CANADA SHIPPING ACT, 2001 (CSA 2001) PUBLIC CONSULTATION

Transcription

1 CANADA SHIPPING ACT, 2001 (CSA 2001) PUBLIC CONSULTATION Options for Enhanced Air Emission Regulations for Vessels Operating in the Great Lakes St. Lawrence Area (Great Lakes St. Lawrence Seaway System, St. Lawrence River and the Gulf of St. Lawrence) CANADIAN MARINE ADVISORY COUNCIL (CMAC) DISCUSSION PAPER Please forward your comments to: Paul Topping Manager, Environment Protection Transport Canada, Marine Safety Tower C, Place de Ville 330 Sparks Street, 11 th Floor Ottawa, Ontario K1A 0N8 November 2010 Telephone: Facsimile: This Discussion Paper has been prepared for comment and discussion.

2 Table of Contents EXECUTIVE SUMMARY INTRODUCTION POLICY RATIONALE COMMITMENTS TO CLEAN AIR REGULATORY AGENDA DIFFERENCES BETWEEN CANADIAN AND US FLEET IN THE GREAT LAKES ST. LAWRENCE AREA DESCRIPTION OF REGULATORY OPTIONS OVERVIEW OF OPTIONS ECA-STANDARDS OPTION DESCRIPTION OF FLEET AVERAGING APPROACH DESCRIPTION OF PHASE-IN APPROACH ENVIRONMENTAL AND HEALTH IMPACTS AND COSTS SUMMARY AND NEXT STEPS SUMMARY OF OPTIONS NEXT STEPS Page 2

3 Acronyms / Abbreviations Annex VI 2008 APPS CAA CAC CFR The International Maritime Organisation (IMO), International Convention for the Prevention of Pollution from Ships, MARPOL 73/78, Annex VI 2008 Act to Prevent Pollution from Ships (APPS) Clean Air Act (US Law) Criteria Air Contaminants US Code of Federal Regulations CSA 2001 Canada Shipping Act 2001 ECA Emissions Control Area (defined in MARPOL Annex VI 2008) EGCD EIAPPC EPA Great Lakes St. Lawrence Area GT HFO IAPPC IFO IMO KW MARPOL MDO MGO MW NO 2 NOx NTC PM SCR SO 2 SOx US VOC Exhaust Gas Cleaning Device (e.g. scrubbers) Engine International Air Pollution Certificate (required by NTC) US Environmental Protection Agency The geographic area extending from Atlantic Ocean at the Gulf of the St. Lawrence through the St. Lawrence River and into all of the Great Lakes Gross Tonnage Heavy Fuel Oil International Air Pollution Prevention Certificate (MARPOL Annex VI requirement) Intermediate Fuel Oil International Maritime Organisation Kilowatt International Convention for the Prevention of Pollution from Ships Marine Diesel Oil Marine Gas Oil Megawatt Nitrogen Nitrogen Oxides Annex VI 2008 NOx Technical Code Particulate Matter Selective Catalytic Reduction technology Sulphur Sulphur Oxides United States Volatile Organic Compounds Page 3

4 Executive Summary On March , Canada ratified Annex VI to the International Convention for the Prevention of Pollution from Ships (MARPOL), which establishes limits on emissions of certain pollutants including sulphur oxides (SOx) and nitrogen oxides (NOx). On the same date, the International Maritime Organisation (IMO) approved a proposal put forward by Canada, the United States (U.S.) and France (St. Pierre and Miquelon) to designate the area within 200-nautical miles off the east and west coasts of Canada and the U.S. as a special Emissions Control Area (ECA) under Annex VI to MARPOL. In ECA areas, SOx and NOx emissions standards are stricter than non-eca areas. The North American ECA comes into force on August 1, Canada is now required to develop regulations for marine vessels, which reflect emission standards included in MARPOL Annex VI and the new North American ECA. Canada must also consider how Canadian air emissions regulations will fit with the ECA-level emissions standards applied by the Government of the U.S. in December 2009 to also include the internal waters of the U.S., including the shared waters of the Great Lakes and St. Lawrence River and Seaway. Owing to differences between the U.S. and Canadian fleets, the Government of Canada is considering three different regulatory options to achieve ECA-level air emission standards by 2020 for vessels in the Great Lakes St. Lawrence Area of Canada. ECA Standards option: This approach would implement ECA-level emission standards in Great Lakes St. Lawrence Area waters at the same time as the North American ECA this approach would be identical to the approach adopted by the U.S. EPA in its final regulations for internal waters; Fleet Averaging option: This approach would require averaged emissions from the collection of vessels in a company s fleet must to minimum emission standards over the course of a year. The preliminary analysis presented herein assumes that the Fleet Averaging option will result in the highest rate of fleet renewal; and Phase-In option: This approach would allow older vessels more time to meet air emission standards than newer vessels. The preliminary analysis presented herein assumes that the Phase-In option will result in a rate of fleet renewal half as high as the Fleet Averaging option. The Canadian fleet requires modernization and renewal, for which marine shipping firms are already preparing investments and technical work. This will bring broader environmental, energy efficiency, economic and safety benefits to Canada s transportation system as well as U.S. regions served by Canadian ships. With the recent announcement of the 25% duty remission on certain types of imported vessels, as well as forthcoming certainty on air pollutant emissions requirements, external conditions to support fleet renewal are quickly falling into place. However, regulatory conditions also need to support fleet renewal if the current climate for positive industry investment decisions is to be fully exploited. Page 4

