The Environmental Protection Agency recently adopted new maritime emissions regulations, something the Lake Carrier’s Association has been actively following. We asked LCA President James Weakley what impact these rules would have on the cost of moving aggregate by ship and what is going on with dredging the waterways.
Can you get EPA to delay the fuel ban?
We’ve already succeeded with regard to our steamships. In the conference report, EPA was specifically directed for steamships on the Great Lakes to be exempted from the fuel standard. There are 13 U.S.-flag steamships and seven Canadian-flag steamships.
There were another 13 U.S.-flag residual burners and 54 Canadian-flag residual burners. That’s a little more complicated because it’s the costs. The impression we got was that the regulators weren’t really concerned about costs, because they felt it could just be passed on to the customer, and the customer could absorb that cost. We disagreed with EPA on that, particularly with the stone. At some point, the cost of transporting the products costs the producer out of the marketplace. That was really critical with the 13 steamships because they are primarily servicing the rocks and limestone products. With the 13 intermediate fuel burners, if the 1% diesel is available in that port, they have to buy it. If it is not available in that port, they have to document that it is not available and buy the lowest sulfur-residual fuel that is available. So, there’s a fuel waiver that is available on a per-fueling basis between 2012 and 2020 when the next standard kicks in.
Can the ships burn the cleaner fuel?
There are minor changes they have to make to their fuel plants in order to burn the 1%; it is replacing some pumps and injectors and improving the reliability of that system so they can burn the fuel. The problem for those diesel engines that are burning residuals is that it can be as much as a 70% increase in the cost of the fuel per gallon. At some point, on some routes, the cost of the fuel could take cargo off of ships and put it onto rail or put in onto trucks for shorter transports. To the EPA’s credit, there’s an additional waiver. If it is going to cause severe economic harm, a company can request a waiver from the fuel standard. I believe that waiver is only granted on an annual basis. EPA has given itself and industry some flexibility.
Did EPA define extreme economic hardship?
That’s in the eyes of the beholder. In the regulation, they gave a lot of things that EPA would look at. They’ve done this in the oil-refinery business, so there is a precedent. But, at the end of the day, what we think is a severe economic hardship and what the approving official believes may be different. Unfortunately, we won’t know until 2014 when people start applying for the waivers.
Is the steamship exemption safe?
That remains safe until 2020. In 2020, there’s a worldwide fuel standard that comes into play. The Coast Guard and EPA will have to do another regulatory package in 2020. At that point, I believe, they will apply that international standard to all steamships including ours. There are two different fuel standards: one is for all ships in all places in the world, the second is for ships that operate with in an ECA-an emission control area. EPA proposed that all of North America, with the exception of parts of Alaska, the Hudson Bay, northern Canada and parts of Hawaii, be included in an ECA. Lower fuel standards will apply to all ships operating within that area. We believe, based on our reading of the environmental impact statement and the economic analysis, that the Great Lakes were a last-minute addition. We didn’t feel that they did their research from an environmental-and economic-impact perspectives for the Great Lakes vessels. We also felt that there was a modal shift impact from an environmental as well as an economic impact that EPA didn’t take into account.
What will all this mean to aggregate companies?
If you figure it is about an extra $1 per gallon that could have been increased, the question is could stone producers afford to throw an additional dollar per ton on each ton of stone and still sell it? My read is, no, they couldn’t.
Will there be any grandfathering of these vessels in 2020?
My guess is that they will not be grandfathered. We argued for a permanent grandfathering, and that did not appear to be in the cards. The good news is that between now and 2020, we have some time to make decisions about modifying those ships or replacing that capacity. Had we not been successful, we’d have had between now and August 2012 to have that vessel capacity replaced or those ship engines altered, which was physically impossible. God bless Congressman Oberstar and Congressman Obey; without their leadership, we would not have been successful. They understood that you cannot re-engine 13 ships in one shipyard in a two-year period. They bought us some time and took away the surprise factor. Industry needs time to adjust to regulations, and that time needs to be tailored to the impact of the regulations.
Will the 2020 regulations apply to all vessels?
Everything is written from an ocean-going vessel perspective. All the analysis was done from an ocean-going vessel perspective. Clearly there are problems with ocean-going ships burning the heavy fuel, which has much higher sulfur content than what we currently burn on the Great Lakes. It was a classic misapplication of what works and is necessary for Long Beach is not necessarily what is appropriate for Detroit. We did an analysis of an EPA study they did a couple of years ago where they said if you take the Port of L.A. and use it as the basis for the Port of Cleveland, here are the air emissions. Well, it didn’t take a rocket scientist to say hey, there are no container ships that call on Cleveland. There are no cruise ships that call on Cleveland. You’ve done the math wrong; you can’t just take the Port of Los Angeles multiply it by the square root of two and say that is what is happening in Cleveland. You’ve got to do the research. We were able to build on that previous analysis and use it in this case, and again, point out to EPA that what is appropriate for L.A. and New York is not necessarily appropriate for Duluth, Detroit or Chicago.
Can the rule be changed before 2020?
