The Study on Impacts of Market-based Measures for Greenhouse Gas Emission Reduction on Maritime Transport Costs

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1 The Study on Impacts of Market-based Measures for Greenhouse Gas Emission Reduction on Maritime Transport Costs Weihong Gu 1*, Ruihua Xu 2 and Jie Zhao 3 1 College of Transportation Engineering, Tongji University, Shanghai, China College of Transport & Communication, Shanghai Maritime University, Shanghai, China whgu@shmtu.edu.cn 2 College of Transportation Engineering, Tongji University, Shanghai, China. rhxu@tongji.edu.cn 3 College of Transport & Communication, Shanghai Maritime University, Shanghai, China happy-betty@163.com * corresponding author Abstract Main market-based measures for greenhouse gas emission reduction from the international shipping discussed in International Maritime Organization have now been studied and divided into three categories: a maritime global emission trading system (METS), an international fund for greenhouse gases emissions from ships (GHG Fund) and the market measures based on energy efficiency of ships by taxes or carbon credit transactions (EIS and SECT). The results showed the implementation of METS or GHG Fund mechanism would directly cause the ship voyage costs increased, while implementation of the EIS and SECT mechanism will cause the capital and operating costs of shipping increased. The discipline of shipping costs changes with fuel prices and carbon prices of some typical types of ships, such as bulk carriers, oil tankers, container ships and ro-ro ships was studied. The results showed that the implementation of market mechanism based on the fuel consumption would cause transport costs increased, and the higher the carbon prices, the higher the carbon cost. The greatest impact of the shipping costs was on the type of the container ship because such type of the ship usually operated at a higher speed. With the rise of fuel prices, the proportion of carbon cost in the total costs decreased gradually, indicating that the main motivation of saving energy for ship owners come from the high marine oil price rather than the carbon tax (or GHG Contribution), especially under the circumstance of the high fuel price. Keywords: Greenhouse gases, Emission reduction, Market measures, Impacts, Shipping costs 1. Introduction Nowadays, emission reduction of greenhouse gas from international shipping has become one of the hot topics in the international society, it was discussed both under the framework of UNFCCC and IMO. According to IPCC (2006), the emission from the international water transport refers to one from the fuel combustion of all the ships engaged in the international water transport, which includes the whole emission from the country of departure to the country of destination occurred on the sea, inland lakes and coastal waters, but does not include the emission of the fishing vessels. The emission from the international aviation or navigation was excluded from the emissions of a country as it was difficult to define the country s boundary when the emission occurred, which resulted that there was no relevant legally documents binding the international maritime greenhouse 1

2 gas emissions under the Framework of UNFCCC available. The Kyoto Protocol provided in Article 2.2: "the parties included in AnnexⅠshall pursue limitation or reduction of emission of greenhouse gases not controlled by the Montreal Protocol from aviation and marine bunker fuels, working through the International Civil Aviation Organization and the International Maritime Organization (IMO), respectively. Based on the above provisions, the International Maritime Organization has commenced the research and negotiations on emission of greenhouse gases from international shipping since Up to now, two studies have been finished by IMO, namely Study of Greenhouse Gas Emissions from Ships (IMO, 2000) and Second IMO GHG Study (IMO, 2009). According to the second study, the carbon dioxide occupied 96% of the total greenhouse gas emission from the marine transportation. In 2007, about 1,046 million tons of CO2 were exhausted from the global shipping, accounting for 3.3% of the global emissions, of which, 870 million tons CO2 