pollutant involved
originate from only a few, easily controlled sources, and so on.
In the shipping industry, new legislation and policies are often laid down by IMO.
They often concern safety issues, and take the form of technical requirements. These
have to be adopted directly by the Norwegian government. Voluntary agreements
cannot easily be implemented in achieving such absolute goals.
For voluntary agreements to work according to intentions, certain issues have to be
- Targets have to be defined clearly
- Credible and reliable monitoring has to be in place
- Possible sanctions as a result of non-compliance have to be agreed upon
- The level of third party participation must be known
- A way of dealing with “free riders” must be laid down
- Credible regulatory threats must be shown.
2.2. Incentive Contracts for Quality in Shipping - Siri Pettersen
The presentation concerned the importance of information on vessel quality, and a
system to flag quality, in order to achieve better prices for high-quality services.
The argument was put forward that the possibility to flag vessel quality and hence to
achieve higher freight rates is an important incentive to raise the quality of service.
Basically, if a shipowner has no way of showing that he is a better quality ship
operator than the competitors, there is no incentive to keep above the minimum
requirements. The problem is defined as “to get paid for quality”.
The notion of assymetric information was introduced. The stakeholders in the industry
have different information on the vessel’s and company’s quality and performance.
The owner/operator, having the best information on the vessel, should therefore be
able to choose between different setups of contracts, according to his perception of
possible risk of non-fulfilment of the contract. He can either choose lower risk on his
own behalf, but receive a lower rate, or accept a higher risk and thus higher rate. If the
operator knows that his ship is of a good quality and the risk of forfeiting the contract
he has with the shipper, he can accept higher liability cost and propose a higher
Other examples of such Incentive contracts are car insurance schemes where one can
choose a lower premium and a higher self-cost if one thinks one is unlikely to have an
Back to the argument of flagging vessel quality, schemes for ranking the vessels and
show quality above minimum compliance, such as Condition Assessment
Programmes and voluntary environmental class notations, exist today. The reasons for
shipowners to make use of these are 1) to counteract the effects of assymetric
information, 2) to counteract the effects of adverse selection, 3) to signal to the
customers, employees and the society one’s “above-medium” quality levels, 4) to
make sure moral hazard is not induced. The aim in the end is to be able to charge
more for a higher quality service.
2.3. Experiences with using incentive schemes in shipping - Bertil
The presentation concerned the experiences of the Swedish Maritime Administration
and the Swedish Shipowners’ Association regarding the differentiated fairway and
The differentiated dues were introduced in 1998 and offer a rebate on the fairway due
and the port due according to the emission of NOx and SOx. It was aimed at vessels
operating in Swedish waters, adding directly to the acidification of Swedish waters.
The scheme has lead to a reduction of 27 000 tonnes (some 8 %) of NOx and 50 000
tonnes (20 %) of SOx. Most of the NOx-reduction was achieved by installing Selective
Catalytic Converters on 30 ferries trading between Sweden and other countries. A
large portion of the SOx-reduction can be attributed to the use of low-sulphur fuel in
tankers trading to and from the Baltic Sea.
A quick estimate showed that the added cost of using low sulphur fuel on a coastal
tanker can come to about 1.2M SEK/year, and the sulphur rebate on port and fairway
dues amounts typically to 90K SEK/year. Even though the sulphur rebate is only
approximately 10 % of the added cost, the shipowners have started using the low
sulphur fuel. This is thought to be because the environmental profile of the company
towards shippers and the public is worth more than the 1.1M SEK cost.
For future development of the scheme it has been proposed to increase the sulphur
rebate, and make some further adjustments.
The presentation also concerned the proposed EU-wide scheme for trading SOx and
NOx emissions. This system aims to:
- Create emission reductions in EU and to include both intra-EU and transit
reductions to meet reduction goals
- Cost effectiveness in choosing environmental measures
- Create financial incentives for shipping sector to reduce emissions of SOx and
The fact that the shipping industry can reduce emissions at a lower cost than land
based industry creates the basis for a voluntary emission trading system where
reduction credits can be sold like any other commodity. Some issues to be addressed
by the system are that the IPPC Directive will have to be amended, which is a time
consuming process, and that the acidification sensibility varies between Northern and
3.1. How can the shipping industry use incentive schemes:
The Norwegian shipping industry wants to use incentive schemes to:
- Make investments in environmental technology possible by rewarding or
remunerate operators with good environmental performance
- Invite to environmental performance outwith minimum requirements
- Reduce cost related to environmental improvements
- Increase profit through improved profile
- Show environmental improvements to customers
- Create a positive profile for the whole sector of seaborne transport
- Support existing environmental improvement schemes, eg. make the operating of
new double hull vessels able to compete with old, single hull vessels
- Motivation for Innovation: Incentives for creating new technology
3.2. Interest groups to consider:
A number of interested parties should be involved in the process of creating and
deciding a new incentive scheme:
- Shippers, owners of cargo
- Governmental bodies
- NGOs: Environmental organisations, safety forums
- Insurance companies
- Classification societies
- Society in general
3.3. What environmental parameters are important?
- Aspects to consider when ranking environmental parameters:
- Which are environmentally important? Different parties will rank the
- Which are possible to improve? There is no use introducing measures that are
impossible to fulfil.
