Copyright © 2010 by K&L Gates LLP. All rights reserved.

The New Maritime Paradigm: U.S. Environmental Regulation of the Maritime Industry

May 19, 2010

2

ModeratorAdam Schempp, Environmental Law Institute

Panelists

Jennifer Carpenter, American Waterways Operators

Barry Hartman, K&L Gates

Michaela Noble, Maritime Administration (MarAd)

Annie Petsonk, Environmental Defense Fund

Bryan Wood-Thomas, World Shipping Council

3

Topics

Overview of Major Regulatory Changes

Air Issues Emissions and GHGs, SO2 emissions regulations

Waste Issues

TSCA and waste disposal

Water Issues Vessel permits under CWA

4

Overview of Major Environmental

Regulatory Changes

Barry HartmanK&L Gates

5

Water

Air

Waste

6

Water

EPA: New Vessel General Permit Governing Incidental Discharges

Coast Guard: Ballast Water Phase One (“IMO”) / Phase Two 2014 or 2016

for existing vessels Estimated cost of compliance $1.1 billion

7

Air

Large “category 3” marine diesel engines “Tier II” provisions – reduce NOx by 15 to 25 percent, starting in

2011; “Tier III” provisions – achieve NOx reductions 80 percent below

current levels, by 2016; Estimated cost of compliance $1.85 billion in 2020, increasing to

$3.11 billion by 2030.

Additionally, in 2009, California implemented state regulations that require all oceangoing vessels within 24 nautical miles of the California coastline to use cleaner burning diesel fuel, aimed at reducing SOx, NOx and PM emissions.

Kerry-Lieberman

8

Waste

TSCA regulates disposal of PCBs

Vessels contain PCBs

9

2010 2012Coast GuardBallast WaterCompliance

Phase I

2016 2020Clean Air

ComplianceBenchmark I

2030Clean Air

ComplianceBenchmark II

0

$3.5

$3

$2.5

$2

$1.5

$0.5

$1

Phase I

Phase II

● $1.66B

● $1.91B

Coast GuardBallast WaterCompliance

Phase II

(All costs are estimated based on data in rulemakings)

Do

lla

rs (

in b

illi

on

s)

● $267M

● $3.14B

New Annual Maritime Industry Compliance Costs

10

States

California, Michigan, Minnesota, New York, and Washington have adopted or have begun the process of adopting their own stringent ballast water or emissions rules.

The agency estimated that compliance with the regulations would typically add $30,000 to a California port visit.

11

Air Issues

Annie PetsonkEnvironmental Defense Fund

12

Air Issues

Bryan Wood-ThomasWorld Shipping Council

13

Waste Issues

Michaela NobleMaritime Administration (MarAd)

Air Emissions from Ships: The Changing Landscape

Bryan Wood-Thomas ELI and K&L Gates WebCast World Shipping Council 19 May 2010

World Shipping Council

• Represent global liner industry

• Carry >90% of the world’s containers

• 29 Member Companies– Container ships– Transoceanic Vehicle

Carriers

Overview

• Annex VI and the Designation of Emission Control Areas

• Key Questions & Challenges:– Fuel Availability– Scrubbers ?

• Climate – Where is the Debate going in the IMO?

New International Standards

New enginesTier 2: 20% reduction from Tier 1 in 2012Tier 3: 80% reduction from Tier 1 in 2016

Geographic standard – applies in Emission Control Areas (ECAs)

Fuel Sulfur Limits (to address SOx and PM)

July 2010: 1% in ECAs2012: Global cap falls to 3.5%2015: ECA cap falls to .1%2020: Global cap falls to .5%

- subject to review in 2018

New Standards will result in large reductions

Effects of the New Annex VI Standards

• Costs will be significant, but uniform across competitors.

• New engine technologies will emerge to meet the Tier III NOx standards. – Some will drive a departure from the usual trade-off

between NOx and CO2.

• Requirements to burn cleaner 1000 PPM fuel in 2015 represent a significant change in demand in the international oil market.

Where May We See New Emission Control Areas?

• Candidate ECAs:

- Mediterranean

- Tokyo Bay

- Hong Kong

- Shanghai

- Eastern Atlantic Coast of Europe

- Black Sea

What Engine Technologies Will emerge to meet Tier III?

