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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

November 2010

Please forward your comments to: Paul Topping Manager, Environment Protection Transport Canada, Marine Safety Tower C, Place de Ville 330 Sparks Street, 11th

This Discussion Paper has been prepared for comment and discussion.

Floor Ottawa, Ontario K1A 0N8 Telephone: 613-991-3168 Facsimile: 613-993-8196 E-mail: [email protected] RDIMS 6149132

Discussion Paper for National CMAC – November 2010

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Table of Contents

EXECUTIVE SUMMARY ........................................................................................................................................... 4

1 INTRODUCTION ............................................................................................................................................ 7

2 POLICY RATIONALE ....................................................................................................................................... 8

2.1 COMMITMENTS TO CLEAN AIR REGULATORY AGENDA ............................................................................................ 82.2 DIFFERENCES BETWEEN CANADIAN AND US FLEET IN THE GREAT LAKES ST. LAWRENCE AREA ...................................... 12

3 DESCRIPTION OF REGULATORY OPTIONS .................................................................................................... 16

3.1 OVERVIEW OF OPTIONS .................................................................................................................................. 163.2 ECA-STANDARDS OPTION ............................................................................................................................... 203.3 DESCRIPTION OF FLEET AVERAGING APPROACH ................................................................................................... 233.4 DESCRIPTION OF PHASE-IN APPROACH .............................................................................................................. 25

4 ENVIRONMENTAL AND HEALTH IMPACTS AND COSTS ................................................................................ 28

5 SUMMARY AND NEXT STEPS ....................................................................................................................... 28

5.1 SUMMARY OF OPTIONS .................................................................................................................................. 285.2 NEXT STEPS .................................................................................................................................................. 30


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Acronyms / Abbreviations

Annex VI 2008 The International Maritime Organisation (IMO), International Convention for the Prevention of Pollution from Ships, MARPOL 73/78, Annex VI 2008

APPS Act to Prevent Pollution from Ships (APPS)

CAA Clean Air Act (US Law)

CAC Criteria Air Contaminants

CFR US Code of Federal Regulations

CSA 2001 Canada Shipping Act 2001

ECA Emissions Control Area (defined in MARPOL Annex VI 2008)

EGCD Exhaust Gas Cleaning Device (e.g. scrubbers)

EIAPPC Engine International Air Pollution Certificate (required by NTC)

EPA US Environmental Protection Agency

Great Lakes St. Lawrence Area

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

GT Gross Tonnage

HFO Heavy Fuel Oil

IAPPC International Air Pollution Prevention Certificate (MARPOL Annex VI requirement)

IFO Intermediate Fuel Oil

IMO International Maritime Organisation

KW Kilowatt

MARPOL International Convention for the Prevention of Pollution from Ships

MDO Marine Diesel Oil

MGO Marine Gas Oil

MW Megawatt

NO Nitrogen 2

NOx Nitrogen Oxides

NTC Annex VI 2008 NOx Technical Code

PM Particulate Matter

SCR Selective Catalytic Reduction technology

SO Sulphur 2

SOx Sulphur Oxides

US United States

VOC Volatile Organic Compounds


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Executive Summary 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). 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, 2012. 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.


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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 ECA-level 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

Regulatory Option

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


2010-2020 2010-2030 ECA Standards 592,147,787 17.7% 856,361,945 15.5% Fleet Averaging 658,947,044 19.7% 1,529,945,376 27.7%

Phase-In 592,896,707 17.8% 1,183,379,538 21.4%


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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 (2010-2020) and the 20-year long-term phase (2010-2030), 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 longer-term (2010 – 2030), 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 Area1

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.

. 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.

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.


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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, 2012. 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.


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Under the Fleet Averaging and Phase-In options, all vessels are required to comply with ECA standards by 2020. 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 2030. 2 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 2008. These international standards would be subsequently implemented in Canadian domestic regulation for all vessels that are currently

• The adoption by the IMO of a revised Annex VI to MARPOL in October 2008 that subsequently came into force on July 1, 2010;

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:

• 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.