- Cost-effectiveness: Maximum overall environmental benefit for available
funding. Again, the “benefit” perceived would vary between parties.
- Which parameters can be used to compare shipping with other industries?
Look at which parameters the land (and air) transport sector reports.
- Which parameters are the public/customers interested in? The media govern
the public perception, although these concerns might not be of the greatest
environmental importance. However, if the aim is to create a better profile for
seaborne transportation, the issues regarded important by the media must be
addressed (often at the expense of other, more important issues).
- Acidifying gases: NOx, SOx.
- Acidifying gases, NOx and SOx being the most important, create acid rain,
over-fertilization of inland and coastal waters with subsequent algal blooms
and eutrophication (as experienced in the Baltic Sea), and contribute to local
health problems in the large cities.
- Norway has, through the Göteborg-protocol, promised to decrease the
emission of NOx by 65 000 tonnes by 2008. Norwegian authorities have
therefore put the emphasis on this environmental aspect, as can be seen in the
importance of NOx and SOx in gaining a high score in the system for
determining lower tonnage taxes.
- The NOx-reduction obtained in Sweden by introducing the environmentally
differentiated fairway and port dues was some 27 000 tonnes, or some 8%.
The SOx-reduction was 50 000 tonnes, or 20%.
- The Norwegian reductions as agreed in the Göteborg-protocol can be achieved
to the highest cost-effectiveness to society by installing 50-60 SCR units
- Other important environmental parameters:
- Greenhouse gas emissions: CO2, (H)CFC
- Ozone depleting substances: VOC
- Health effects: HC/Particulates
- Operational oil discharges
- Sewage, garbage, biocides to sea
- Invasive species
- Accidental spillages
- Garbage/special waste to land
- Lifecycle assessment
3.4. Which mechanisms are interesting?
Interesting mechanisms/schemes are:
- Differentiated tonnage tax. The Norwegian scheme already in place offers a good
- Emission trading is the new issue in EU. A system for trading SOx and NOx will
be created within the EU in the near future. Further, an emission trading system
for GHG will open up under the Kyoto agreement.
- Varying time periods for the depreciation of assets
- Subsidies for environmental investments
- Port fees, “coast charge”
3.5. The attitude of the Norwegian Shipping Industry
The Norwegian shipping industry is positive to the use of incentive schemes for the
improvement of environmental performance, providing:
- Long term schemes are implemented, so that a stable business environment is
ensured, and the frames for conducting business are well known;
- The incentive schemes are created to ensure financial viability of environmental
improvements as opposed to create higher revenues for the authorities.
As stated in the NSA environmental policy, the Norwegian Shipping Industry is
interested in using incentive schemes to improve environmental performance: NSA
Environmental Policy Chapter 3 (translated from Norwegian): “(…) NSA will: (…)
work for an increased market focus on quality, including environmental
differentiation of relevant fees, and better access to information about a vessel’s level
of quality (…)”.
3.6. Proposals for incentive schemes
The Workshop as invited by MAREN discussed the possibility of creating an
environmental indexing system. The system could consist of a “menu” of parameters
reported in a standard format. An environmental declaration like the one used for
calculating the Norwegian differentiated tonnage tax could then be filled in for each
The declaration could then be used as a basis for calculating fees, subsidies or any
other rebate offered by ports and other authorities. These could set up incentive
schemes where any environmental parameters as regarded important to the scheme in
question, simply by picking from the “menu” and applying weighing factors
according to importance. For instance, a port in Norway could apply higher weights to
acidifying gas parameters SOx and NOx than an Australian harbour, which would
more likely put the emphasis on a parameter describing an invasive species parameter.
The indexing system could also be used to rate a vessel’s environmental performance,
and hence flag quality in the market.
The indexing system should be created with the future issue of emission trading in
mind. The indexing system should be able to report the total NOx, SOx and CO2
emission from each ship, available for trading.
The indexing system should be set up in cooperation with shipowner associations,
ports (nationally and internationally), classification societies, national authorities, and
international authorities (notably IMO and the EU).
4. Recommendations for MAREN
The Workshop as invited by the NSA research initiative MAREN recommends that
MAREN develops an indexing system for environmental performance. The indexing
system should create a basis for flagging vessel quality, for differentiating fees (port
fees and the like, nationally and internationally), and future emission trading systems.