5 An important element of the regulatory framework will be to ensure that it is compatible with the U.S. regulations that have already been finalized. While only the ECA Standards option offers full alignment with the U.S. standards, a compatibility agreement with the U.S. could be struck under either of the two alternate options. With respect to maximum NOx emission levels, the required emissions standards are identical across all three regulatory options under consideration. Canadian vessels currently active in the Great Lakes St. Lawrence Area are able to meet existing Tier I and Tier II standards. In order to meet the stricter Tier III standards for engines built in 2016 or later, shipowners must depend on the manufacturing industry to produce engines that can meet Tier III standards. If such engines are not available (or not at a reasonable price), shipowners are more likely to use selective catalytic reduction (SCR) exhaust after-treatment technologies to reach Tier III standards. With respect to maximum SOx emission levels, all options require all vessels to meet the ECAlevel standards by 2020 (0.1% sulphur content fuel). Shipowners and operators can meet the stricter emission standards by using lower sulphur fuel (which would require use of more expensive distillate fuels to comply), or by using technologies such as exhaust gas cleaning devices (EGCD) or scrubbers that would result in the equivalent lower emissions standards. While there are not yet international standards or regulations for greenhouse gas emissions, adopting domestic regulations that encourage fleet renewal will improve the fuel consumption and overall efficiency of Canadian fleets. The efficiency and safety benefits of putting new and modern vessels into service in the Great Lakes would also contribute to the strategic goals of ensuring the long-term viability and competitiveness of Canadian Great Lakes shipping and increasing the efficiency and sustainability of the Canadian freight transportation system. There are considerable environmental and health impacts from air emissions. Both SOx and NOx emissions are known to contribute to respiratory health problems, as well as acidification of soil and water, damaging plant life and species. The Discussion Paper presents estimates of the relative environmental and health impacts of SOx and NOx emissions that would be realized under each option. The estimates are based on emissions from 79 vessels, which are part of the Canadian fleet of larger, slower-speed vessels engaged in marine trade in the Great Lakes St. Lawrence Area. This primarily includes lakers, and includes a few tankers and container ships. The figures include a Do Nothing option, whereby only the Annex VI standards, which apply globally, would be implemented. Figure ES-1: Environmental Benefit from Reduced SOx and NOx Emissions Environmental Benefits ($) vs. Do Nothing : Implementation % Improvement Compared to Do Nothing Environmental Benefits ($) vs. Do Nothing : Long-Run Regulatory Option % Improvement Compared to Do Nothing ECA Standards 592,147, % 856,361, % Fleet Averaging 658,947, % 1,529,945, % Phase-In 592,896, % 1,183,379, % Page 5

6 The figure above shows the estimated economic health and environmental benefit associated with SOx and NOx reductions for all three options during the short-term implementation phase ( ) and the 20-year long-term phase ( ), relative to a Do Nothing base case scenario. The ECA Standard option achieves the lowest health and environmental benefit with a 17.7% improvement over the short-term and 15.5% over the long-term compared with the base case. The Fleet Averaging option achieves the greatest health and environmental benefit with improvements of 19.7% over the short-term and 27.5% over the long-term compared with the base case. The Phase-In option falls between the two, achieving an improvement of 17.8% over the short-term and 21.4% over the long-term. Figure ES-1 shows that the environmental benefit of all three options are quite similar over the short-term implementation phase, but diverge over the long run. There will also be economic costs and impacts on shipowners and operators. All but the Do Nothing option would result in higher operating costs for shipowners, be it through direct increases in costs from the purchase of more expensive lower-sulphur fuel, or from increases in financing costs to cover the capital costs of investing in new technology such as SCR or scrubber technology. Given that lower sulphur fuel is more expensive than higher sulphur fuel, estimates in this Discussion Paper indicate that ship operators would need to increase their spending on fuel considerably. Compared with the Do Nothing option, between 2010 to 2020, fuel costs are estimated to increase by 41% under the ECA Standards option, 18% under the Fleet Averaging option, and 21% under the Phase-In option (excluding any impacts of inflation). In the longerterm ( ), fuel costs would increase 17% under the ECA Standards option, 3% under the Fleet Averaging option and 9% under the Phase-In option, compared to a Do Nothing option. The estimates of SOx and NOx impacts should be interpreted with caution, as they are based on a set of basic assumptions. Actual health and environmental improvements will depend on a complex, as of yet, and unpredictable set of factors, including: cost and availability of low sulphur fuel in the Great Lakes St. Lawrence Area; cost and availability of scrubber technology; shipowner decisions regarding fleet renewal; timing of steamship retirement; and the effect of any modal shift away from marine to other modes. In addition, the estimates are based on data from only 79 large cargo carrying vessels active in the Great Lakes St. Lawrence Area 1. In reality, a larger number and more varied set of vessels would be subject to regulations. As such, the benefits of emissions-reduction are likely understated in this paper. The purpose of this Discussion Paper is to present to stakeholders the preliminary estimates of impacts, feasibility and benefits of the three different options, and to solicit feedback on the options and certain key assumptions such as fleet renewal rates under each option, and timeframe for retiring of steamships from the domestic fleet. 1 The 79 marine carriers active in the Great Lakes St. Lawrence Area whom are part of the fleet of members of the Canadian Shipowners Association. There are approximately 16 other large carriers whose activities have not been taken into consideration due to lack of data. Page 6