were exhausted from the international shipping, accounting for 2.7% of the global emissions. IMO (2009) report further forecasted that, being considered the growth of marine transportation, the greenhouse gas from shipping in 2050 will possibly grow up 2-3 times as much as that in 2007 if special operational measures are untaken. In such the context, IMO proposed a package of measures based on technology, operation and market to achieve global goals of greenhouse gases emission reduction from international shipping. Research has shown that technology and operational measures were not enough to reach a satisfactory target under the expectations of continued world trade growth. So the 60th session of the marine environment protection committee (MEPC 60) of IMO focused more on market-based mechanism. In this paper, three main categories of market-based measures discussed in IMO had been analysed and evaluated. Quantitative analysis was applied to study the discipline of cost changes with fuel oil prices, GHG Contribution or carbon quota prices. 2. Qualitative Analysis of the Impacts of Market Mechanisms on Shipping Cost At present, 3 main categories of the market measures have been discussed in IMO. They are global emissions trading system for greenhouse gas emissions from international shipping (METS), which was proposed by Norway(2010), the United Kingdom(2009), France(2010) and Germany(2010), an International Fund for Greenhouse Gas emissions from ships (GHG Fund) submitted by Denmark (2009) and the tax or transaction mechanisms based on ship energy efficiency proposed by Japan, International Chamber of Shipping (2011) and the United States(2010) respectively. The core of METS measure is to introduce a maritime greenhouse gas emissions limits and transaction mechanism. The emissions cap and target period are set by general assembly of the Convention Party or Convention parties. According to the industry s emissions cap and the history data reported by ships, a certain amount of free quotas were allocated to each ship per year, or a ship get certain quotas by auction. At the end of a year, every ship included in the system has the obligation of submitting emission quotas according to their actually carbon dioxide exhausted. In the case of quota insufficient, the ships may purchase the carbon quota outside the system like the Clean Development Mechanism (CDM) or similar carbon credit. The CO2 emission from a ship can be measured as the fuel consumed in the defined period multiplied by the fuel carbon emission factor. As the merchant ships mainly use the heavy fuel oil (HFO) while sailing, the oil consumption becomes the main factor which influence the emissions. In the scenario of full auction of carbon credits in an METS mechanism, shipping companies calculate their carbon costs as Eq. 1. C = Q * C * P ETS fuel factor quota (1) Where: CETS -- carbon cost occurred in the measures of ETS; 2

3 Q fuel -- fuel consumption of a ship in the defined period; -- carbon dioxide emission factor of the fuel used in international shipping; C factor Pquota -- carbon quota price in a carbon transaction market or CDM price. The proposal MEPC/59/4/5 submitted by Denmark (2009) suggested a greenhouse gas emissions levy (or GHG Contribution) on the fuel oil ship purchased for international shipping. Its core design mentality is: The International Fund for Greenhouse Gas Emissions from Ships (the Fund) would establish a global reduction target for international shipping. A target which limits on net emissions from international shipping has been set and would be achieved largely by purchasing approved emission reduction credits. The quantity of credits purchased by the Fund would be calculated on the basis of the difference between the actual emissions from international shipping and the agreed target. The offsetting activities of the Fund would be financed by a contribution paid by ships on every tonne of bunker fuel purchased. According to the mechanism of GHG Fund, the carbon costs paid by the shipping companies shall be calculated as Eq. 2. C * GHGFund = Qfuel ContriGHG (2) Where: CGHFund Q fuel -- carbon cost occurred in the measure of GHG Fund; -- ship fuel consumption in the defined period; ContriGHG -- the