Breaking Down The Cost of MARPOL
by Gary EnglishWednesday, June 19, 2013, 10:15 AM
Since January 8, 2009, United States (U.S.) and foreign flagged ships operating
in the waters of the U.S. have been subject to MARPOL Annex VI. The Marine
Environmental Protection Committee (MEPC) of the International Maritime
Organization (IMO) adopted amendments to Annex VI and the nitrogen oxides (NOx)
Technical Code, collectively referred to as Annex VI (Revised). Annex VI
(Revised) entered into force on July 1, 2010. These amendments include
significant and progressive limits for sulfur oxide (SOx) and NOx emissions
from marine engines and for the first time addressed emissions of Particulate
Matter (PM). The amendments replaced the SOx Emissions Control Areas (SECA) by
introducing the concept of Emission Control Areas (ECA) for SOx, NOx, and PM.
On March 26, 2010, MEPC at its 60th session adopted amendments to MARPOL Annex
VI to designate the new North American ECA and at its 62nd session, July 2011,
to designate the U.S. Caribbean Sea ECA. The North American ECA entered into
force on August 1, 2011 and took full effect on August 1, 2012; the U.S.
Caribbean Sea ECA entered into force on January 1, 2013 and shall take full
effect on January 1, 2014. The boundaries of the North American and the U.S.
Caribbean Sea ECA are defined in Table 1.
Annex VI (revised) implements a three-tier structure for new engines.
Tier I applied to a diesel engine that was installed on a ship constructed
on or after January 1, 2000, and prior to January 1, 2011, and represents the
17 g/kWh standard, as stipulated in the existing Annex VI.
For Tier II, NOx emission levels for a diesel engine installed on a ship
constructed on or after January 1, 2011, would be reduced to 14.4 g/kWh.
For Tier III, NOx emission levels for a diesel engine installed on a ship
constructed on or after January 1, 2016, would be reduced to 3.4 g/kWh, when
the ship is operating in a designated ECA. Outside a designated ECA, Tier II
limits apply.
The Coast Guard has entered into a Memorandum of Understanding (MOU) with the
Environmental Protection Agency (EPA) dated June 27, 2011, to set forth the
terms by which the USCG and EPA will mutually cooperate in the implementation
and enforcement of Annex VI to MARPOL as implemented by the Act to Prevent
Pollution from Ships (APPS).
The EPA has conducted an analysis of the expected economic impacts of Annex VI
(Revised) on the markets for marine diesel engines, ocean-going vessels, and
the marine transportation service sector. The EPA examined the impacts of all
components of the markets for marine diesel engines, ocean-going vessels,
marine fuels and international marine transportation services. This included
the cost of the Clean Air Act emission control program marine diesel engines
for U.S. vessel owners and the costs of complying with the emission and fuel
sulfur controls for all ships operating in the area proposed by the U.S.
Government to be designated as an Emission Control Area (ECA) under MARPOL
Annex VI. This analysis looked at two aspects of the economic impacts:
estimated social costs and how they are shared across stakeholders, and
estimated market impacts in terms of changes in prices and quantities produced
for directly affected markets.
Annex VI (Revised) requires each party to take all reasonable steps to promote
the availability of compliant fuel in its ports and terminals. For ships using
low sulfur fuel oil, separate fuel supplies may be carried for use while
operating worldwide and within the ECA's. Table 1 below provides the fuel oil
sulfur limits referred to in Annex VI (Revised).
With limited exceptions, including for certain public vessels, all vessels that
operate in the North American ECA are required to be in compliance with the
Annex VI (Revised) ECA fuel oil sulfur standard. Most vessels under 400 gross
tonnage are likely already in compliance with the standard as the majority of
these vessels operate using solely distillate fuel oil that meets the Annex VI
(Revised) ECA fuel oil sulfur limit.
The total estimated costs in 2030 are approximately $3.1 billion. These costs
are expected to accrue initially to the owners and operators of affected
vessels when they purchase engines, vessels and fuel. These owners and
operators are expected to pass their increased costs on to the entities that
purchase international marine transportation services, in the form of higher
freight rates. Ultimately, these costs will be borne by the final consumers of
goods transported by affected vessels in the form of higher prices for those
goods.
With regard to market-level impacts, the EPA estimates that compliance would
increase the price of a new vessel by 0.5 to 2%, depending on the vessel type.
The price impact on the marine transportation services sector would vary,
depending on the route and the amount of time spent in waterways covered by the
engine and fuel controls. For example, the EPA estimated that the cost of
operating a ship in liner service between Singapore, Seattle, and Los
Angeles/Long Beach, which includes about 1,700 NM of operation in waterways
covered the EMC, would increase by about 3 percent. For a container ship, this
represents a price increase of about $18 per container, assuming the total
increase in operating costs is passed on to the purchaser of marine
transportation services. The per passenger price of a seven-day Alaska cruise
on a vessel operating entirely within waterways covered by the EMC is expected
to increase about $7 per day. Ships that spend less time in covered areas would
experience relatively smaller increases in their operating costs and the impact
on freight prices is expected to be smaller.
This analysis of the economic impacts relies on the estimated engineering
compliance costs for engines and fuels. These costs include hardware costs for
new U.S. vessels, to comply with the Tier 2 and Tier 3 engine standards, and
for existing U.S. vessels to comply with the MARPOL Annex VI requirements for
existing engines. There are also hardware costs for fuel switching equipment on
new and existing U.S. vessels to comply with the 1.0% fuel sulfur limit; the
cost analysis assumes that 32% of all vessels require fuel-switching equipment
to be added (new vessels) or retrofit (existing vessels). Also included are
expected increases in operating costs for U.S. and foreign vessels operating in
the U.S. ECA and U.S. internal waters. These increased operating costs include
changes in fuel consumption rates and increases in fuel costs.