7 1 Introduction On March 26, 2010, Canada ratified Annex VI to the International Convention for the Prevention of Pollution from Ships (MARPOL), which establishes limits on emissions of certain pollutants including sulphur oxides (SOx) and nitrogen oxides (NOx), both of which are contributors to smog and acid rain. Also on March 26, 2010, the International Maritime Organization (IMO) accepted a proposal put forward by Canada, the United States (U.S.) and France (St. Pierre et Miquelon), to designate the area extending 200-miles off the east and west coasts of North America as an Emission Control Area (ECA) under Annex VI to MARPOL. Vessels operating in ECA areas are subject to stricter emissions standards than non-eca areas. The North American ECA comes into force on August 1, In December 2009, the U.S. Environmental Protection Agency (EPA) published its final regulations related to implementing MARPOL Annex VI, the North American ECA, and air emissions from maritime shipping in general. Of significance to Canada is that the EPA chose to extend the stricter ECA standards beyond the designated ECA area approved by the IMO, to include the internal waters that could be accessed from the ECA area. This wider ECA area includes the Great Lakes on the U.S. side. As well, the EPA rule exempts steam-powered vessels operating the Great Lakes and St. Lawrence River to Anticosti Island. Canada is now required to develop regulations for marine vessels to implement the emission standards included in MARPOL Annex VI and the new North American ECA. Given that the Great Lakes are a shared waterway with the U.S., and that regulations of both nations apply to vessels operating in these waters, Canada must also consider how domestic regulations can ultimately be compatible with the U.S. domestic regime while recognizing the inherent differences between the Canadian and U.S. fleets. As well, the Canadian fleet requires modernization and renewal, for which marine shipping firms are already preparing investments and technical work. This will bring broader environmental, energy efficiency and safety benefits to Canada s transportation system as well as American regions served by Canadian ships. However, regulatory conditions need to support investment decisions. The purpose of this Discussion Paper is to present to stakeholders the policy rationale, relative environmental impacts, feasibility, costs and benefits of three different options to regulate air emissions from vessels in the Great-Lakes St. Lawrence area extending from Atlantic Ocean at the Gulf of the St. Lawrence through the St. Lawrence River and into all of the Great Lakes: ECA Standards option: This approach would implement ECA-level emission standards in Great Lakes St. Lawrence Area waters at the same time as the North American ECA this approach would be identical to the approach adopted by the U.S. EPA in its final regulations for internal waters; Fleet Averaging option: This approach would require averaged emissions from the collection of vessels in a company s fleet to meet minimum emissions standards over the course of a year. The preliminary analysis presented herein assumes that Fleet Averaging will result in the highest rate of fleet renewal; and Phase-In option: This approach would allow older vessels more time to meet air emissions standards than newer vessels. The preliminary analysis presented herein assumes that the Phase-In option will result in a rate of fleet renewal half as high as the Fleet Averaging option. Page 7

8 Under the Fleet Averaging and Phase-In options, all vessels are required to comply with ECA standards by Under the ECA Standards options, all vessels are required to comply with stricter ECA standards by August 1, 2012 (when the North American ECA comes into force). Under the ECA option six Canadian steamships will be exempted and it is assumed that they will be a component of the fleet through to Policy Rationale 2.1 Commitments to Clean Air Regulatory Agenda In response to Environment Canada and Health Canada evidence on the impacts of air emissions on human health and the environment, on October 21, 2006, the Government of Canada published a Notice of intent to develop and implement regulations and other measures to reduce air emissions. The Notice of Intent provided the framework for establishing emissions reduction regulations related to transportation sources (among other areas). In the Notice of Intent, the government also stated that it would set fixed targets for air pollutants that are at least as rigorous as those in the U.S. or other environmental performance leading countries. Given the international nature of global shipping, the Government of Canada is commitment also advanced the development of rigorous new emission standards at the IMO, where Canada is a member and participated in discussions to revise Annex VI to MARPOL in These international standards would be subsequently implemented in Canadian domestic regulation for all vessels that are currently subject to the Canadian Regulations for the Prevention of Pollution from Ships and for Dangerous Chemicals. Since the introduction of the Clean Air Regulatory Agenda in 2006, major events have taken place that need to be considered in the development of domestic regulations: The adoption by the IMO of a revised Annex VI to MARPOL in October 2008 that subsequently came into force on July 1, 2010; Canada s accession to MARPOL Annex VI, obliging Canada to develop regulations that will enforce the new 2008 MARPOL Annex VI emission standards; The IMO s adoption of the joint U.S. / Canadian / French proposal to establish the North American ECA, which sets stricter air emissions standards in North American waters that extend 200 nautical miles off the east and west coasts of North America; The potentail introduction of the Energy Efficiency Design Index to MARPOL Annex VI at MEPC 61 in July of 2011; The publication, in December 2009, of the U.S. EPA final rule to implement MARPOL Annex VI and the North American ECA in all U.S. waters, including the Great Lakes and the St. Lawrence; and The recent Government of Canada announcement on October 1, 2010 to remit the long-standing 25 per cent import duty on certain types of foreign-built vessels. Page 8