The international fuel standard has already been adopted by the International Maritime Organization, which is a United Nations organization based in London that deals with maritime. That is already cast in stone. What is not cast in stone yet is the U.S. implementation of that standard. In 2020, EPA and or the U.S. Coast Guard will have to do another rule-making proposal to implement that international standard. There will be another opportunity to comment and engage in the fight. My guess is that we will not be successful in opposing the 2020 fuel standards. We either have to buy the more expensive fuel or go out of business; it is that simple.
Are there other options such as biodiesel or smokestack control?
In the initial proposed rule, that was not an option. That was something that we and other parts of the industry commented on. There should be alternate means of meeting the emissions standards. In the final rule, EPA did make that an option. I’m not aware of scrubbers as an option on steamboats, just because of the way the stacks are designed. Scrubber technology is possible, though it is under development, for those 13 motor ships.
Then can technology keep shipping costs in check?
Certainly, but what is the cost of that technology? Are the plants still viable? Look at the scrubbers used on a trial basis on the West Coast. The California Air Regulatory Board loves it because it takes the sulfur out of the air. But the water board hates it because there is an overboard water discharge that puts the sulfur in the water. Technology is great, but you have to look at the whole package. Hopefully by 2020 those options will be developed.
What is the next step for LCA?
To see what vessels are appropriate for engine replacement. We have at least one company that has applied for an EPA grant to assist with re-engining.
Do you anticipate any loss in capacity?
We’re good between now and 2012. At 2015, we are good again. What happens after 2020 is the next big question. We will be able to adjust and be ready. Certainly, 2020 gives us enough time to do that. Certainly, 2012 did not.
What is the status of the Great Lakes dredging?
We had some really good years in 2008 and 2009 budget cycle. Those were probably the only two years in over a quarter of a century where we were able to not contribute to the backlog. We dredged the minimum 3.3 million cubic yards that it takes to maintain the Great Lakes. In 2010, that is not the case. We were underfunded, again, and we will be filling in the Great Lakes and rivers, ports and connecting channels because of a lack of money. Our biggest hope is that we put a legislative fence around the harbor maintenance trust fund. The harbor maintenance trust fund takes in about $1.3 to $1.4 billion per year, which is supposed to maintain the Great Lakes, East Coast, West Coast and Gulf coast ports. Of that $1.4 billion, the Corps only spends half. If we can get a legislative requirement so that the money that the Corps collects from industry to maintain the waterways is spent on what it is intended to be spent for, the coastal and Great Lakes ports will be in great shape. Until we get that, we are going to continue to fight tooth and nail and fight a losing battle to maintain our waterways.
What are your chances of having that fence built?
They are pretty good. Two years ago we were just starting this process; we are building momentum. There’s an organization called RAMP, it stands for Restoring America’s Maritime Promise. It is a coalition of the users on all four coasts trying to come together and get that fence around it. Two years ago, the coasts were not on the same page. There were some different formulas being proposed that would benefit one coast and not the other. We’ve all worked past that and are now in the right place. It’ll take time, but I’m confident we’ll get there.
Where does the money come from?
It is paid for by the shippers. It is a 0.0125% tax on the value of the cargo. Customs collects it on a quarterly basis, and it goes into the harbor maintenance trust fund that has a surplus now of almost $5 billion. On the Great Lakes, the latest numbers from the Corps of Engineers is that they need to remove 15 million cubic yards of sediment to get the system back to project dimensions. They estimate that would cost about $180 million. If they were spending what they take in each year, the money is there to fix the lakes. This is no different than what has been done with other modes of transportation. The highway trust fund has a fence around it. The aviation trust fund has a fence around it. We’re the only mode that doesn’t have a fence around our trust fund. It gives whatever administration is in power the ability to redirect money that is collected from us.
Is there a local match required?
Maintaining the federal channels at their authorized depth is federal money. If you want to deepen the project, there’s a cost share for that. If you want to build a confined disposal facility, there’s a cost share for that. There’s an inland river trust fund as well as the harbor maintenance trust fund. It is for maintaining the river system and is paid by a fuel tax. If you go back 10 years ago, it had a $400 million surplus. That trust fund is now broke. They’ve half-built so many projects and are so over taxed on that fund, that on the Recovery Act, Congress waived the dollar-for-dollar match. Contrast that with the harbor maintenance trust fund, which has a $5 billion surplus. If you go back two or three years ago, some of the users of the inland rivers trust fund were looking to raid the harbor maintenance trust fund. We effectively stopped that, I hope.
Why do aggregate producers care if the harbors are dredged?
For every inch of water depth, you can add that many more tons of cargo to the ship. For our biggest ships, our 1,000-foot ships, that’s about 270 tons per inch. For our smaller steamboats, it is about 100 tons per inch. Most boats in the stone trade range from 90 to 120 tons per inch. For every inch of water we lose, we give up 90 to 120 tons of cargo per trip. A vessel loses 8,000 tons of limestone each trip, the amount you need to build 24 homes. It is like a regulatory requirement that says you can only load your trucks half full. It is an inefficiency that is being forced into the system by a lack of maintenance.