GHG Contribution levied in the measure of GHG Fund for per ton fuel oil used for international shipping, which will be affected by the severity of emission reduction targets, the price of CDM or other regulated carbon credits. Therefore, the common points of above two market mechanism are to limit the greenhouse gas emissions from the international shipping, which were mainly achieved by restricting fuel consumption at the present stage. For the measure of EIS proposed by Japan and the International Chamber of Shipping (2011) and SECT proposed by the United States (2010), they are more likely the hybrid measures mixed tax or trading mechanism with the standards of ship energy efficiency. The mandatory phased-in energy efficiency standards for new building and existing ships respectively have been defined in those proposals. Non-compliance ships required to pay a fine or offset emission through buying carbon credits. Under those mechanisms, the ship owners are to take into account future requirements for energy efficiency when they plan to build new ships, which will obviously cause the cost of new buildings increased. For existing ships, the implementation of the energy conservation technological or the ship energy efficiency management plan will cause the operating costs of the ship increased. The above study illustrated those different market-based measures for emission reduction will have different impacts on shipping costs. As we know, shipping costs mainly consisted of capital costs, operation costs and voyage costs. The EIS or SECT measures will cause the capital and operating costs of ships increased, while the METS and GHG Fund mechanism linked with fuel consumption closely mainly caused the voyage cost of ships increased. 3. Quantitative Analysis of the Impact of Market Mechanism on Shipping Costs Typical types of ships, such as bulk carriers, oil tankers, container ships and ro-ro ships have been selected to evaluate the impacts of market-based mechanisms on shipping costs. In this section, the proportion of the carbon cost among the total transportation costs has been quantified first. Then, the discipline of the transportation cost changing with the fluctuations of carbon price and fuel price is illustrated. 3

4 In case of an ETS or GHG Fund mechanism implemented, total shipping costs are to be composed by four categories as Eq. 3 showed below. TC = NP + OC + FC + CC (3) where: TC means total annual cost of a ship, NP means annual capital cost of a new coming ship, OC means annual operating cost, FC means annual fuel cost and CC means annual carbon cost. Carbon cost occurred in the implementation of ETS or GHG Fund mechnism is closely related to the total fuel consumption, carbon emission factors, carbon quota prices, GHG Contribution and fuel price, as the Eqs. 1-2 showed above Parameter setting Some relative factors used in the quantitative analysis have been settled as follows: The factor of the carbon dioxide emissions is determined by the carbon content of fuel and the share of non-oxidation of carbon in fuels. International ships are mainly driven by high-power low-speed diesel engine, consuming residual fuel oil (HFO) on sailing and marine diesel oil (MDO) at ports. The factor of CO2 emissions of residual fuel oil and marine diesel oil is 3130 and 3190 kilograms per ton fuel oil respectively according to the newest massive test by the Lloyd's register (IPCC, 2006). The price of carbon dioxide quota on European carbon trading market is mostly fluctuated from $ 10 to $ 50 per ton in recent years. Thus, the median carbon quota prices of $15 and $30/ton have been chosen in this quantitative analysis. With the reference to Eq. 1 and Eq. 2, we know that the carbon quota price of 15 or 30 dollars for per ton carbon dioxide will result the same impacts on shipping cost as the fuel levy of $ 47 or $ 94 per ton fuel oil does. The marine fuel price was fluctuated much in the last decade. Figure 1 showed that shipping residual fuel oil price rose from $ 165 per ton in 2002 to $ 1,100 / ton in 2008, and then fell to $ 400 / ton because of the financial crisis in 2009, and back to $ 700 again in If we take the factors like economy growth, inflation and the use of low sulphur fuel oil and etc. into account, future marine fuel oil price is in a trend of rise, therefore, this article considers a fluctuation range from $300 to $900 per ton HFO for the quantitative investigation $/ton Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 singapore HFO price($/ton) Figure 1: Trend of Marine Heavy Fuel Oil Prices (US $ / ton, price of Singapore) Source: Clarkson Research Service 4