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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

Maximum In-Use Engine Speed (n=maximum crankshaft

revolutions per minute, rpm) n < 130

rpm 130 ≤ n < 2000 rpm

n ≥ 2000 rpm

Tier I Annex VI waters January 1, 2000 – January 2010

17.0 45.0.n(-0.20) 9.8

Tier II Annex VI waters, including ECA areas

January 1, 2011-December 31, 2015

14.4 44.0.n(-.23) 7.7

Tier II Annex VI waters, excluding ECA areas

January 1, 2016 and later

14.4 44.0.n(-.23) 7.7

Tier III ECA areas January 1, 2016 and later

3.4 9.0.n(-0.20) 2.0

*Tier based on engine install date 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 paper2, 60 (76%) were constructed prior to 19903

2.2. More information on the structure of the Canadian fleet is included in

Section 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.


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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, 2011 4.5% January 1, 2012 – December 31, 2019 (or 2024)* 3.5 % January 1, 2020 (or 2025) onwards* 0.5%

ECA Standards Up June 30, 2010 1.5% July 1, 2010 – December 31, 2014 1.0% January 1, 2015 onwards 0.1%

*Subject to an IMO study to confirm availability of low-sulphur fuel that meets standards4

2.1.2 North American Emissions Control Area (ECA)

. 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.

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, 2012.

4 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.


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Figure 2-3: Map of the North American ECA

Source: U.S. EPA

2.1.3 U.S. Publication of Final EPA Rule December 2009 The U.S. published final regulations for air emissions from marine vessels in December 2009. 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.


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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 steamships5

2.2 Differences Between Canadian and US Fleet in the Great Lakes St. Lawrence Area

. 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.

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

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.

. 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.


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Figure 2-4: Canadian Fleet Active in Great Lakes St. Lawrence Area

Vessel Type Number of Vessels Average Age Bulk Cargo 37 37 years (1973) Container 9 26 years (1984) Self-Unloader 34 32 years (1978) Tanker 15 20 years (1990) Total / Average 95 32 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.

2.2.1 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 SOx 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 time-consuming 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.


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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 2.1.4. 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.

2.2.2 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.


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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.

2.2.4 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.


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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).

3.1.1 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 Canadian-flag 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, 2001. 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.


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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

3.1.2 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.

3.1.3 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 2016. 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 levels7

7 Based on phone interview with Exhaust Gas Cleaning Systems Association, UK.

. 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%.


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SCR technology works by converting NOx into diatomic nitrogen (NO2) and water (H2

3.1.4 Shipowner Options to Meet SOx Standards

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 2016.

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 2007. 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 2004–20078. 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

8 BMT Group Study for Environment Canada, “Update on Availability, Quality and Quantity of Marine Fuels in Canada”, July 17, 2009 9 Information provided by Canadian Shipowners Association for fleet of 79 vessels in 2008. 10 BMT Group Study for Environment Canada, “Update on Availability, Quality and Quantity of Marine Fuels in Canada”, July 17, 2009

, 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.


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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

3.1.5 General Reporting Requirements for Shipowners

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.

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 2008. 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.


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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

3.2.1 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.

3.2.2 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 3.1.5.

3.2.3 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.


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From a reporting perspective, the reporting requirements are not overly complex in that most operators already maintain the necessary Technical File (to meet NTC inspection standards), and obtain Bunker Delivery Notes and Fuel Samples (to meet the SOx requirements). Where the low-sulphur fuel is not available, shipowners would be required to alert Transport Canada of this fact, but this should not be considered as overly burdensome.

3.2.4 Implementation Requirements for Canadian and U.S. Regulatory Bodies The ECA-Standards Option is similar to the approach being used by the U.S. Administration, and is thus the easiest to coordinate of the three options. There are no requirements for coordination with respect to NOx emissions, as the U.S. has exempted Canadian vessels in the Great Lakes St. Lawrence Area from the NOx requirements of U.S. regulations. Canada and the U.S. should also coordinate and share information on the availability of low-sulphur fuels in the Great Lakes St. Lawrence Area region in order to develop an understanding of any challenges and barriers to the greater availability of lower-sulphur fuel.

