Sustainability Strategies Addressing Supply-Chain Air Emissions (2014)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

56 Demand for freight transport and resulting air emissions are affected by a broad range of public policies and regulations that may pertain to the economy, industry, regional develop- ment, energy, land use, safety, recycling, and air emissions. These policies and regulations have the potential to result in unforeseen and unintended impacts on air emissions. Even those policies and regulations that do not specifically relate to air emissions can have air emissions impacts. For example, in the view of one researcher, policies that favor trade liberalization can lead to more trade and greater demand for the international movement of goods and freight air emissions (Hummels, 2009). Monetary policy may inflate the real cost of holding inventory, which could tighten just-in-time deliveries, leading to more road freight deliveries and increased emis- sions (McKinnon, 2010a). Freight-related policy and regula- tion also can have unintended air emissions consequences. Carriers interviewed as part of this study expressed concern that regulations limiting hours of service for truck drivers can result in productivity losses, potentially forcing carriers to put more trucks on the road, and thereby increasing total truck miles and air emissions. Economic policy efforts that promote industrial devel- opment in peripheral regions; land-use policies and zoning regulations that move intermodal facilities, warehousing, and distribution centers to the urban edge; and environmen- tal regulations that require product recycling are examples of public policies and regulations that can increase freight transportation movements per ton of product, with potentially adverse implications for GHG emissions from freight trans- portation. At the same time, policies and zoning regulations supporting the decentralization of intermodal, warehousing, and distribution facilities may, in some cases, have CAP emissions benefits where such facilities are removed from population concentrations. In addition, the way freight air emissions are regulated can have potential collateral con- sequences for business and society. Supply chains involve the movement of goods across jurisdictional boundaries, where they encounter a range of different regulations. In the United States, a unique mix of international, federal, state, and local environmental regulations apply across transport modes. Although air emissions standards, policies, and regulations can be geographically based, depending on the jurisdiction of the regulating authority, carriers and shippers tend to move goods along corridors that traverse several jurisdictional boundaries, where they encounter a range of regulatory requirements. Differences and discrepancies between regula- tions in various jurisdictions can create difficulties for supply chain operations. These can result in high costs and additional administrative requirements for carriers. A key question con- sidered in the research is whether these additional costs and reporting requirements have caused shippers and carriers to make decisions about mode, routing, and vehicle deploy- ment that might result in higher overall GHG emissions or the transfer of CAP emissions from one location to another (where the environmental and health impacts to communities may be worse). This intelligence is important for public-sector decision- makers who can then consider such factors and ensure that the sustainability of supply chains is supported in the development of policies and regulations. Through the literature review and interviews with industry, the research team found only lim- ited evidence of policy and regulation resulting in unintended consequences for supply chain sustainability. In some cases in the literature, the impacts of policies, programs, and regula- tions aimed at reducing emissions were not clear-cut and out- comes were unexpected or ambiguous. From our interviews with industry, the research team also found that in several cases, emissions regulation has resulted in higher private-sector costs, increased administration, and reduced flexibility. Although not the primary intent of regulation, these impacts are often to some extent “foreseen” in the rulemaking process, and their impacts on industry may not be well understood. It is the outcomes of these impacts on the behavior of shippers and carriers that is a specific focus of this chapter. C H A P T E R 6 Unforeseen and Unintended Consequences of Air Emissions Regulation

57 6.1 Unintended Consequences— Evidence from Literature Balancing CAP vs. GHG Emissions A key issue for regulators, carriers, and shippers is that CAP and GHG emissions do not always respond in tandem to emissions reduction efforts. In fact, regulations aimed at CAP emissions may conflict with, or undermine, GHG emissions reductions efforts and vice versa. For example, diesel truck engine improvements that reduce CAP emissions have tended to compromise fuel efficiency improvements, thus, adversely impacting GHG emissions (Tunnel, 2010). End-of-pipe con- trols, such as selective catalytic reduction for the control of NOx can carry a fuel efficiency penalty. Reducing the pollutant content in fuels (e.g., by requiring the use of low-sulfur diesel) can increase fuel consumption and GHG emissions at refin- eries (Purvin and Gertz, 2004). Therefore, efforts to regulate air emissions should take into account—and balance—the potentially conflicting objectives of air quality improvements and GHG emissions reduction. As with GHG emissions, CAP emissions can increase with the amount of fuel used or distance traveled. However, these emissions categories behave differently. Although GHG emis- sions are global and cumulative, CAP emissions have local- ized impacts. CAP concentrations, and NAAQS exceedances, are determined by local atmospheric concentrations of pol- lutants that depend on atmospheric chemistry, wind, mete- orological and topographical characteristics, all of which