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63 Forwarder Compliance Costs program. However, it does not appear that TSA is willing to commit to an ongoing operational role of screening all pal- Accurate data about the cost of compliance for forwarders is letized shipments, and only TSA-certified and handled canines equally difficult to obtain. The Air Forwarders Association has are considered acceptable for use in screening. been working with its membership to understand the require- Seemingly lost in the debate is the issue of screening of ments imposed on the community and appear to be somewhat inbound freight originating in foreign countries. Specifically, caught in the middle. With few exceptions (e.g., pharmaceuti- the current screening rule imposes requirements that, accord- cal manufacturers and seafood suppliers), shippers are leaving ing to IATA, violate the bi-lateral air service treaties currently compliance to forwarders and airlines. At the same time, air- in place between the United States and nations that engage in lines receiving palletized loads are not eager to invest in costly air commerce with it. Rather than dictate terms that some x-ray equipment and are turning to forwarders and cargo han- fear could trigger trade wars, IATA contends that TSA should dling facilities to screen cargo before it becomes palletized. TSA revisit and renegotiate exiting air service treaties to institute estimates that freight forwarders are screening about 30 per- methods that recognize screening activities in foreign coun- cent of the current 50 percent (or a total of 15 percent of all tries. Had U.S. Customs and Border Protection (CBP) been cargo being screened), with air carriers performing the rest. involved at the onset, as IATA argues they should have, the That 15 percent equates to roughly 1.8 million pounds of cargo result could have been one that uses risk assessment methods screened daily by forwarders.115 and international agreements that are currently in place for According to TSA Cargo Division General Manager Ed land- and sea-based cargo security programs. Kelly, independent cargo screening facilities (ICSFs) are play- ing an important role in helping small and medium-sized freight forwarders (often referred to as indirect air carriers) Case Study 4: State and Federal meet the requirements.116 According to an article in Air Cargo Climate Change Policies News, "TSA has worked with industry to establish facilities in Setting 18 cities across the country where cargo can be screened."117 Still, the numbers represent a very small percentage of the Various policies have been introduced or adopted at the thousands of facilities that handle cargo. state and Federal level to reduce GHG emissions that con- tribute to global climate change. Freight transportation gen- erates more than 7 percent of all U.S. GHG emissions, and Cooperation more than a quarter of GHG emissions are from the transpor- Despite (1) ongoing concerns over how the 100 percent tation sector. Moreover, freight GHG emissions have been screening requirement will ultimately affect the air cargo growing more than twice as fast as those from passenger trans- industry and (2) differences of opinion regarding how best to portation.119 Many of the climate change policies, therefore, ensure the safety of passenger aircraft, representatives from target transportation fuels or the freight industry specifically. industry and the TSA continue to work together to address Some policies target other sectors but are likely to affect the these issues. TSA and industry representatives interact regu- freight sector. larly, sharing ideas and concerns, and seeking a workable, The recent introduction of new policies to reduce GHG practical solution. The CCSP is seen as a positive development emissions has been driven both by the recommendations of and an indicator that TSA is listening to the industry. As of Feb- scientific panels and the recent shift in political control at the ruary 2009, TSA reported that more than 700 applications had Federal level. The most authoritative information on the sci- been received and more than 170 different entities had been ence of climate change comes from the Intergovernmental certified.118 Still, as the GAO report indicates, TSA does not Panel on Climate Change (IPCC), a United Nations body. have the staff to process applicants quickly. The IPCC has documented that the global climate has been All entities involved appear to concur that canine screening warming since the industrial revolution, largely due to human potentially offers the least intrusive and most time-efficient activity.120 During the last 100 years, global average surface method for screening palletized cargo. In fact, industry rep- temperatures have increased in total by about 1.4F, and aver- resentatives have called for a significant expansion in the age temperatures in the Arctic region have increased at almost 115Based on total estimated daily air cargo on-board passenger aircraft of 12 mil- 119John Davies, Cristiano Facanha, Joseph Aamidor. "Greenhouse Gas Emissions lion pounds, as cited in "Air Cargo Screening Moves Ahead," Aviation Today, from U.S. Freight Sources: Using Activity Data to Interpret Trends and Reduce July 13, 2009. Uncertainty." TRB Annual Meeting 2008, Paper #08-2594. 116"TSA Belly to Belly Takes Hold," Air Cargo News, July 20, 2009. 120IPCC. 2007. "Climate Change 2007: The Physical Basis. Summary for Policy- 117Ibid. makers." Contribution of Working Group I to the Fourth Assessment Report of 118"Achieving 100% Cargo Screening on Passenger Aircraft," Non-SSI Presenta- the Intergovernmental Panel on Climate Change. Available at: http://www.ipcc. tion, TSA, February 2009. ch/SPM2feb07.pdf