3.2.5 Summary of Impacts, Benefits and Costs: ECA-Standards Option From a practical perspective, the ECA Standards option would be the most challenging for existing Canadian vessels to meet, given the timeframe within which emissions standards must be met for the entire fleet. The option does not consider the size of the Canadian fleet that would be impacted, nor the age of the Canadian fleet and the resulting difficulties in achieving lower emissions. The fact that all vessels must comply with ECA-level standards by August 1, 2012, combined with the reality that scrubber technology and low-sulphur fuel are not currently widely available in the Great Lakes suggests that shipowners will face more significant costs in trying to meet emissions targets under this option than under other options. For these reasons, reducing the fleet, rather than replacing vessels, is more likely under this option than in other options. The figure below shows the estimated economic health and environmental benefit associated with SOx and NOx reductions for all three regulatory options during the short-term implementation phase (2010-2020) and the 20-year long-term phase (2010-2030), relative to a Do Nothing base case scenario.12

12 Economic costs resulting from emissions from Marbek Resource Consultants, “Evaluation of Total Cost of Air Pollution Due to Transportation in Canada, Final Report”, 2007 (see pages 6-7).


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Figure 3-2: Environmental Benefit from Reduced SOx and NOx Emissions

Regulatory Option


Implementation



Long-Run



Phase-In 592,896,707 17.8% 1,183,379,538 21.4% The ECA Standard option achieves the lowest health and environmental benefit with a 17.7% (15.5%) improvement over the short-term (long-term) compared with the Do Nothing scenario. Over the implementation period (2010 – 2020), the ECA standards option results in very similar improvements in human health and environmental health compared with the other two regulatory options. The relative divergence in improvements between the ECA and the other two options in the long-run (2010-2030), relative to the Do Nothing scenario, are at least partially a result of the assumption that greater fleet renewal would occur under the Fleet Averaging and Phase-In options, thereby introducing vessels built from 2016 onwards that would be required to meet more stringent Tier III NOx emissions requirements. In terms of economic costs to shipowners, the impact of the ECA standard would be significant. As mentioned above, under this option (more than other options), shipowners would be faced more quickly with decisions regarding fleet renewal or decommissioning to meet the required standards by 2012. In addition, given the stricter fuel sulphur content requirements for all vessels and the higher cost of lower-sulphur fuel, total fuel costs would increase significantly under this option. Compared with a Do Nothing option, fuel costs are estimated to increase by 41% between 2010-2020, from $1.8 million under a Do Nothing option to $2.5 million under the ECA Standards option. These increased fuel costs, along with higher costs associated with financing capital expenditures for vessel upgrades, would increase the operating costs for shipowners and the resulting shipping rates they must charge to shippers, making marine transportation less competitive compared with other modes. The ECA Standard option presents the greatest cost to shipowners and operators given the likely challenges in achieving such strict emissions standards in such a short period of time for the large number of vessels that will be subject to the regulations, much larger than the U.S. fleet. These challenges suggest that fleet renewal would be limited under this option compared with the Fleet Averaging and Phase-In options.


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3.3 Description of Fleet Averaging Approach

3.3.1 Key Components of Approach The key components of the fleet averaging approach include the following:

• Fuel sulphur limits enforced based on average of total sulphur emissions of fuel used across one company’s entire fleet over a one year period;

• Average fuel sulphur content limits are based on achieving 1.5% sulphur content fuel starting on August 1, 2012, 1% fuel sulphur by January 2015, and 0.1% fuel sulphur by 2020, on a declining basis as per the figure below;

• The approach (compared to ECA-Standards Option) would avoid a surge in demand for low-sulphur fuels and help the refining industry better adjust to a changing scenario;

• The approach would allow flexibility by the fleet operator to manage different fuel types used by their ships, thereby mitigating fuel price increases or the need for scrubber technology; and

• All vessels in a fleet would be required to comply with the ECA-level standards by 2020 (0.1% sulphur fuel).

Figure 3-3: Annual Average Sulphur Fuel Limits Under Fleet Average Approach

2012 2013 2014 2015 2016 2017 2018 2019 2020 1.6%* 1.3% 1.2% 1.0% 0.8% 0.6% 0.5% 0.3% 0.1%

* 2012 rate uses 1.7% sulphur fuel until end of July 31, and then 1.5% sulphur fuel under December.

3.3.2 Proposed Coverage of the Regulation (type and size of vessel) The same general inclusions and exemptions apply to vessels, as described in section 3.1.1 and in Figure 3-1. There are no other specific exemptions under this approach. All vessels must meet ECA-level standards by 2020.