9 2.1.1 MARPOL Annex VI 2008 Standards Annex VI sets limits on SOx and NOx emissions from ship exhausts and prohibits deliberate emissions of ozone-depleting substances. Sixty countries have ratified the Annex, including Canada. NOx Emission Standards The NOx emission standards in Annex VI are based on the year of construction of the vessel engine (or any major refit of the engine), determined by the year the vessel keel was laid. The emission standards apply to each marine diesel engine with a power rating above 130 kilowatts (kw) installed on a vessel. Tier I and Tier II limits are global limits, which apply to all signatories of Annex VI. Tier III standards apply only in ECAs, and will only apply to engines built in 2016 or later. Figure 2-1: MARPOL Annex VI 2008 NOx Emission Standards (grams of pollutant/kilowatt hour of energy produced) Tier* Area of Applicability Engine Install Date Tier I Annex VI waters January 1, 2000 January 2010 Tier II Annex VI waters, January 1, including ECA areas December 31, 2015 Tier II Annex VI waters, January 1, 2016 excluding ECA areas and later Tier III ECA areas January 1, 2016 and later *Tier based on engine install date Maximum In-Use Engine Speed (n=maximum crankshaft revolutions per minute, rpm) n < 130 rpm 130 n < 2000 rpm n 2000 rpm n(-0.20) n(-.23) n(-.23) n(-0.20) 2.0 Annex VI requires that engines installed on older vessels constructed between 1990 and 1999 comply with the Tier I NOx emissions if a certified Approved Method (technology to meet the standard) is available. Engines that were built or reconstructed prior to 1990 do not need to meet any NOx emission standards. This is significant for Canadian industry given the age of the Canadian registered fleet: of the 79 Canadian vessels analysed in this paper 2, 60 (76%) were constructed prior to More information on the structure of the Canadian fleet is included in Section 2.2 below. 2 The 79 marine carriers active in the Great Lakes St. Lawrence Area are part of the fleet of members of the Canadian Shipowners Association. There are approximately 16 other large carriers whose activities have not been taken into consideration due to lack of data. 3 Based on information from the Canadian Transportation Agency vessel list and the Canadian Shipowners Association. Page 9

10 SOx Emission Standards Annex VI establishes limits on the sulphur content of fuel oil as a measure to control SOx emissions and, indirectly, particulate matter (PM) emissions. Special stricter fuel quality provisions exist for ECAs. The sulphur limits and implementation dates that are in Annex VI 2008 are listed in Figure 2-2 below. Figure 2-2: Annex VI 2008 SOx Fuel Sulphur Limits (%wt) ECA or Global Year standards enforced Fuel Sulphur Content Limit Global Standards Prior to December 31, % January 1, 2012 December 31, 2019 (or 2024)* 3.5 % January 1, 2020 (or 2025) onwards* 0.5% ECA Standards Up June 30, % July 1, 2010 December 31, % January 1, 2015 onwards 0.1% *Subject to an IMO study to confirm availability of low-sulphur fuel that meets standards 4 Sulphur content fuel requirements apply to all fuel used on board a vessel. The Canadian standards will apply to all Canadian ships worldwide and foreign-registered vessels in waters under Canadian jurisdiction (limited exemptions are explained in Chapter 3). As an alternative to using lower-sulphur fuel to achieve SOx emissions standards, shipowners and operators may use alternative technology where it is available (for example, exhaust scrubbers) and if it provides equivalent reductions in SOx and PM emissions North American Emissions Control Area (ECA) The area of the North American ECA includes waters along the Pacific coast, the Atlantic/Gulf Coast and the eight Hawaiian Islands, as illustrated in the figure below. Emissions standards in the North American ECA will come into force on August 1, The IMO is required to undertake a review in 2018 to determine whether an adequate fuel supply is available on a global level to meet the global 2020 standards (0.5% sulphur content). If the review determines that fuel availability and other market conditions are such that the fuel standards cannot be met by 2020, the standard would become effective on 1 January 2025 instead. Page 10

11 Figure 2-3: Map of the North American ECA Source: U.S. EPA U.S. Publication of Final EPA Rule December 2009 The U.S. published final regulations for air emissions from marine vessels in December Canada is obliged to consider the U.S. EPA rule for a number of reasons: in particular, the likely impact of the rule on emission standards in the shared Great Lakes St. Lawrence Area. Of significance for Canada is that the EPA Rule extends ECA emissions standards to ECA Associated Areas inland waters that can be accessed from the North American ECA (including the Great Lakes St. Lawrence Area). The EPA Rule provides specific exemptions: All steamships currently active in the Great Lakes St. Lawrence Area to the west side of Anticosti Island are permanently exempt from stricter emissions regulations in the Great Lakes St. Lawrence Area (global Annex VI standards will still apply to these steamships); Prior to 2015, there is no requirement to bunker with low-sulphur fuel if no such fuel is available; and, Beyond 2015, U.S. vessels can apply for waivers to be exempt from SOx emission standards, based on demonstration of undue economic hardship. Applications are assessed on a case-by-case basis by the U.S. government. Page 11