5 The parameters of costs for typical types of ships, including bulk carriers, oil tankers, container ships and ro-ro ships, were obtained from the study of CE Delft et al. (2010)(see table 1). No harbor expense is considered in this case, because the harbor expense is affected by the specific voyages and the charge level of every berth port, the big difference of each voyage made the harbor cost is difficult to be measured. If port expenses are covered, the fuel cost share in total cost is to drop. Ship Types Table 1: Sample ships operational and financial parameters Bulk Tanker Container Handysize Capesize Handysize VLCC ship 10,000-34, , ,999 20,000-59, , ~6000 TEU Ro-ro ship lane Fuel consumption per day (ton) Annual Operating days (d) New building price ($10 thousand ) Annual Capital cost ($10 thousand ) Annual Operating cost($10 thousand ) Source: data based on CE Delft et al. (2010), reorganized by author Impacts of Market-based Measures on Total Transportation Costs According to the above data and Eq. 3, the study of impacts of ETS or GHG Fund measure on shipping costs showed that, with fuel prices of $ 600 per ton, carbon quota prices 15 $ per CO2 ton, or an equivalent greenhouse gas emissions tax $ 47 per fuel ton, the total cost of ro-ro ship is to be increased by 3.1%, VLCC tanker by 4.1%, the Capesize bulk carrier by 4.4% and TEU container ship by 5.74%. While in the scenario of carbon quota price of $ 30 per CO2 ton or equivalent to $94 carbon tax per fuel ton, the implementation of market-based mechanism will cause the shipping cost increased by 6.3% -11.3% differently (see table 2). Table 2: The Impact of market-based measures on maritime transport costs with fuel price $ 600 / ton and carbon quota price $ 30 /CO2 ton Ship Type Bulk Tanker Containership Handysize Capesize Handysize VLCC 4000~6000TEU RoRo ships Annual Capital Cost 2,250,000 5,060,000 3,470,000 9,370,000 4,810,000 5,550,000 Annual Operating Cost 1,705,970 2,680,896 2,762,116 3,813,054 2,927,538 2,132,487 Annual Fuel Cost 3,405,600 10,044,000 5,280,000 14,796,000 20,250,000 5,124,600 Annual Carbon Cost 532,976 1,571, ,320 2,315,574 3,169, ,000 Fuel Cost share in Total 46.3% 56.5% 45.9% 52.9% 72.4% 40.0% Carbon Cost share in Total 6.8% 8.1% 6.7% 7.6% 10.2% 5.9% Cost increase in percentage 7.2% 8.8% 7.2% 8.3% 11.3% 6.3% 5

6 3.3. The Discipline of Carbon Cost Changes with Different Fuel Oil Prices and Ship Types The study further showed that the proportion of carbon costs also changed if the fuel price or carbon price changed. If a reasonable fuel price range of $ per ton and the carbon quota price of $15 per ton CO2 are set, the transport costs of handysize bulk carriers will rise by %, capesize bulk carriers by % (see figure 2); handysize oil tanker by %, VLCC by % (see figure 3 ); TEU container ships by % and ro-ro ships by % (see figure 4 ). The results showed that (see figures 2, 3 and 4) the higher the carbon quota prices, the greater the costs effected for all types of ships. Furthermore, with the rise of fuel prices, proportion of fuel cost in the total goes up while the carbon cost in the total costs reduced, for the fluctuations of fuel price was larger than that of the carbon price, the quantitative analysis illustrated clearly that stimulation of improving the energy efficiency for the shipowners of their ships is the fuel oil price itself instead of the fuel taxes or GHG Contribution. The stimulation works only if the greenhouse gas emission taxes or carbon quota price at a higher level, such as $30 per ton CO2 or more, which can cause the average shipping costs increased by more than 10 %. 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 12.2% 10.7% 9.30% 9.6% 8.45% 8.7% 7.74% 8.0% 7.15% 7.3% 6.64% 6.8% 6.1% 6.19% 5.4% 5.80% 4.65% 4.8% 4.23% 3.87% 4.4% 3.57% 4.0% 3.32% 3.10% 3.7% 2.90% 3.4% Handy/carbon quota 30 Handy/carbon quota15/cost increase(%) Capesize/carbon quota15/cost increse(%) Capesize/carbon quota30 fuel price $/ton Figure 2: The Impact of Implementation of ETS or GHG Fund on Bulker Transport Costs 12.0% 10.0% 8.0% 6.0% 4.0% 9.19% 8.36% 7.67% 7.09% 6.58% 6.15% 5.55% 5.76% 4.60% 4.96% 4.18% 4.48% 3.84% 4.09% 3.54% 3.75% 3.29% 3.07% 3.47% 2.88% 3.23% 2.0% 0.0% Handytanker/carbon quota15/cost increase(%) Handytanker/carbon quota30 VLCC/carbon quota15/cost increase(%) VLCC/carbon quota30 fuel price $/ton Figure 3: The Impact of Implementation of ETS or GHG Fund on Tanker Transport Costs 6