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64 twice the global average rate.121 Current evidence of global cli- the issue of climate change has put the issue on the public mate change includes agenda. Different regions are stakeholders as well. Different regions Sea Level Rise and Retreating Ice. During the 20th century, of the United States differ with respect to the economic sec- global sea levels rose about 5 to 9 inches.122 Mountain glaciers tors that make up their economy, the patterns of energy use, have retreated in all regions of the world. and their sensitivity to the impacts of changes in the price Weather Patterns and Extremes. A significant rise in pre- of energy. These regional differences have been reflected in cipitation has been observed over eastern parts of North and the policies of state governments--some have been active South America, northern Europe, and northern and central in mandating GHG emissions reductions, while others have Asia. In already dry regions, such as the Sahel, Mediter- resisted these measures. ranean, southern Africa, and parts of southern Asia, there Business stakeholder groups, including manufacturers, has been a significant decrease in precipitation. More pow- transportation carriers and shippers are not monolithic. erful hurricanes and tropical cyclones have been observed in Many businesses have sought to reduce their environmen- the North Atlantic over the past 35 years.123 tal footprint because they realize their customers care about Evidence of Ecosystem Changes. Climate-induced changes environmental issues. Others have not been proactive in have been observed in at least 420 physical processes and implementing such policies. biological species or communities.124 As more current evidence of climate change is observed and Policy Actions as the IPCC and other experts have increased their level of cer- Enacted or proposed climate change policies include the tainty that recent climate change is the result of human-caused Federal Renewable Fuels Standard, Cap and Trade policies, GHG emissions, the debate has shifted from the causes of cli- carbon taxes, EPA regulation under the Clean Air Act, corpo- mate change to the search for solutions. In the last few years, rate average fuel economy (CAFE) standards, low carbon fuel policymakers at the state and Federal level who are concerned standards, and California's fuel efficiency requirements. Each about the potential effects of global warming have proposed of these policies and their relationship to the freight sector are different policies to reduce GHG emissions. summarized below. Stakeholders Federal Renewable Fuels Standard Numerous stakeholders are involved in the policy debate The renewable fuels standard was enacted to reduce emis- over climate change. These stakeholders include sions of GHGs and to limit U.S. dependence on foreign oil. Enacted in 2005, the law was amended in 2007 to increase the Energy companies producing coal, oil, electricity, natural volume of renewable fuels produced in the United States. The gas, renewable fuels, and other energy products. law requires refiners to blend specific volumes of renewable Manufacturing industries, particularly those that are energy fuels into the fuel that they produce. Current ethanol produc- intensive. They will likely be disproportionately affected by tion is 9 billion gallons per year, comprising approximately the regulation of GHGs. Freight carriers in all modes (i.e., truck, rail, marine, and 6 percent of motor fuel used. The 2007 Energy Independence and Security Act (EISA) stipulates that ethanol blending must air) also have a major interest in the formation of climate change policies. Fuel is one of the most significant operat- increase to 15 billion gallons by 2012 and 36 billion gallons by ing costs for transportation carriers. Climate change regu- 2022. EISA requires major increases in biofuel production lation will increase the cost of transportation fuels and will from non-conventional feedstocks, such as agricultural waste, likely alter the demand for freight transportation and the municipal waste, switchgrass, or wood. If these mandated pro- structure of transportation markets. duction targets are achieved, significant additional quantities Environmental groups are also key stakeholders in the cli- of biomass and ethanol will need to be transported, much of mate change policy arena. To a great extent, their focus on it by rail. Railroad capacity may be strained by this demand, and significant new investments in rail infrastructure may be needed. 121Ibid. 122Ibid. 123Ibid. Cap and Trade 124UNFCCC (United Nations Framework Convention on Climate Change), 2007. "Feeling the Heat." Current Evidence of Climate Change Section. Available at: On June 26, 2009, the House passed the American Clean http://unfccc.int/essential_background/feeling_the_heat/items/2918.php Energy and Security Act of 2009. This bill, also known as the