12 2.1.4 U.S./Canada Regulatory Alignment The U.S. approach was designed specifically for the U.S. fleet, and did not consider any implications for Canada s fleet. According to the U.S. EPA, a total of 21 category 3 U.S. vessels in the Great Lakes St. Lawrence Area are subject to the stricter ECA-standard regulations, of which 13 will be exempt because they are steamships 5. In contrast, at least 95 large Canadian vessels in the Great Lakes St. Lawrence Area will be subject to the stricter ECA-standard regulations. The majority of Canadian vessels operating on Great Lakes area will need to travel through waters under U.S. jurisdiction during the course of their service. Similarly, U.S. vessels also transit Canadian waters. This means that there must be compatibility between Canadian and U.S. regulatory regimes. However, the fleet of large Canadian vessels operating in the Great Lakes is markedly different than the U.S. fleet, both in size and composition. This suggests the possibility applying the U.S. rule may not provide an optimal regulatory regime for Canadian industry. If a Canadian regulatory regime is selected that differs from the U.S. approach, Transport Canada would need to formally present the Canadian regulatory regime to the U.S. Environmental Protection Agency and the U.S. Coast Guard to secure a reciprocity agreement to recognize certificates issued by Transport Canada. This would imply that an additional supplement would be attached to the Canadian Air Pollution Prevention Certificate, indicating the vessel s compliance with the Canadian regulations for the Great Lakes. Under the agreement, U.S. authorities and inspectors (such as the U.S. Coast Guard) would accept the Canadian certificate as indicating compliance and Transport Canada Marine Safety would accept U.S. certificates for U.S. vessels. This would allow both countries to adopt the most appropriate regulatory regime for their respective domestic fleets without sacrificing the benefits of regulatory compatibility and accompanying economic and environmental objectives of both countries. To facilitate the acceptance of differentiated regulations by U.S. authorities, it will be demonstrated that Canadian regulations will achieve equal or greater environmental outcomes by 2020 and 2030 than under strict harmonization with the U.S. regulatory requirements. 2.2 Differences Between Canadian and US Fleet in the Great Lakes St. Lawrence Area Any regulatory option developed in Canada needs to reflect the unique circumstances of the marine industry and Canadian-registered fleet active in the Great Lakes St. Lawrence Area. There are currently 95 vessels that will be subject to the air emissions regulations, with an average vessel age of 32 years (since construction or refit) 6. Six of these 95 vessels are steamships, all of which are at least 43 years old. The types and age of the vessels are presented in the figure below. 5 Category 3 vessels is a U.S. definition referring to vessels with per-cylinder displacement at or above 30 litres per cylinder. These are typically large, ocean-going vessels and those active in the Great Lakes. 6 Regulations will also apply to other types of vessels active in the Great Lakes St. Lawrence Area (e.g. ferries, tugs, dredging vessels, etc), but these are not considered within the scope of this Discussion Paper, whose focus is on the major marine carriers. Page 12

13 Figure 2-4: Canadian Fleet Active in Great Lakes St. Lawrence Area Vessel Type Number of Vessels Average Age Bulk Cargo years (1973) Container 9 26 years (1984) Self-Unloader years (1978) Tanker years (1990) Total / Average years Source: CPCS analysis of CTA Vessel List (list excludes tugs, barges, ferries, passenger, and offshore supply vessels). Information supplemented by fleet details provided by Canadian Shipowners Association. Given an average vessel age of 32 years, the marine industry in the Great Lakes St. Lawrence Area is currently at a crossroads where shipowners need to decide whether and how to renew their fleet with more modern ships. In fact, fleet renewal is one of the key reasons why the Government of Canada is looking at a range of options to regulating air emissions the final regulations need to encourage fleet renewal and adoption of new technologies, rather than deter it, to the extent possible Challenges and Opportunities for Fleet Renewal A regulatory framework that encourages fleet renewal will yield more environmental benefits over the long term. Fuel and transport efficiency gains of new vessels would result in reductions in greenhouse gas (GHG) and criteria air contaminant (CAC) emissions through lower fuel consumption. According to the Canadian Shipowners Association, new vessels (large motorships) consume 50% less fuel than existing steamships and 20% less fuel than existing older motorships. New vessels would also have installed new environmental technology to achieve further environmental improvements in other areas. Given the advanced age of the Canadian fleet plying the Great Lakes, and the lower operating costs associated with new ships, a regulatory regime that encourages fleet renewal offers clear benefits to both industry and the environment. The main barrier to fleet renewal under the U.S. ECA option is the requirement that all diesel-powered ships must meet the ECA standard SO x emission limits in 2015, without exceptions. This will give shippers little time to renew their fleets in preparation for the new standards. Large marine vessels are expensive to buy and timeconsuming to build, requiring time for financing, contracting with yards and equipment suppliers. Vessel owners would be faced with decisions to invest in retrofits for fuel handling or emission control technology for vessels that have limited commercial life remaining. Given this, requiring universal compliance with ECA standards by 2015 would minimize or delay the adoption of the new emission control technologies which, while promising, are for the most part still in early stages of development. A regulatory regime that allows more lead-time and flexibility in preparing for the stringent standards would encourage Canadian industry to invest in greater numbers of new ships, which will lead to operational cost savings and increased safety and reliability for shippers in addition to the environmental benefits sought. Page 13