3.3.3 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 NOx Technical Code. With the respect to SOx emissions, the following additional reporting requirements will be required under this option:

• At the end of each year, the vessel operator would need to prepare an Annual “Vessel Fuel Usage Report” for Transport Canada outlining fuel usage over the previous 12 months for each vessel. This should be accompanied by a “Fleet Fuel Usage Summary Report” illustrating fuel usage across all vessels in the operator’s fleet.

• Vessel operators would also need to prepare a “Future Fuel Use Plan” to demonstrate planned reductions in the percentage of sulphur in fuel to be used for upcoming year.

• Transport Canada would issue “Certificates of Compliance” for each vessel based on these annual reports submitted by the operator.


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3.3.4 Level of Complexity for Shipowners / Operators This Fleet Averaging option is more complex than simply requiring use of lower sulphur fuel for all vessels, as vessel owners or operators would need to consider exactly which vessels they want to fuel with what type of fuel and when. However, it is less complex than the ECA Standards option in that shipowners or operators would not be faced as imminently with the decision regarding how to ensure all of their vessels comply with lower SOx emissions standards by 2012. For reporting SOx emissions under this option, there would be some added complexity in predicting the exact amount and type of fuel to be used in each vessel, and in preparing the “Future Fuel Use Plans” for review by Transport Canada, especially as these would need to change each year (as the average sulphur content declines almost linearly between 2012 and 2020).

3.3.5 Implementation and Compliance Requirements for Regulatory Bodies Given that the U.S. EPA and U.S. Coast Guard will implement ECA standards in the Great Lakes St. Lawrence Area, the success of the fleet averaging system is conditional on a reciprocal acceptance of each country’s approach. The fleet averaging option does not include any exclusions or exemptions, such as the steamship exemptions or economic hardship exemptions that are features of the U.S. EPA approach.

3.3.6 Summary of Impacts and Costs: Fleet Averaging option The flexibility provided by this option would reduce the immediate up-front / expenditures required for fuel purchase and scrubber technology investment that would be required under the ECA Standards option. This is because only some, but not all, vessels would need to comply with stricter emissions standards in the short term as long as the fleet, on average, meets the standard. Therefore, expenditures on lower sulphur fuel and scrubber technology could be spread out more evenly between 2012 and 2020. This also means that there would be more flexibility in considering fleet renewal options13

13 Two other important updates affecting fleet renewal include ballast water regulations and the 25 per cent duty on imported vessels.

. The figure below shows the estimated economic health and environmental benefit associated with SOx and NOx reductions for all three options during the short-term implementation phase (2010-2020) and the 20-year long-term phase (2010-2030), relative to a Do Nothing base case scenario.


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Regulatory Option


Implementation



Long-Run



Phase-In 592,896,707 17.8% 1,183,379,538 21.4% The Fleet Averaging option achieves the greatest health and environmental benefit with a 19.7% (27.5%) improvement over the short-term (long-term) compared to the base case. Over the implementation period (2010-2020), the Fleet Averaging option results in very similar improvements in human and environmental health compared to the other two regulatory options. Over the long run (2010-2030), the Fleet Averaging option would achieve a significant improvement over the other two options. This is because fleet renewal is likely to be most significant under this option, and new vessels built to Tier III standards will produce 80% less NOx emissions than existing vessels. In terms of economic costs to shipowners, the impact of the fleet averaging option would still be significant, but not as high as the ECA standards option. Vessel owners would have more flexibility to meet emissions standards under this option. Compared with a Do Nothing option, fuel costs are estimated to increase by 18% between 2010-2020, from $1.8 million under a Do Nothing option, to $2.1 million under the Fleet Averaging option. The Fleet Averaging also has the added benefit (compared to the ECA Standard option) of providing some flexibility for shipowners to meet the required standards and a greater ability to manage business decisions regarding fuel use, vessel retrofits, and vessel upgrades. 3.4 Description of Phase-In Approach

3.4.1 Key Components of Phase-In Approach The key components of the Phase-In Approach are as follows:

• Gradual phase-in of ships into compliance with ECA SOx standards based on vessel age, with newer vessels required to meet stricter standards earlier than older vessels;

• All vessels, regardless of age, must reach 0.1% ECA sulphur content standards by 2020; • The approach (compared to ECA-Standards Option) would avoid a surge in demand for

low-sulphur fuels and help the refining industry better adjust to a changing scenario; and • The approach would induce fleet renewal in a phased manner, with owners given the

opportunity to spread out fleet renewal investments over a 10-year period before the 2020 standards come into force, which would require vessel retirements.