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65 Waxman-Markey bill, proposes to establish a cap and trade health, clearing the way for EPA to regulate GHG emissions system to reduce GHG emissions. The bill requires a 17 per- under the Clean Air Act. If Congress does not act, EPA could cent emissions reduction from 2005 levels by 2020 and an use its current authority to regulate GHG emissions. This 80 percent reduction by 2050. In general, the bill would cap could involve the regulation of motor vehicles as well as GHG GHG emissions and gradually reduce the cap. EPA would issue emissions from industrial and commercial sources. or auction permits to emit GHGs, and these permits could be The administrative costs of regulating GHGs could be sig- traded between firms. This would allow those firms with the nificant, depending on the form of regulation. One of the most lowest cost for emissions mitigation to make reductions first. challenging issues in administering an emission control pro- Transportation fuels would be regulated with an upstream cap gram is determining a baseline from which reductions can be on the GHG emissions from refiners. A cap and trade system measured. Protocols for determining GHG baselines and full would make carbon-based forms of energy more expensive, lifecycle emissions are still under development. Unlike the cri- which would increase the cost of transportation and influence teria pollutants traditionally regulated under the Clean Air the mix of commodities moved by the freight system. Act, which focus only on emissions from the vehicle tailpipe, Critics of a cap and trade system have argued that it would regulating transportation GHG emissions requires the consid- likely introduce additional volatility into the price of fuel given eration of the global consequences of an action, including that the price of carbon allowances would vary based on eco- upstream emissions (from the production and transport of nomic activity. Economic growth would tend to increase prices, fuels) and potentially downstream emissions (from the disposal while the onset of a recession could result in sharp reductions of equipment). in the price of allowances. CAFE Standards for Trucks Carbon Tax EISA requires EPA to develop fuel economy standards for A carbon tax has been proposed as an alternative to a cap medium- and heavy-duty trucks. A CAFE standard requires and trade system. The purpose of a carbon tax is to reduce the the vehicle fleet sold by a manufacturer to meet an average fuel carbon content of fuels by making carbon-intensive fuels more economy. Based on the timeline provided by the law, new reg- expensive. By raising the cost of fuel, a carbon tax would also ulations for trucks will likely not take effect before 2016.125 tend to encourage fuel efficiency and reduce demand for trans- Developing and implementing fuel efficiency standards for portation. Some economists and industry representatives have trucks will be more complicated than developing standards for argued that a carbon tax would have certain advantages over cars and light trucks. The heavy-duty vehicle fleet contains a a cap and trade system. A carbon tax would build on existing diverse range of equipment sizes and types, with disparate fuel taxes, be easy to implement, and have low government operational and usage profiles. Accurately measuring the fuel administrative costs. Some industry representatives have also efficiency of this equipment requires the use of a variety of dif- argued that an important benefit of a carbon tax would be to ferent test cycles. Currently little data can be used to capture provide industry with a level of certainty about how much fuel the diversity of usage and activity profiles of different types of prices would increase because of GHG regulation. Certainty vehicles. about higher future prices would provide clearer incentives to Another factor complicating the implementation of businesses to make long-term investments in fuel-efficient CAFE standards for heavy-duty trucks is that the engine, equipment. One drawback to a carbon tax is that it would chassis, and body of trucks are often produced by different apply equally to firms, irrespective of their compliance costs manufacturers--One manufacturer may produce the chas- for reducing emissions. British Columbia, Canada, recently sis, a second builds the engines, and a third assembles the vehi- became the first jurisdiction in North America to implement cle. Furthermore, the fuel efficiency of combination trucks is a carbon tax. The tax is set to increase gradually each year affected by the type of trailer used. Trailers are made by yet through 2012, with all of the revenues returned to consumers another manufacturer. Determining which entities should be through a package of tax cuts and credits. responsible for the combined fuel efficiency performance of the vehicle will thus be difficult. The appropriate metric to be used to measure efficiency is EPA Regulation under the Clean Air Act also unclear in the case of heavy-duty trucks. Although miles In April 2007, in the Massachusetts versus EPA case, the per gallon (mpg) is often used, fuel use per ton-mile for freight Supreme Court ruled that GHGs are air pollutants under the Clean Air Act. The court instructed EPA to decide whether GHG emissions endanger public health and welfare. In April 125 M. J. Bradley and Associates. "Setting the Stage for Regulation of Heavy-Duty 2009, EPA declared that GHG emissions do endanger public Vehicle Fuel Economy & GHG Emissions: Issues and Opportunities."