14 Conservative estimates suggest that modern vessels are greater than 30% more fuel-efficient than vessels built in the 1950s and 1960s. The switch to distillate fuel used in more modern engines also offers efficiency and environmental gains, though even residual fuel-powered new vessels burn that fuel more effectively and produce fewer pollutants and more horsepower per unit of fuel than older engines. However, more regulatory lead-time and flexibility for industry would require that Canadian regulations allow some ships the possibility, at least initially, to have marginally higher emission levels than allowed in the U.S. ECA option, creating alignment challenges as discussed in section For this reason, it should be borne in mind that the benefits of fleet renewal from such a regulatory regime would need to balance these early losses Regulatory Conditions to Support Fleet Renewal Commercial designs to invest in modernizing the fleet are heavily influenced by the regulatory framework set by Government. New large vessels constitute a major investment, so policy and regulatory uncertainty provides motivation for shippers to delay fleet turnover. However, there have been a number of recent developments in Canada s domestic and international context that have greatly increased the long-term regulatory and policy certainty for industry. A key consideration is the recent Government of Canada announcement on October 1, 2010, to remit the 25 percent duty on imports of all general cargo vessels and tankers regardless of length, as well as ferries longer than 129 metres. Partners in both government and industry have identified the 25 percent duty as a significant barrier to trade since it has prevented the purchase of new vessels that will be required to maintain and expand Canada s domestic and international trade linkages. Remitting the 25 percent duty is expected to save Canadian ship owners $25 million per year over the next decade. These savings will likely be passed on to other key sectors of the economy or reinvested into new ships. The new duty remission framework will increase certainty and predictability for investment decisions, help lower the costs for Canadian fleets to meet new and emerging environmental standards, and as the Canadian Shipowners Association (CSA) has long argued, ultimately spur investment in new, cleaner, and more efficient vessels. Setting air emission standards for new vessels has also been identified as a source of uncertainty for industry; however, as the government is now developing regulations for this purpose, this uncertainty will also soon be eliminated. In addition, on March 26, 2010, Canada ratified Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL), which addresses air pollution by ships, thereby offering further certainty to industry on the direction of Canadian environmental regulatory policy. There has also been uncertainty concerning requirements for ballast water treatment in the Great Lakes and St. Lawrence Seaway. The Government of Canada recognizes the need for an approach to managing ballast water discharges on the Great Lakes and St. Lawrence Seaway System that is consistent, practicable and protective to the satisfaction of all regulators. Page 14

15 2.2.3 Emissions Benefits from Fleet Renewal The benefits of fleet renewal go far beyond enabling Canadian industry to meet the ECA sulphur emission requirements. In implementing a regulatory regime to reduce sulphur emissions, government and industry have an opportunity to realize reductions in other harmful pollutant emissions as a co-benefit. New vessels will be built to conform to current Annex VI NOx standards. Marine engine technology has seen significant advancement over the last thirty years, and new engines have substantial gains in efficiency over those currently in use aboard older vessels in the Canadian Great Lakes fleet. Even beyond the engine itself, advanced construction techniques, materials, and coatings give new vessels greater efficiency over older ones. Moreover, the greenhouse gas emission reductions achieved by new vessels are expected to increase as the industry moves to comply with the Energy Efficiency Design Index (EEDI) targets are set by the IMO in the near future. Fleet renewal is therefore also linked to reductions in greenhouse gas emissions, as well as lower operating costs, due to decreased fuel consumption. Requiring a large decrease in sulphur emissions in the short term could lead industry to invest in control solutions, which are not cost effective for aging vessels, rather than in fleet renewal. This could have the unintended result of making it more difficult to achieve other environmental co-benefits Strategic Considerations Fleet renewal figures significantly in strategic considerations related to both the competitiveness of Canadian fleets and the overall sustainability and profitability of the marine transport system in the Great Lakes area. Encouraging fleet renewal is also linked to long-term strategic goals of developing short-sea shipping options and maximizing the efficiency of the transportation system. Providing Canadian shippers with opportunities to make the investments required to achieve advancements in system efficiencies is therefore a valuable strategy to help realize these goals. The three regulatory options under consideration would each influence fleet renewal differently. As discussed below, both the Fleet Averaging and Phase-In regulatory options have been proposed specifically to address the unique structure of the Canadian marine industry and to encourage greater fleet renewal. Other options could also be considered and it is crucial that key assumptions are validated before designing a regulatory regime. Page 15