7 20.0% 15.0% 10.0% 5.0% 17.51% 14.73% 12.71% 11.18% 9.98% 8.76% 9.01% 8.21% 7.37% 6.36% 5.59% 4.99% 3.86% 4.50% 3.57% 4.10% 3.31% 3.09% 2.90% 2.73% 2.58% 0.0% containership /cabon quota15/cost increase(%) containership /carbon quota30 roro2000lane/carbon quota15/cost increase(%) roro2000lane/carbon quota30 fuel price $/ton Figure 4: The Impact of Implementation of ETS or GHG Fund on Containership Transport Cost 4. Conclusion The above studies showed that the implementation of the market-based mechanism relative to fuel consumption will cause the transportation costs increased. The higher the carbon price, the greater the cost increased. The costs of container ships are impacted greatly because they are usually operated at relatively high speeds, while the costs of bulk carriers, oil tankers and ro-ro ships are impacted less. The research concluded that the shipowners inspiration of improving ship energy efficiency is mainly driven by the high fuel price itself rather than imposing the marine fuel carbon taxes. In fact, as the shipping transportation is an energy-hungry industry, contributions is to be made to the energy saving technology before introducing of the carbon taxes or other market-based measures. In a booming shipping market, the ship operator would not accept the low-speed operation but let the ship loaded with more cargoes and run fast as far as possible, for the increased fuel cost can be offset by additional freight revenue at this moment. In the point of view of stimulating the ship s energy efficiency, the higher fuel price is more effective than the market-based measures. The harsh rules of setting a carbon dioxide emissions cap or net emission target for international shipping through an METS or GHG Fund mechanism may cause the cargoes to be transported by other ways in which there is no such kind of measures. In the opinion of this article s authors, it is necessary to make a comprehensive assessment on such the market-based measures, and find more appropriate and effective solutions for the emission reduction of greenhouse gas from international shipping rather than with more burdens on the shipping industry, which is the greenest model in the global transportation. References CE Delft, DLR and Fearnley Consultants (2010), A Global Maritime Emissions Trading System Design and Impacts on the Shipping Sector and on Countries and Regions, 7

8 Denmark (2009), An International Fund for Greenhouse Gas emissions from ships, MEPC59/4/5, internal document, unpublished. France (2010), further elements for the development of an Emissions Trading System for International Shipping, MEPC 60/4/41, internal document, unpublished. IPCC (2006), IPCC Guidelines for National Greenhouse Gas Inventories, International Maritime Organization, (2000), Study of Greenhouse Gas Emissions from Ships, MEPC 45/8. International Maritime Organization, (2009), Second IMO GHG study, MEPC 59/INF.10. Japan and the World Shipping Council, (2011), Consolidated proposal of "Efficiency Incentive Scheme" based on the Leveraged Incentive Scheme and the Vessel Efficiency System, GHG-WG 3/3/2.2011, internal document, unpublished. Norway. (2010), A further outline of a Global Emission Trading System (ETS) for International Shipping, MEPC 60/4/22, internal document, unpublished. United Kingdom. (2009), A global emissions trading system for greenhouse gas emissions from international shipping, MEPC 60/4/26, internal document, unpublished. United States of America. (2010), Further Details on the United States Proposal to Reduce Greenhouse Gas Emissions from International Shipping.MEPC60/4/12, internal document, unpublished. 8