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66 trucks is also relevant. For instance, LCVs might receive a low because ships could easily avoid purchasing fuel in California. fuel efficiency rating in miles per gallon, but be more efficient If an LCFS resulted in a significant cost difference, it is likely on a ton-miles per gallon basis. that there would be some shift in diesel fuel sales to other states. A heavy-duty vehicle fuel efficiency standard can be seg- Interstate heavy-duty vehicles already tend to purchase a dis- mented by vehicle class, requiring a higher efficiency standard proportionate amount of fuel in low-tax states. for smaller vehicle classes. This can provide perverse incentives to manufacturers if not properly implemented. For instance, California's Freight Vehicle Fuel many have argued that having separate passenger car and light- Efficiency Requirements duty truck CAFE standards encouraged manufacturers to build and market heavier trucks and SUVs to consumers so as In 2006, the California legislature passed the Global Warm- to avoid the more stringent fuel efficiency standards for pas- ing Solutions Act (AB 32) to reduce GHG emissions in the senger cars. Fuel efficiency standards that provide different state. The legislation requires the CARB to develop programs standards for different truck classes could thus have similar to reduce GHG emissions to 1990 levels by 2020. In response, unintended consequences and might either encourage manu- CARB has proposed a list of early action measures that could facturers to build larger and heavier vehicles to avoid more be implemented by 2010. One of these proposed measures stringent standards in lighter vehicle classes or, alternatively, if is the Heavy-Duty Vehicle GHG Emission Reduction Mea- fuel efficiency standards raise the cost of using large combina- sure. The regulation will require the use of technologies that tion vehicles, some carriers might be encouraged to make more improve the efficiency of heavy-duty tractors and trailers oper- frequent deliveries using smaller trucks, which could result in ating in California. Specifically, the proposed rule will require more VMT and GHG emissions on a ton-mile basis. the use of side fairings and low rolling resistance tires on heavy-duty combination trucks operating in the state after 2011. In addition, the rule requires model year 2011 and later California's Low Carbon Fuel Standard tractor sleeper cabs used in California to be SmartWay certi- fied. This rule would exempt some categories of trucks, includ- California has adopted a low carbon fuel standard (LCFS) ing those operated less than 50,000 miles per year. California that will require a 10-percent reduction in the carbon intensity and other states have also considered freight operating restric- of transportation fuels sold in the state by 2020. On Decem- tions to reduce GHG emissions, including speed limits for ber 31, 2008, representatives from 11 Northeastern and Mid- trucks and ships. Atlantic states signed a Letter of Intent to develop a similar CARB has estimated that the heavy-duty vehicle GHG mea- LCFS at a regional scale. Other states have passed biofuels man- sure will reduce GHG emissions by approximately one million dates to require blending of biodiesel into diesel fuel. metric tons of CO2-equivalent by 2020, statewide. CARB esti- The LCFS requires that the lifecycle emissions associated with mates that between 2010 and 2020, trucking companies will the fuel sold by a distributor in the state meet an average CO2- save approximately $8.6 billion by reducing fuel consumption equivalent content. Lifecycle emissions include the expected by 750 million gallons in California and 5 billion gallons across emissions from the combustion of fuel, as well as emissions the country. from upstream fuel production processes (e.g., resource extrac- There was significant concern expressed by trucking firms tion and transportation of raw materials to the refiner). Distrib- about the likely benefits and costs of the rule. Most of the ben- utors can comply with the California LCFS in three ways: efits of aerodynamic technologies are achieved at speeds over 60 miles per hour (mph). On many roadways in California, 1. Distributors can blend low GHG biofuels into gasoline or traffic congestion and a 55 mph speed limit for trucks reduces diesel. Biofuels produced from cellulose or waste would be the benefits of implementing side fairings. Trucking firms also considered to reduce lifecycle GHG emissions. noted that diverse operating conditions often make it difficult 2. Distributors can buy low GHG fuels such as natural gas, to generalize the costs and benefits of new technologies. For biofuels, electricity, and hydrogen. instance, fleet managers claim that trailer side fairings can be 3. Distributors can buy credits from other refiners who have damaged by snow banks. In cold weather, trailer side fairings made reductions in lifecycle emissions. may also build up ice that can detach from the truck and dam- age other vehicles. Given that CARB's regulation would apply Implementation of an LCFS at the state or regional level to all vehicles operating in the state, carriers throughout the would likely be significantly less effective than a national LCFS United States would be required to comply. because a statewide LCFS would tend to encourage distributors Another challenge with implementing this policy is that to shift clean fuels to states or regions with carbon standards motor carriers often do not own the trailers they haul. The rule and sell higher carbon fuels in states without the standard. Cal- could make them responsible for the equipment of other busi- ifornia has exempted marine bunker fuels from the regulation, nesses over which they have little control.

