Unintended Consequences of Environmental Regulation of Maritime Shipping : Carbon Leakage to Air Shipping

We evaluate the expected impact of the anticipated International Maritime Organization’s regulatory regime that will cap CO2 emissions from global maritime shipping. Focusing on U.S. imports---for which we compile granular vessel, route, emission, and trade data---we structurally estimate a model featuring substitution between maritime and air transportation. We demonstrate that the cap will instigate a shift towards much more carbon-intensive air transportation, causing a short-term increase in total transportation-related CO2 emissions! Additionally, the cap will induce substantial welfare losses in both the short and long run. We conclude by advocating for alternative, more efficient policy options