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The sulphur content of fuel allowed under this approach is presented in the Figure below.

Figure 3-5: Phase-In Approach Annual Sulphur Fuel Limits (% wt)

Year of Vessel Construction (Date Keel Laid*)

1.5% (distillate or

HFO)

1.0% (distillate or

HFO)

0.5% (distillate)

0.1% (distillate)

Before Jan 1, 1990 2012 N/A 2016 2020 Jan 1, 1990 – Dec 31, 1994 N/A 2012 N/A 2018 Jan 1, 1995 or later N/A 2012 N/A 2015 * The date a ship’s keel is laid marks the beginning of its construction and is a widely accepted means to determine its age. ** N/A means not applicable. The given sulphur limit is not relevant as another limit already applies.

3.4.2 Proposed Coverage of the Regulation (type and size of vessel) The same general inclusions and exemptions apply to vessels, as described in section 3.1.1 and in Figure 3-1. There are no other specific exemptions under this approach. All vessels must meet ECA-level standards by 2020.

3.4.3 Reporting Requirements for Shipowners The reporting requirements for shipowners relating to NOx emissions are identical to those for the other two options – they are simply the requirements included in Annex VI 2008 and the NTC. The shipowner reporting requirements for SOx emissions would be less cumbersome than the other options, as no special reporting would be required. Inspectors would simply check the age of the vessel against the emissions levels to ensure compliance. Transport Canada would then issue “Certificates of Compliance” for each vessel.

3.4.4 Level of Complexity for Shipowners / Operators The level of complexity for shipowners or operators under this option is relatively limited as it is clear that emission standards apply based on the year the vessel was constructed, determined based on the year the keel was laid.

3.4.5 Implementation and Compliance Requirements for Regulatory Bodies As with the other two options, the success of this option is contingent on U.S. authorities accepting the Transport Canada-issued Certificates of Compliance.


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3.4.6 Summary of Impacts and Costs: Phase-In Option This option, more than others, takes into consideration the age and composition of the Canadian fleet by giving more time for older vessels to meet stricter emissions standards. The figure below shows the estimated economic health and environmental benefit associated with SOx and NOx reductions for all three options during the short-term implementation phase (2010-2020) and the 20-year long-term phase (2010-2030), relative to a Do Nothing base case scenario.


Regulatory Option


Implementation



Long-Run



Phase-In 592,896,707 17.8% 1,183,379,538 21.4% The Phase-In option would achieve a health and environmental benefit of 17.8% (21.4%) improvement over the short-term (long-term) compared with the base case, an outcome falling between that which would be realized under either the ECA Standard or Fleet Averaging options for both the short and long-term. Over the implementation period (2010–2020), the Phase-In option results in very similar improvements in human and environmental health compared to the other two regulatory options, but would achieve a significant improvement over the other ECA Standard option in the long run (2010-2030). This is because fleet renewal is more likely under this option than the ECA Standards option, though less likely than under the Fleet Averaging option. In terms of economic costs to shipowners, the impact of the Phase-In option would still be significant, but shipowners would be given more flexibility to Phase-In older vessels more gradually than the ECA Standards and Fleet Averaging options. Compared with a Do Nothing option, fuel costs are estimated to increase by 21% between 2010-2020, from $1.8 million under a Do Nothing option to $2.2 million under the Phase-In option. The Phase-In option would take into consideration the fact that much of Canada’s vessel fleet is quite old and that achieving emissions reductions across the entire fleet all at once (as per ECA Standards option) is simply not feasible for all of these vessels.