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67 Policy Impacts storage of pure biodiesel in underground storage tanks because the additives used in pure biodiesel were not fully vetted by reg- The likely impacts of the climate change policies recently ulators. As another example, the EIA scenarios for cap and enacted or under consideration are not well understood. trade programs assume increases in nuclear power generation Although discussing impacts on the freight system is inher- of 100 to 150 percent.127 This could require the construction of ently speculative, it is useful to identify some of the likely 100 new nuclear power plants. EPA lists "the degree to which effects by considering the general economic effects of price new nuclear power is technically, politically, and socially fea- increases on supply chains and transportation markets. The sible" as one of the key uncertainties in their projections.128 observed impacts of other policies that have affected freight Given that no new nuclear power plants have been con- transportation costs can also shed light on potential climate structed in the United States in the last 30 years, this projected change policy impacts. In the following sections the research rate of development for a controversial and unpopular energy team discusses technology appears optimistic. To the extent that low carbon energy sources from nuclear and renewable sources of energy Impacts on transportation costs are slower to come online than EIA predicts, the price of car- Impacts on supply chains bon allowances and fuel prices will be higher than projected. Impacts on coal demand and the rail system Impacts resulting from lifecycle emissions effects Impacts on Supply Chains Impacts on Transportation Costs Freight transportation is the backbone of the manufacturing economy. Significant productivity improvements in manufac- GHG regulations will increase the price of fuel. Analytical turing have been based on making supply chains lean and opinions vary regarding the magnitude of these price increases. implementing just-in-time (JIT) inventory management sys- The Energy Information Administration projects that the tems. By substituting transportation for inventory, businesses Waxman-Markey Cap and Trade bill will increase diesel fuel have been able to reduce the cost of goods, thereby encourag- prices by $0.25 to $1.73, depending on the specific regulatory ing increased demand and driving economic growth over the scenario.126 Although many analyses assume that fuel cost last 30 years.129 Improvements in the efficiency of freight trans- increases will be seamlessly passed on to shippers and con- port and reductions in the cost of transportation have also sumers, there is significant industry concern that fuel cost made the increased globalization of economic activity possible. increases will reduce transportation carrier profits. Depending Increases in the cost of transportation caused by GHG on specific transportation contracts that have been negotiated, regulations will likely affect the structure of supply chains. some carriers may be limited in their ability to impose fuel sur- Although the forecast price increases for Waxman-Markey charges for fuel price increases in the short run. If cap and trade and other climate change policies are less than recent market or other GHG policies introduce additional fuel price volatil- price spikes, the types of effects caused by GHG regulation ity into the market, transportation carriers may have difficulty would likely be similar to those observed recently. In response hedging their fuel prices, or they may need to pay more to to the recent run-up in energy prices, there is considerable hedge against price spikes. anecdotal evidence suggesting that businesses have sought to Some industry experts are concerned that policymakers may shorten supply chains.130 Future price hikes would likely not fully understand the current technological limitations for cause businesses to reduce foreign sourcing of supplies or to different types of fuel production. Mandates to use lower car- use geographically closer foreign suppliers to reduce trans- bon fuels that are currently in limited supply could lead to sig- portation cost. nificant price spikes unless markets can adapt rapidly. The In addition, significant fuel price increases will likely have technologies to produce cellulosic ethanol or other low-carbon at least an incremental impact on domestic distribution net- biofuels (e.g., algae biodiesel) at an industrial scale have yet works. As transportation costs rise, some businesses may seek to be developed. Regulatory analyses often assume aggressive to locate warehouses and facilities closer to their customers. rates of technology development and adoption. These may in fact occur, but the price of rapid innovation could be high. In some cases, regulatory barriers or public opinion may 127EPA, "Preliminary Analysis of the Waxman-Markey Discussion Draft: The stand in the way of new sources of energy. For example, fuel- American Clean Energy and Security Act of 2009 in the 111th Congress," 4/20/09. 128See http://www.epa.gov/climatechange/economics/pdfs/WM-Analysis.pdf ing stations in California were recently required to halt the 129The Freight Story. FHWA. http://ops.fhwa.dot.gov/freight/publications/fhwao p03004/index.htm 130See "Shipping Costs Start to Crimp Globalization," New York Times, August 126Energy Market and Economic Impacts of H.R. 2454, the American Clean 3, 2008. Also: "Stung by Soaring Transport Costs, Factories Bring Jobs Home Energy and Security Act of 2009, EIA, August 2009. Again," Wall Street Journal, June 13, 2008.