16 3 Description of Regulatory Options 3.1 Overview of Options The three regulatory options under consideration are listed below and described subsequently in the remainder of this chapter. ECA-Standards Option Fleet Averaging option Phase-In option All options are expected to meet the ECA-level emission standards by January 1, 2020 (sulphur emissions equivalent to use of 0.1% sulphur content fuel) General Exemptions Across All Options There are a number of common inclusions and exemptions to the proposed regulations, regardless of which of the three regulatory options is chosen. These are summarised below. NOx standards: Canada would follow MARPOL Annex VI in applying the NOx emissions standards to all marine diesel engines with a power output above 130 kilowatts. These are generally slower-speed engines primarily used for propulsion on large bodies of water such as the Great Lakes and for ocean-going activities. There are about 95 vessels in the Canadian fleet that will be subject to these NOx regulations. Applicability according to vessel flag: Canadian regulations would apply to all Canadianflag vessels worldwide and foreign-flag vessels active in waters under Canadian jurisdiction. Geographic scope: Specific regulations would apply in the Great Lakes St. Lawrence Area, extending from the Atlantic Ocean at the Gulf of St. Lawrence through the St. Lawrence River and into all of the Great Lakes. Pleasure craft exempt: Pleasure craft would be exempt from the regulations. Some public vessels exempt: The regulations will exempt government vessels of other countries in non-commercial service, as exempted under MARPOL and vessels of the Canadian Forces, as exempted under the Canada Shipping Act, Other Canadian government vessels and public vessels in commercial service must comply. (All public vessels in Canada are expected to comply with environmental regulations on a voluntary basis). Annex VI exemptions: There are some exemptions under Annex VI that would apply under all three regulatory options. These are summarized in Figure 3-1 below. Additional exemptions apply under each option, as described later in this Discussion Paper. Page 16

17 Figure 3-1: Annex VI 2008 Exemptions Common to All Regulatory Options General Exemptions SOx-Related Exemptions NOx-related Exemptions Emissions necessary for securing safety of a ship or saving life at sea Emissions resulting from damage to a ship Emissions exempted specifically to conduct ship emissions technology trials Emissions from exploration, exploitation and processing of sea-bed mineral resources If no low-sulphur fuel is available for bunkering, ships are not required to comply, but need to report it to their Administration. Ships are not required to deviate from their intended voyage or unduly delay voyage to meet standards Ships can use alternative technology to meet SOx emissions standards (e.g. scrubbers), instead of using low-sulphur fuel Engines used solely for emergencies Engines installed on ships operating only within waters subject to the sovereignty of the flag of which the ship is flying, provided alternative NOx control measures exist In ECAs, ships less than 24 metres in length and used for recreation In ECAs, ships with diesel propulsion power below 750 kw NOx Standards Common Across Options The three regulatory options differ only in terms of the levels of allowable SOx emissions, and the timeframes in which they must be met. The NOx emissions standards under MARPOL Annex VI and its NOx Technical Code are identical across options Shipowner Options to Meet NOx Standards As described above, NOx emissions standards are identical under all three regulatory options. The technical issues discussed below are common to all three options. Vessels in the Great Lakes St. Lawrence Area are currently able to meet the Tier I NOx standards for the vessels subject to that regulation (17 g/kwh for slow-speed engines). As engine manufacturers worldwide are currently able to design engines that meet the Tier II NOx standards (a 20% reduction in NOx emissions from Tier I standards) this option is also available for engines that will be built before As such, meeting Tier I and Tier II NOx standards is not seen as problematic in the Great Lakes St. Lawrence Area for existing vessels. Achieving the Tier III NOx emissions requirement for vessels built from 2016 onwards is more challenging, as the emissions need to drop to 80% of the Tier I levels. Engine manufacturers internationally are developing engines which are just about able to lower NOx emissions to 70% of Tier I standards, but not yet able to reach 80% reduction levels 7. Unless Tier III standard engines are developed and are easily accessible by 2016 at a reasonable cost, manufacturers are more likely to use selective catalytic reduction (SCR) exhaust after-treatment technologies to reach the Tier III standards. SCR technology cuts NOx emissions by between 80% 95%. 7 Based on phone interview with Exhaust Gas Cleaning Systems Association, UK. Page 17

18 SCR technology works by converting NOx into diatomic nitrogen (NO 2 ) and water (H 2 O). These systems have been used worldwide for many years in large utility boilers, solid waste boilers and power plants. In more recent years, they have been used on diesel engines, including on large ships. To date, this SCR technology has not been used in the Great Lakes St. Lawrence Area to lower NOx emissions. One of the criticisms of SCR technology is the requirement to use significant amounts of urea in the cleaning process, which is a noxious substance to carry on a ship. SCR technology is also not as effective in slow-speed engines like those in the Great Lakes St. Lawrence Area. This is a key consideration for fleet renewal, as many of the new vessels would likely use engines built after Shipowner Options to Meet SOx Standards Although the level of permissible SOx emissions varies across regulatory options, there are only two means for carriers to comply with stricter fuel standards: switching to lower sulphur fuels or using technologies such as exhaust gas cleaning devices (EGCD), or scrubbers, which result in the equivalent lower emissions standards. The fuel and technology requirements to meet these standards are described below. Using Lower Sulphur Fuel Sulphur content increases significantly in successively less refined fuels. In terms of what is available across Canada, between 2004 and 2007, the annual average sulphur content of marine distillate fuels decreased from 0.21% in 2004 to 0.07% in 2007; over the same time period, the average sulphur content of residual fuels decreased from 1.7% in 2004 to 1.6% in The average sulphur content of fuel available in the Great Lakes St. Lawrence Area was in the range of 1.5% 2% over the period from According to the Canadian Shipowners Association, the majority of their members use fuel with sulphur content between 1.5% and 3%, with a fleet average sulphur content of 1.7%, across 79 vessels. 9 According to Natural Resources Canada and Environment Canada 10, there are no new refining methods being developed in Canada to reduce sulphur levels in residual fuels, since these refining methods are not currently considered commercially viable. This presents a problem that is exacerbated by the declining availability of low-sulphur crude supplies for Canadian refiners. It seems likely that, given the current refining situation, shipowners and operators may be more likely to switch to alternative technology to meet stricter ECA level emission standards, than to switch to using distillate fuel for aging, less efficient fleets. The cost of distillate fuel is higher than the cost of residual fuels, and switching to higher cost fuels would have a direct impact on operating costs for shipowners and operators, as well as their customers. 8 BMT Group Study for Environment Canada, Update on Availability, Quality and Quantity of Marine Fuels in Canada, July 17, Information provided by Canadian Shipowners Association for fleet of 79 vessels in BMT Group Study for Environment Canada, Update on Availability, Quality and Quantity of Marine Fuels in Canada, July 17, 2009 Page 18

