Unintended consequences of environmental regulation of maritime shipping: Carbon leakage to air shipping

We assess the expected impact of the upcoming International Maritime Organization's CO2 emissions cap on global maritime shipping. Using detailed data on U.S. imports-covering vessels, routes, emissions, and trade-we estimate a model that allows for substitution between maritime, air, and land transport. Our findings show that the cap will drive a shift to more carbon-intensive air and land transport, leading to an overall increase in transportation-related CO2 emissions in both the short- and long-run. Additionally, it will cause significant welfare losses. Our findings support a case for more efficient alternative policy options.