vary dramatically across the country. CAP impacts also are affected by the proximity of sensitive receptors. The concentration of pollutant emissions from greener/ less-GHG-intensive modes such as shipping and rail at criti- cal points along the supply chain (e.g., ports and intermodal yards) can result in health impacts to adjacent communities. However, efforts to regulate such pollutant emissions that result in higher costs to carriers and shippers could result in a shift away from greener modes to more GHG-intensive modes, particularly where regulation increases the cost of these greener modes. For example, a potential loss of mode share from short sea and inland shipping to less sustainable modes is forecast by some authors as a result of the future introduction of the North American Emissions Control Area (ECA), effective in 2015 (Research and Traffic Group, 2009). Studies of the impacts of the proposed tightening of sulfur emissions limits in the Baltic and North Sea ECA also pre- dict a 50% mode shift to road and rail, thereby potentially increasing GHG emissions (Entec, 2010). The extent of these impacts needs to be properly understood prior to the adop- tion of air emissions regulations, with consideration given to mitigation measures, for example, through the potential provision of financial incentives to these greener modes. Truck Size and Weight Limits Measures that increase the fuel efficiency of trucking (e.g., by increasing truck size and weight limits) are considered to have potential to reduce GHG emissions. As one example, fuel and GHG savings through longer combination trucks in Europe are estimated to be between 17% and 28% based on ton-km traveled (Greszler, 2009). However, these improved truck efficiencies resulting from the relaxation of truck size and weight restrictions can have the unintended impact of increasing demand for road freight as a result of reduced costs. This can undermine the mode share of rail and short- sea shipping, causing an overall net increase in GHG emis- sions (March, 2001). This phenomenon is generally referred to as the “rebound effect.” A German study found that the rebound effect can increase road congestion and reduce road safety (Döpke, 2007). Further, a study of lifecycle effects of heavy trucks indicates a potential increase in sulfur dioxide (SO2) and PM emissions as a result of the relaxation of truck size and weight restrictions due to increased emissions from additional pavement maintenance and construction required to accommodate heavier trucks (Sathaye et al., 2010b). Some U.S. states are opposed to longer and heavier trucks. MAP-21 calls for the U.S.DOT to undertake a study to assess the effects of longer and heavier trucks on the nation’s infrastructure, highway safety, efficiency, and the economy. Speed Limits Measures such as reduced vehicle speed limits can have fuel consumption and GHG emissions benefits for individual truckloads. Nevertheless, reduced speeds have been shown to have little or ambiguous impacts on CAP emissions from trucks. Furthermore, reduced speeds also decrease the distance a driver can cover during a workday; requiring more trucks to move the same amount of freight, and resulting in sub- optimal outcomes including higher shipping costs, increased traffic congestion, and increased opportunity for accidents from more trucks on highways and roads (Committee to Assess Fuel Economy Technologies et al., 2010). For ocean carriers, slow steaming can reduce bunker fuel consumption and emissions while improving on-time reli- ability. However, the advantages are dependent on the com- modities being moved. In addition, increased charterage, longer transit time, additional equipment requirements and engine maintenance costs can offset fuel savings and affect a carrier’s competitive advantage. Further, vessels required to slow in one geography may be compelled to pick up speed in another location to ensure schedules are met, thus increas- ing GHG emissions on the unregulated leg of the journey. Because of the multitude of issues at play, it is considered that voluntary, as opposed to mandatory, slow steaming is

58 less likely to have unintended or undesirable consequences (Hanjin, 2011). Efforts to Promote Mode Shift It can be difficult for public agencies to influence mode shift. For example, truck tolls in Switzerland were set delib- erately to discourage truck traffic and induce a freight mode shift to rail with associated air emissions benefits. However, studies found that significant mode shift to rail did not occur. Instead, unforeseen changes to truck configuration and deliv- ery logistics were set in motion, with large trucks chaining more pick-ups and deliveries together. These unintended (although still beneficial) effects occurred partly as a conse- quence of delays in rail freight improvements, but also dem- onstrate the inherent logistical advantages of using trucks for many shipment types (Minnesota DOT, 2010). Another study found that a Pan-European truck tolling pro- gram would reduce truck miles by 15%. However, only one- third of this reduction was attributed to freight mode shift from trucks to other modes, with the rest being attributed to improved truck freight efficiencies (De Jong et al., 2010). Although significant public investment in pricing policies, targeted grants, and infrastructure investments aimed at pro- moting freight mode shift has had some impact in Europe, the full extent of benefits generated remains uncertain, and it is unclear whether similar benefits could have been attained at a lower cost through other means (U.S. GAO, 2011a). Mode shift over the ocean is usually between air and ocean- going vessels. The per ton-mile emissions of marine vessels are typically 2.5% or less than those associated with airfreight carriers (U.S. EPA, 2008b). Thus, significant emissions reduc- tion gains are possible through mode shift from air to marine modes. However, despite the cost competitiveness and com- parative environmental sustainability of marine shipping, the scope of mode shift