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4 Environmental and Health Impacts and Costs NOx, SOx and PM are primary pollutants, representing 93% of the costs of human health and agro-environmental impacts from air emissions from transportation sources in Canada. Exposure to NOx, SOx and PM are linked with increased human morbidity, asthma, emphysema and bronchitis, and can aggravate existing heart and lung disease. These pollutants also contribute to smog and acidification of soil and water, which negatively affect animal and plant life. The smaller PM particulates (2.5 microns) are major contributors to creation of smog and poor visibility. In this Discussion Paper, an average cost per tonne of emissions is used in order to estimate the economic cost of environmental and health impacts. The average cost figures take into account health damages, agriculture (changes in crop yield from ozone), and visibility, and are based on the cost of avoided air pollution from reducing one tonne of emissions (SOx

5 Summary and Next Steps

and NOx) for transport-related activities. These are the average unit costs for all modes of transportation for the provinces of Ontario and Québec. Using an average cost per tonne of emissions can under- or over-estimate the true impact depending on where and from what sources emissions are produced. The average cost figures used apply to costs across all transportation modes, not just marine, and across all areas of Ontario and Québec (not just directly adjacent to the Great Lakes St. Lawrence Area). An average cost based on emissions strictly from the marine sector might be different; but a breakdown of this specific cost is not available. In addition, the average costs have been calculated based on the Canadian impact and do not take into account impacts in the U.S. The benefits of regulating air emissions are significant across all three regulatory options, with lower environmental costs across all options compared to the Do Nothing approach. The Fleet Averaging option results in the greatest environmental benefits overall: a reduction in environmental costs of $1.5 billion, or 27%, compared to the Do Nothing approach.

5.1 Summary of Options The Government of Canada is required to develop air emissions regulations for marine vessels that reflect emission standards included in MARPOL Annex VI and the North American ECA. These regulations will consider how they will fit with those finalised in December 2009 by the U.S. government. This Discussion Paper presented three potential regulatory options for air emissions regulations in the Great Lakes St. Lawrence Area: ECA Standards option, Fleet Averaging option, and Phase-In option. A summary of the application, emissions and impacts of each option is provided in the figure below.


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Figure 5-1: Comparison of Options

ECA Standards Fleet Averaging Phase-In Key Component • Implements ECA-

level standards in Great Lakes St. Lawrence Area

• Same implementation dates as North American ECA

• Emissions standards enforced based on averaged emissions from all vessels in a company’s fleet

• Slightly lower emissions standards in medium term, compared to ECA standard

• All vessels must meet ECA standards by 2020 (0.1% fuel)

• Older vessels given more time to comply with emissions standards

• Lower emissions standards than ECA Standard and Fleet Averaging option in short term

• All vessels must meet ECA standards by 2020 (0.1% fuel)

Special Exemptions • US EPA Rule option of “economic hardship” exemptions not applicable in Canada

• Steamships permanently exempt but must still adhere to global Annex VI standards

• None • None

Total Environmental and Health Cost from SOx

$4,670,403,598

and NOx emissions (CAD), 2010 – 2030

$3,996,820,167 $4,343,386,005

Fuel Costs for shipowners (CAD), 2010 – 2030

$4,790,785,211 $4,222,102,717 $4,489,614,231


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ECA Standards Fleet Averaging Phase-In Impact on fleet renewal

• No fleet renewal (or certainly more limited than other options)

• Influence of the25% duty remission will also influence fleet renewal

• More flexibility to manage investment decisions

• 10 new vessels in 2016


• Influence of the 25% duty remission will also influence fleet renewal

• Some flexibility to manage investment decisions


• 10 news vessels in 2020

• Influence of the 25% duty remission will also influence fleet renewal

Outcomes of these preliminary environmental impact and cost analyses should be interpreted with caution. A number of recent developments, including the 25% duty remission on foreign-built ships and the potential application of Energy Efficiency Design Indices for new ships, have not been fully accounted for in the analysis and would likely have an impact on commercial investment decisions, ship design and resultant fleet fuel efficiency and related emissions. The preceding analysis is for illustrative purposes only and a recalibration of scenario assumptions or options under consideration may be warranted in the formal regulatory development process. 5.2 Next Steps The issues and questions raised in this Discussion Paper are designed to solicit comments and feedback from stakeholders, which will enable development of the most appropriate of regulatory option. The results of consultations through the Discussion Paper will also be used to create the Regulatory Impact Analysis Statement and the development of regulations in the future. At this time, we seek stakeholder views on these options and input on certain key assumptions of the analysis (including fleet renewal rates, and the timeframe for retiring of steamships from the domestic fleet). Stakeholders will have the opportunity to submit comments until December 1, 2010. Additional opportunities for stakeholder engagement will exist through the Canadian Marine Advisory Council meetings and other fora, including meetings with interested stakeholders.

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