• SCR-based Systems– Allows dramatic Improvement in NOx emissions w/o

traditional trade-off in fuel economy

– Requires urea and presents challenges for some other technology applications

• Advanced EGR with HAM – Test bed efforts underway

to reach Tier III levels

The Global Fuels Market

• Demand for lighter fuels is increasing …

• Uncertainty in supply will be a reality

• Scrubbers – Are they a viable option?

Exhaust Gas Cleaning

• Seawater scrubbers

• Freshwater systems

• Other systems…

CO2 Generation in the Global Supply Chain

- Marine transportation accounts for some 2- 3.5% of total anthropogenic CO2 emissions worldwide.

- Generation of CO2 in the transoceanic leg is tremendously low when compared to all other transportation options

- What does this suggest about future trends in a changing economy?

- movement of production?- vessel speed?- changes in design?

The GHG Debate at the IMO

• Development of a legally-binding treaty is under debate

• Scope of application is highly contentious

• Most parties want universal application

• What system is to be employed?– Fuel tax– Differentiated tax scheme

with rebates– Mandatory efficiency

standards– Trading scheme– A hybrid of above

approaches

UNFCCC

Specific Proposals

• GHG Fund (Denmark et al)

• Leveraged Incentive Scheme (Japan)

• ETS (Multiple variants)

• Efficiency Standards with trading (USA)

• Efficiency Standards with fund (WSC)

• Import Levy with Rebates (IUCN)

• Port Fees (Jamaica)

• Proportionality (Bahamas)

Where Can We Expect the IMO Debate on GHG to Go?

□ Development of mandatory efficiency standards for new builds is highly likely.

□ Industry is fully supportive of a global, legally-binding treaty.

□ Scope of application and what type of system or treaty architecture is most appropriate will remain contentious.

□ At the WSC, we believe an efficiency-based scheme drawing on elements tabled by the U.S., Denmark, the WSC, and Japan will produce the most effective regime.

Discussions Currently Underway at the IMO

• Experts group formed under the IMO to evaluate the different proposals before the Committee- will not recommend a specific proposal, but will assess the effectiveness of the respective proposals

- present report to next MEPC

• MEPC moving forward with development of mandatory efficiency standards for new builds.

Questions

Bryan Wood-Thomas, Vice-PresidentWorld Shipping Council

bwoodthomas@worldshipping.org

29

Water Issues

Vessel Discharge Regulation Under the Clean Water Act:The Vessel General Permit

Jennifer CarpenterThe American Waterways Operators

May 19, 2010

30

The Bottom Line

Vessel discharges in U.S. waters prohibited except as provided by CWA permit

Out to 3 miles from shore Limited exceptions for certain discharges

already subject to CWA regulation

31

The VGP: Two Views

A square peg in a round hole?OR . . .

Making the best of a bad situation?

Answer: Yes!

32

The Challenge of VGP Development

First application of NPDES program to mobile sources

Individual or general permit 401 certification process

Constrained time frame

Limited EPA experience with vessel operations

33

VGP Basics

26 covered discharges Best Management Practices Notice of intent to comply Reporting and recordkeeping Corrective action State-specific conditions

34

The Challenge of VGP Implementation

Application to vessel operations BMPs Notice of Intent process Recordkeeping

Compliance with state conditions Some not technically feasible

Enforcement: who and how?

35

Trying to Make it Work

Industry self-help BMP guides, template forms

EPA Q&A Guidance to be posted on Web

State conditions Advocacy on multiple fronts

Interagency cooperation Coast Guard-EPA MOU pending

36

Signs of Progress

Practical EPA interpretations NOI holder for barges Definition of voyage Definition of visible sheen Electronic recordkeeping?

State conditions Removal of IL, NJ, CA conditions IA and PA requests for removal

37

The Next Chapter

“VGP 2.0” VGP expires 12/18/13 Needs: lead time, transparency, improved

EPA/state process

A new legislative framework for regulation of vessel discharges?

Will Congress take up the challenge?

38

Questions?

39

Thank you for joining us.

Jennifer Carpenter, AWOjcarpenter@vesselalliance.com

Barry Hartman, K&L Gatesbarry.hartman@klgates.com

Michaela Noble, MarAdmichaela.noble@dot.gov

Annie Petsonk, EDFapetsonk@edf.org

Bryan Wood-Thomas, World Shipping Councilbwoodthomas@worldshipping.org