19 Equivalents and Alternative Technologies to Meet SOx Standards Shipowners and operators also may use alternative technology to achieve equivalent lower SOx emissions, such as EGCDs, commonly known as scrubbers. The SOx scrubbers can remove up to 95% of SOx from ship exhausts using water to absorb SOx and to remove most of the direct PM. The IMO has developed guidelines for the use of EGCD, including treating waste water before discharge, and disposing of sludge. 11 Going forward, ports in the Great Lakes St. Lawrence Area, and elsewhere, will need to have facilities available to dispose of the sludge from scrubber systems General Reporting Requirements for Shipowners Compliance with the provisions of Annex VI is determined by periodic inspections and surveys for all vessels above 400 gross tonnage (GT). The inspections and surveys are the responsibility of the Administration where the vessel is registered. For vessels registered in Canada, Transport Canada has this responsibility. The reporting requirements to meet NOx emissions standards are identical across all three regulatory options and are set out in Annex VI. The NOx Technical Code (NTC) is the overarching code, which lists the engine surveys required for compliance with Annex VI Engines that meet the NTC requirements will be issued with an Engine International Air Pollution Certificate (EIAPPC) (engine certification) by Transport Canada, which is a precursor to issuing an International Air Pollution Prevention Certificate (IAPPC) (vessel certification). In order to enable Transport Canada to complete the surveys, shipowners or operators must maintain a Technical File for each engine on their vessels, which includes a full record of the engine type and performance, NOx emissions performance and systems, copies of engine test data and the EIAPPC (as applicable). These functions may also be fulfilled by Classification Societies recognized by Transport Canada. In order to demonstrate compliance with SOx emissions standards, vessels that are 400 GT and above are required to keep onboard vessel bunker delivery notes that specify the details of fuel oil brought onboard for combustion purposes. Bunker delivery notes need to be kept for a period of three years. A fuel sample is also required to accompany each bunker delivery note, sealed and signed by the supplier s representative and the master or officer in charge of fuel operations. The sample must be taken pursuant to IMO guidelines and must be retained for at least 12 months from the date of delivery. Where EGCDs are used, this would be noted on the vessels IAPPC and bunker delivery notes are still required. When no low-sulphur fuel is available, the shipowner or operator must notify Transport Canada and the relevant port of destination when it cannot purchase compliant fuel oil, and indicate how attempts were made to locate compliant fuel. In turn, Transport Canada must notify the IMO when a ship presents evidence on non-availability. The report must be sent within three months after the fuelling event (an Annex VI 2008 requirement). 11 IMO, 2009 Guidelines for Exhaust Gas Cleaning Systems, Resolution MEPC.184(50), Adopted on 17 July 2009, MEPC 59/24/Add1/Annex 9. Page 19

20 In the remainder of this chapter, we describe each of the three regulatory options are described, including how each would work in practice and the implications for shipowners, operators and public authorities. 3.2 ECA-Standards Option Key Components of Approach The ECA-Standards regulatory option closely mirrors the approach which exists under the U.S. EPA Rule. The key components of the ECA-Standards Option are as follows: ECA-level SOx standards would apply in the Great Lakes St. Lawrence Area beginning August 1, 2012, as follows: o Global Annex VI 2008 fuel sulphur limit until July 31, 2012 o 1% sulphur fuel from August 1, 2012 December 31, 2014 o 0.1% sulphur fuel by January 1, 2015 and thereafter Steamships active in the GLSLSS are exempt from the stricter standards, but would still need to comply with global Annex VI standards (0.5% fuel sulphur from 2020); If compliant low sulphur fuel is not available, with a vessel may use the lowest sulphur fuel available. Note: At this time, Canadian legislation does not permit the use of waivers to emissions standards based on undue economic hardship Reporting Requirements for Shipowners The reporting requirements for shipowners relating to NOx emissions are identical across all options; they are simply the requirements included in Annex VI 2008 and the NTC. With the respect to SOx emissions, reporting requirements would be those required by Annex VI, as described in Level of Complexity for Shipowners / Operators Given the SOx standards come into force for all vessels at once on August 1, 2012 in the ECA Standards option, shipowners and operators must be ready in less than two years to meet these standards either through low-sulphur fuel, or through alternative scrubber technology. Neither of these is currently widely available in the Great Lakes St. Lawrence Area region. Even if they were, the shipowners or operators would need to consider the capital and operating costs associated with the changes, and decide which option (low fuel or alternative technology) is best in the long run, and whether the costs associated with a change might affect their business operations to the extent that they would need to decommission vessels. Page 20