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68 $75 Per Barrel Oil $200 Per Barrel Oil Source: D. Simchi-Levi, "Operations Rules: Delivering Customer Value through Flexible Operations." MIT-Press, September 2010. Figure 5-5. Hypothetical effect of change in oil prices on distribution centers. There may be some reversal in the recent emphasis of firms on have limited ability to impose changes in one place without JIT inventory management. Firms may choose to hold more losing market share. inventory and use less transportation. Figure 5-5 shows a sim- Policies that affect fuel prices could shift marine traffic to ulation of how the movement of oil from $75 to $200 per bar- competing ports. For example, in recent years, the share of rel could cause a firm to move from five distribution centers to Asian trade that calls directly on East Coast ports has grown at seven to reduce the cost of transportation.131 Long-term expec- the expense of West Coast ports (which are dominated by Los tations for the cost of transportation will ultimately shape how Angeles and Long Beach). This is in part because of the lower businesses invest in logistics in the future. cost (but longer transit time) of an all-water route compared Rising fuel costs could also cause firms to shift freight with a route involving rail transport across the United States. between transportation modes. Because trucking and air are rel- The ability to shift to an all-water route may be even greater atively energy-intensive modes of transport, increased fuel costs once the capacity of the Panama Canal is increased by the addi- would tend to make them more expensive relative to marine tion of a new set of larger locks. Some ports in Canada, partic- and rail transport. Customer service requirements, access to ularly Vancouver and (to an increasing degree) Prince Rupert, competing modes of transport, or a short length of haul may have excellent rail connections and compete with Seattle and limit the ability of businesses to shift freight onto other trans- Tacoma. To the south, ports in Mexico (including the pro- portation modes. Nonetheless, cost increases in energy-inten- posed port at Punta Colonet) may be able to compete strongly sive transportation modes are likely to shift some competitive with West Coast ports if rail connections to the Southwest can hauls to other modes. be solidified. U.S. climate change policy that significantly affects fuel Of course, fuel price is only one component in the selec- prices could have supply chain impacts that extend globally. tion of ocean trade routes. The Southern California ports International supply chains are complex and sensitive to price. continue to be very attractive to ocean carriers because such In many cases, shippers have a choice between a wide range carriers prefer to call at the largest local market first and off- of sourcing options, transportation routes, and facilities. In load inland cargoes there. Recent research suggests that ocean these cases, shippers are very price sensitive and can make carrier demand at the Ports of Los Angeles and Long Beach is changes to their supply chain to avoid regulatory costs imposed relatively price inelastic if the increment is below $60 per 40- piecemeal or only at a regional level. For instance, the market foot import container.132 Conversely, a recent study for the for marine bunker fuels is essentially a worldwide market. Port of Seattle estimated that that port could lose 30 percent Ships calling on East Coast ports can refuel in Panama or even of its business if its costs rose by as little as $30 per full-size Singapore rather than the United States, and those calling on container.133 West Coast ports can refuel in Asia. Individual regions or even The possibility of a shift to short sea shipping (SSS) result- nations that regulate marine bunker fuel may find that they ing from the fuel cost increases possible under cap and trade or 131 "Rising Fuel Prices/The Effects of Energy Prices on Global Trade Patterns," 132Leachman & Associates, Final Report Port and Modal Elasticity Study, Prepared FHWA, Talking Freight, October 15 2008, http://www.fhwa.dot.gov/freightplan for Southern California Association of Governments, September 2005. ning/08talking.htm 133Telephone interview, Officials at the Port of Seattle, February 2009.

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69 even an LCFS appears to be limited, for various reasons. The with bituminous coals; performance is not as good with lower potential utility of SSS in California is limited by the state's rank and higher ash coals such as western lignite and sub- small number of ports. Officials at the Port Authority of New bituminous coal. As a result, cap and trade legislation is York/New Jersey estimate that even a large fuel cost increase expected to significantly reduce the volume of coal used from would be likely to raise SSS's share of traffic only from its cur- the Powder River Basin.137 According to EIA, if the Lieberman- rent 1 percent to no more than about 4 percent even by 2030.134 Warner Act were passed, production of coal from this region The Jones Act, which requires U.S. flagged vessels for cargo would drop from about 400 millions tons currently to only 8 between U.S. ports, limits the efficient use of SSS and is one to 77 million tons in 2030.138 Estimates for the Waxman- reason why SSS is less popular in the United States than else- Markey bill are similar. Analysis of the Waxman-Markey bill where (such as Europe). In extreme cases, SSS could become estimates that nationwide coal production volumes (in tons) important if fuel prices increased enough to discourage truck- would be 19 to 83 percent