“Lower sulphur levels are cost effective”: Airclim responds to SFIF.

In the last issue of GreenPort Journal (Nov 2009) Karolina Boholm from the Swedish Forest Industries Federation argued that IMO’s new sulphur standard for Sulphur Emission Control Areas (SECAs) is “230 per cent more expensive than the value of it”.

Her argument is primarily based on a report by the Swedish Maritime Administration (SMA) published in May 2009. Referring to that report, Boholm claims that the “benefit to society has been calculated by the SMA to be €0.7 billion” and that the “measure is therefore +230 per cent more expensive than the value of it.” This, she asserts, makes the “SECA regulation unsustainable.”

The SMA report estimates the increased cost for ships that called on Swedish ports in 2008 at SEK13 billion for 2015, and the socioeconomic benefits of the sulphur reductions alone to SEK4 billion.

However, when valuing the benefits SMA used an old Swedish figure related to benefits of reducing sulphur emissions from land-based sources in Sweden. If instead using more appropriate figures, such as those applied by the European Commission for its Thematic Strategy on Air Pollution, that relate specifically to emissions from shipping in the North Sea and the Baltic Sea, the annual benefits would amount to between SEK12 and SEK32 billion. Significant health benefits will also result from the accompanying reductions in particulate matter (PM) emissions. The SMA report concludes that the socio-economic benefits of PM reductions resulting from switching from heavy fuel oil (HFO) to 0.1 percent sulphur marine gas oil (MGO) in the whole SECA-area are estimated at between SEK18 and SEK51billion per year. Consequently, the estimated monetised benefits by far outweigh the costs – and this is without even including the very significant environmental benefits that will follow from reduced sulphur emissions in terms of, e.g., less acidification of ecosystems (including of forest soils). Currently emissions from shipping are responsible for some 20-28 per cent of the total sulphur deposition on Sweden, Norway and Denmark.

It should also be noted that the SMA’s estimated additional costs for moving to 0.1 percent sulphur MGO are at the high end. The SMA assumed a lowest price differential of US$297 per ton fuel, and two higher ones at $520 and $750, respectively.

For comparison, the price differential used by the United States Environment Protection Agency in its impact analysis of the proposed US/Canada ECA was $145 per ton, and when allowing for the fact that the MGO-fuel has approximately five per cent higher energy content, the real price difference would be $123 per ton. A Finnish study from April 2009 included several levels of assumed price differential, where the lower one was set at about $150 per ton.

When evaluating the possible impacts on shipping of switching to 0.1 percent MGO, the assumptions made on additional costs for cleaner fuel is of critical importance. As can be seen from the above, the SMA study assumed very high, perhaps extremely high, additional costs. No sensitivity analysis was made on what would be the impacts under scenarios with lower or more moderate price differentials. Considering the very high uncertainty about future oil prices and about price differentials between the various types of fuel oil, this is remarkable.

In her article, Boholm claims that the new IMO sulphur regulation will “lead to a modal backshift to the road”, and that the SMA report “showed one scenario, in which road transport will increase by 6 percent within Sweden, corresponding to more than 300,000 tonnes of CO2.”

   In this context, it should be noted that for all three scenarios investigated by the SMA, significant increases in fuel costs were assumed for ships, but no increase at all in costs for the competing transport sectors (road, rail and air). It is therefore not surprising that the outcome of the modelling shows a modal shift from shipping to other sectors.

Moreover, the SMA scenarios included both assumptions on high increases in the crude oil price and high additional costs for the cleaner fuel. It is therefore impossible to differentiate how much of the modal shift indicated by the modelling outcome that actually emanates from the higher crude oil price as such, and how much emanates from the additional costs for 0.1 percent MGO fuel.

 Combining these three major shortcomings in the SMA’s basic assumptions – the assumed high additional cost for 0.1 percent MGO; the assumption of no cost increase at all for competing transport sectors; and, the “mixing up” of assumed increased crude oil price and increased additional costs for 0.1 percent MGO – makes it virtually impossible to draw any sensible conclusions from the modelling of possible modal change impacts.

By the way, the scenario mentioned by Boholm as showing a 6 percent increase in road freight transport in Sweden was the most extreme one, called scenario 3, for which a price of $1,655 per ton fuel was assumed. For comparison, the market price for 0.1 percent sulphur MGO when the SMA carried out its analysis in spring 2009, was about $400 per ton. Reducing the sulphur content of marine fuels to 0.1 percent in the SECAs is a clearly cost-effective measure in the sense that the monetised health benefits by far exceed the costs. The fact that the benefits are much higher than the costs becomes even more obvious if considering also the very significant non-monetised environmental benefits, such as less acidification of ecosystems.

   Moreover, several studies have shown that the costs of cutting air pollutant emissions from ships are lower – sometimes much lower – than the cost of further reducing emissions of the same pollutants from sources on land. This means that cutting emissions from shipping will help the EU to achieve its agreed and adopted health and environmental objectives at a lower overall cost to society as a whole. In the summary of its report, the SMA concludes that it wants all sea areas around Europe to become SECAs – a conclusion that has full support from European environmental organisations engaged in reducing air pollution from shipping.