Estimated price impacts for a sample of engine-vessel combinations are set out
in Table 2 (see previous page), for medium speed engines, and Table 3 (see
previous page), for slow speed engines. These are the estimated price impacts
associated with the Tier 3 engine standards on a vessel that will switch fuels
to comply with the fuel sulfur requirements while operating in the waterways
covered by EMC, for all years, beginning in 2016.
The estimated price impacts for Tier 2 vessels is substantially lower, given
the technology that will be used to meet the Tier 2 standards is much less
expensive. Because the standards do not phase in, the estimated price impacts
are the same for all years the Tier 2 standards are required, 2011 through 2015.
The EPA maintains that these estimated price impacts for Tier 2 and Tier 3
vessels are relatively small when compared to the price of a new vessel. A
selection of new vessel prices is provided in Table 4; these range from about
$40-$480 million. The program price increases range from about $600,000 - $1.5
million. A price increase of $600,000 to comply with the Tier 3 standards and
fuel switching requirements would be an increase of approximately 2% for a $40
million vessel. The largest vessel price increase is for a Tier 3 passenger
vessel or about $1.5 million; this is a price increase of less than 1% for a
$478 million passenger vessel. The EPA concludes that price increases of this
magnitude would be expected to have little, if any, effect on the sales of new
vessels, all other economic conditions held constant.
The market impacts for the fuel markets were estimated through the World Oil
Refining Logistics and Demand (WORLD) model. The expected price impacts are set
out in Table 5. Note that on a mass basis, less distillate than residual fuel
is needed to go the same distance (5 % less). The prices in Table 5 are
adjusted for this impact. Table 5 shows that the regulatory scheme is expected
to result in an increase in the price of marine distillate fuel, about 1.3%.
The price of residual fuel is expected to decrease slightly, by less than one
percent, due to a reduction in demand for that fuel.
Because of the need to shift from residual fuel to distillate for ships while
operating in the waterways covered by the engine and fuel controls (the U.S.
ECA and U.S. internal waters), shipowners are expected to see an increase in
their total cost of fuel. This increase is because distillate fuel is more
expensive than residual fuel. Factoring in the higher energy content of
distillate fuel relative to residual fuel, the fuel cost increase would be
about 39%.
The EPA used the above estimates of engine, vessel and fuel price impacts to
estimate the impacts on the prices of marine transportation services. This
analysis is limited to the impacts of increases in operating costs due to the
fuel and emission requirements. Operating costs would increase due to the
increase in the price of fuel, the need to switch to fuel with a sulfur content
not to exceed 1.0% while operating in the waterways covered by the engine and
fuel controls and due to the need to dose the after treatment system to meet
the Tier 3 standards. Table 6 summarizes these price impacts for selected
transportation markets. Table 6 also lists the vessel and engine parameters
that were used in the calculations.
The total social costs of the coordinated strategy are based on both fixed and
variable costs. Fixed costs are a cost to society; they displace other product
development activities that may improve the quality or performance of engines
and vessels. In this economic impact analysis, fixed costs are accounted for in
the year in which they occur, with the fixed costs associated with the Tier 2
engine standards accounted for in 2010 and the fixed costs associated with the
Tier 3 engine standards and the fuel sulfur controls for vessels operating on
the waterways covered by the coordinated strategy are accounted for in the
five-year period beginning prior to their effective dates.
These estimated social costs for all years are presented in Table 7. For 2030,
the costs are estimated to be about $3.1 billion. It is expected that consumers
of the marine transportation services will pay for these costs. Additionally,
consumers will pay prices for the goods transported by sea.
The EPA estimated annual monetized health benefits of Annex VI (Revised) in
2030 will be between $110 - $270 billion, assuming a 3% discount rate (or
between $99 - $240 billion at 7% discount rate). EPA believes by 2030 emission
reductions associated with the ECA will annually prevent: between 12,000 -
31,000 premature deaths, about 1,400,000 work days lost: and about 9,600,000
minor restricted-activity days. Furthermore, the EPA predicts the following
important ecosystem benefits: NOx, SOx and direct PM reductions reduce
deposition in many sensitive ecosystems, improve visibility especially in
Class I federal areas; and reduce ozone damage to many ecosystems throughout
the U.S.
The bottom line is every consumer will be paying more for the goods used in
everyday life and more in taxes for governmental regulatory enforcement in
order reduce NOx, SOx, and PM in the atmosphere. Finally, under the law of
unintended consequences, will this cause a consolidation in the industry? The
larger carriers could absorb some of these additional costs, potentially
squeeze out smaller carriers and then purchases these assets and make up
profits on the back end. We are seeing a similar scenario playing out in the
airline industry.
Gary English is President of Marine Forensic & Investigation Group, LLC. Mr.
English focuses on Marine Accident Investigation, Forensic Analysis, Risk
Assessment & Management, Regulatory Compliance, Expert Testimony, Consulting
and Mediation Services. Mr. English graduated from the United States Naval
Academy with a Bachelor of Science in Applied Science, the Naval Postgraduate
School with a Master of Science degree in Applied Science and the Charleston
School of LawCum Laude.
(As published in the June 2013 edition of Maritime Reporter & Engineering News
- www.marinelink.com)
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