lower under the bill.139 The high end ing and railroads: port cities could be more closely linked to of this range (83 percent) would represent a loss of approxi- each other than to nearby cities inland. mately 18 percent of rail industry revenue from the current Unintended or perverse consequences of climate change baseline and an even larger drop in profit. policy, in the forms of leakages that reduce efficiency at the The specific geography of coal production and use would same time that they increase emissions, are more likely if poli- influence the policy implications for the railroads. Although cies are not coordinated and carefully structured. One exam- approximately 64 percent of coal consumed nationwide is ple of this kind of unintended consequence is the possibility of moved by rail, 98 percent of coal from Wyoming (where Pow- shifting waterborne freight to land transport if rules affect- der River Basin production is predominantly located) is moved ing ports are too onerous. Some SSS companies in Europe by rail.140 Figure 5-6 shows how important Powder River Basin have warned that higher fuel prices (related to desulfuriza- coal is to rail traffic. Major reductions in coal production in the tion of bunker fuel) will push traffic off of ships and onto more Powder River Basin will thus affect railroad traffic significantly. carbon-intensive modes, like trucks. The European Commu- Reduced coal production both reduces coal traffic and shifts nity Shipowners Association warned of the environmentally demand to regions that have other competing transportation counterproductive consequences of raising the cost of fuel for modes (e.g., barge, truck, and slurry pipeline). These markets short trips across the Baltic and North Seas, noting the poten- provide more competition and smaller margins for rail traffic. tial to shift from the sea to land-based transport with a larger Railroads will thus suffer both lost revenue from reduced rail environmental footprint.135 traffic and reduced margins from the remaining business. The railroads that currently serve this region, UP and BNSF, would Impacts on Coal Demand and the Rail System experience the largest revenue loss. The geographic distribution of policy impacts would also be Regulation of GHGs could significantly reduce the demand affected by differences in the use of coal for electricity genera- for western U.S. coal and the associated revenues and profits tion. For instance, coal accounts for 94 percent of electricity that railroads make from transporting coal. Coal transport is generation in Indiana, while California only generates 1 per- a large piece of railroad business, accounting for 44 percent cent of its electricity from coal. Generators in the Midwest, of tonnage, 24 percent of carloads, and 21 percent of gross Southeast and Southwest rely more on coal than do generators revenues.136 in other parts of the country. As a result, reductions in coal Pricing carbon would have multiple effects on the technolo- traffic would not be evenly distributed across the states, but gies used to generate electricity. To reduce their carbon emis- will be concentrated in specific regions and corridors. sions, coal-fired power plants may need to employ carbon Climate change policies could create new business for rail- capture and storage technologies. Most existing coal-fired roads as well. Ethanol mandates and subsidies have recently plants burn pulverized coal to generate power. The need to generated new business for railroads moving ethanol to mar- capture and store carbon would require wide-scale implemen- ket. The rapid increase in ethanol production driven by the tation of integrated gasification combined cycle (IGCC) tech- 2005 Energy Policy Act initially caused shortages in available nology, which involves gasifying coal and burning the gas. This allows carbon emissions to be more efficiently removed. IGCC 137Berlin, Ken; Sussman, Robert. Global Warming and the Future of Coal: The capital costs vary with the type of coal used and work best Path to Carbon Capture and Storage. Center for American Progress, May 2007. 138Energy Market and Economic Impacts of S.2191, the Lieberman-Warner Cli- 134Telephone interview, Officials at the Port Authority of New York/New Jersey, mate Security Act of 2007. EIA. February 2009. 139Energy Market and Economic Impacts of H.R. 2454, the American Clean Energy 135"Bunker Busting: How To Clean Up Shipping," Wall Street Journal, Keith and Security Act of 2009. Energy Information Administration. August 2009. Johnson, April 10, 2008. 140EIA. Coal Transportation Issues. http://www.eia.doe.gov/oiaf/aeo/otheranalysis/ 136Railroads and Coal. AAR. July 2008. cti.html

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70 RAIL REVENUE TONNAGE 2004 WAYBILL Coal Non Coal 200,000 100,000 50,000 Seattle 100,000 50,000 200,000 (in 000's) Portland Superior B Reno Buffalo Newark Chicago Salt Lake Cit Kansas City E St Louis Norfolk Los Angeles Atlanta Dallas Jacksonville New Orleans Houston Source: McCollum, David. Future Impacts of Coal Distribution Constraints on Coal Cost. 2007. University of California Davis. Figure 5-6. Rail revenue tonnage, 2004. tank cars.141 Interviewees noted that shippers have largely paid teria pollutants. This can make it challenging to design poli- the bill for the new equipment required, as well as investing cies that reduce freight GHG emissions without creating capital in rail sidings to accommodate longer unit trains for unexpected freight system and environmental impacts. large ethanol shipments. A good example of this issue is the ship speed rule under To date, climate change policies have not had significant consideration for areas around the Ports of Los Angeles and freight system impacts. Transporting ethanol remains a rela- Long Beach to reduce California's GHG emissions. Both ports tively small share of railroad revenues--approximately 1 per- already have a Vessel Speed Reduction Program covering ships cent. Initial equipment shortages have been resolved with within 20 nautical miles for the purposes of reducing smog- limited impact on the railroad industry. Although domestic forming NOx emissions. Slower speeds also reduce GHG emis- demand for coal has grown slowly in recent years, foreign sions because of the relationship between speed and fuel exports have led to continuing growth in overall coal traffic efficiency. Fuel consumption is roughly proportional to the volumes, at least through 2008.142 cube of speed, so slowing a ship from 25 knots to 12 knots leads to a nearly 90 percent drop in the rate of fuel use. But if the ship Impacts Resulting from Lifecycle Emissions Effects increases speed somewhere else in its journey to make up for a near-port drop in speed, the savings can be wiped out. CARB GHG emissions have essentially the same climate change estimates that if its proposed rule causes even a 1/2 knot increase effects, no matter where they occur on the planet. So the regu- in other parts of the trip, it would cancel out the savings from lation of GHGs requires consideration of emissions across slow speeds close to the port.143 the full lifecycle of activity, rather than simply considering the emissions within a given region as is done for traditional cri- 143 Public Workshop: Vessel Speed Reduction for Ocean-Going Vessels, Sacra- 141USDA. Ethanol Transportation Backgrounder. September 2007. mento, July 29, 2009. http://www.arb.ca.gov/ports/marinevess/vsr/docs/072909 142"Weekly US Rail Shipments Sink Again Last Week," Forbes, December 11, 2008. speakingnotes.pdf

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71 Table 5-2. Classification of climate change policies with freight system impacts. Technology Mandates Operating Practice Regulation Pricing State and Biofuel mandates Ship speed rules Port container fees Local CA LCFS Idling CA HDV GHG Measure Truck speed limits National CAFE for trucks Truck speed limits Cap and trade CAA GHG Regulations Carbon taxes Renewable Fuel Standard The practice of cold-ironing by vessels in a port offers global and national supply chains to adapt so as to avoid costs another example of the complexity of calculating lifecycle imposed in specific regions. Local air emissions regulations can emissions. Switching ships from using on-board diesel gen- create offsetting lifecycle emissions increases in other regions erators to the grid clearly reduces criteria pollutant emissions or components of the supply chain. within a port. The GHG emissions consequences are also very Although the geographical scope of regulatory activity is likely to be good, but the quantitative effects will depend on important, the technological scope of a policy may also create the source of the electricity. Even in California, a substantial unintended impacts. Regulating or mandating specific tech- amount of the electricity is generated from conventional nologies or operating practices can cause unanticipated adjust- fuels, which have a high carbon content. Of greater relevance, ments in market behavior. For example, requiring trucking though, is the marginal source of electricity. Electric utilities firms to invest in specific vehicle technologies reduces the tend to use coal for base load generation and natural gas or resources available for other capital investments that might be other cleaner sources of energy to satisfy peak loads. The more appropriate for the specific circumstances of a firm's source for incremental megawatt hours of electricity will operations. The direct impacts of a regulation can be offset by change throughout a given day, because the sources for peak the unseen secondary market impacts. and base-load power are different. The emissions conse- Unexpected impacts of climate change policy are likely to quences of cold ironing thus depend on the time of day of use be minimized if they involve pricing applied at the largest and the specific sources of power in that location. geographical scale possible. Policies such as cap and trade programs or carbon taxes impose costs based on the out- Summary come desired, as opposed to mandating the specific means Table 5-2 summarizes some of the most important climate to achieve the outcome. As such, these policies tend to change policies, proposed or implemented, that are likely to require less foresight of policymakers and provide the most have freight system impacts. One can classify these policies flexibility for industry to achieve the desired outcomes. based on their geographical scale of application (i.e., national, However, even national-level pricing policies are likely to state, and local) and the type of policy tool used (e.g., technol- cause unforeseen and unintended impacts. The secondary ogy mandates, operating practice regulation, and pricing). The market impacts of price increases are often hard to predict likely impacts of these policies, and the uncertainties associated and quantify because it is often unclear how supply chains with their impacts, vary according to these key characteristics. might adjust to changes in transportation costs. The signif- One potential set of unintended impacts stems from trying icant secondary impacts of GHG mitigation policies on sup- to address a global air emissions problem with local, state, or ply chains and economic productivity have not been fully even national regulations. Local regulatory strategies can cause considered.