from air to ocean carrier tends to be lim- ited given the requirements of just-in-time delivery schedules for certain products. Further, the emissions penalties associ- ated with shifts from marine to air cargo are significant. There- fore, regulations that adversely affect the speed, reliability, and cost of marine shipping, resulting either in mode shift from marine vessel to air, or the diversion of marine cargo to ports with poorer or no rail connections, could risk signifi- cant overall increases in GHG emissions for that particular journey. Note that the research did uncover specific instances of this occurrence. Truck Time and Weight Restrictions in Urban Areas Delivery time and weight restrictions in urban areas intended to reduce congestion and improve urban amenity have been shown to result in the need for additional trips, causing envi- ronmental and financial impacts (Allen and Browne, 2010). Vehicle weight restrictions applied during parts of the work- ing day have been found to increase total vehicle operating costs by as much as 30%, depending on the level of restriction. Such restrictions can increase total time traveled due to the need for a greater number of vehicle trips using lighter vehi- cles. Environmental impacts worsen as a result of increases in total miles traveled (Anderson, 2005). Research has found that social benefits such as reduced noise, vibration, and road accidents that accrue from time and weight restrictions tend to occur at the expense of environmental performance (Quak and de Koster, 2009). Unilateral Decision Making on Global Emissions—the EU Aviation Emissions Trading Scheme On a global scale, agencies such as the International Maritime Organization (IMO) serve a key role in ensuring international regulatory consistency. For example, the IMO International Convention on the Prevention of Pollution from Ships (MAR- POL) agreements regulate CAP emissions from ocean car- riers. However, in some cases, international agencies are slow or unable to reach agreement on emissions. For example, the IMO has, to date, been unable to reach agreement on the regulation of international maritime GHG emissions. As a result, the European Commission (EC) has threatened to develop proposals of its own if the IMO fails to act. A myriad of locally or regionally defined emissions regulations can add significantly to administrative requirements and can result in increased costs for global carriers. The EC’s threat of uni- lateral action is not an idle one. Their frustration with slow progress of the International Civil Aviation Organization (ICAO) on aviation GHG emissions resulted in a unilateral decision in 2009 to extend the European Union Emissions Trading Scheme (EU ETS) to international aviation. This was applied without the prior agreement of the affected countries or airlines, and resulted in significant opposition from ICAO member countries. There are indications that non-European governments, such as China, are developing parallel plans to reduce emissions from their own airlines, and are negotiat- ing EU aviation ETS exemptions for their own carriers based on their own adoption of “equivalent measures.” Note that flights arriving at EU airports from countries that have adopted equivalent measures are exempt from the EU ETS. The nature of “equivalency” and the administrative require- ments that another, potentially different (Chinese or other) regulatory regime will place on the airlines is unclear. Despite industry assertions to the contrary, studies esti- mate that the EU aviation ETS will not constrain growth in the U.S. aviation business, and that the financial impact on

59 airlines is relatively modest (Malina, 2012; Schröder, 2008). Nevertheless, some analysts consider that the European avia- tion ETS may create some distortions in the cargo sector, with express freight favored over standard cargo, and could result in increased use of pure freighter aircraft models as opposed to belly cargo within passenger aircraft (Schröder, 2008). This could increase the GHG intensity of passenger air travel, although in the absence of further study, the extent of this impact is unclear. There is also some concern that the EU aviation ETS may undermine the competitiveness of prod- ucts derived from outside the EU, because the costs of trans- port will increase and producers will have limited ability to pass on these costs. Producers contend that this may, in some cases, unfairly prejudice products whose carbon footprint may actually be less than that of equivalent European prod- ucts (New Zealand Productivity Commission, 2012). Notwithstanding the challenges that locally defined emis- sions regulations can pose for international carriers that are required to deal with administrative and technology require- ments that vary by jurisdiction, there are indications that the application of emissions regulations in one region can result in willingness on the part of carriers to engage in voluntary changes in other locations. For example, regulations requiring a switch to lower sulfur fuels in certain areas (e.g., those cur- rently required in sulfur emission-control areas in the North Sea and Baltic Sea, and off the coast of California) have argu- ably paved the way for shipping lines to voluntarily commit to using low-sulfur fuel off the coast of Hong Kong as part of the Fair Winds Charter initiative. 6.2 Unintended Consequences and Increased Costs—Evidence from Industry Consultation Heavy-Duty Vehicle GHG Reduction Regulation This Californian regulation requires the use of aerody- namic tractors and trailers that also must be equipped with low-rolling resistance tires to improve fuel efficiency and reduce GHG emissions. Tractors and trailers subject to this regulation must either use EPA SmartWay-certified tractors and trailers, or retrofit their existing fleet with SmartWay- verified technologies, including trailer skirts. Consultation with industry revealed concerns that the necessary invest- ments in trailer skirts do not yield commensurate benefits in California where the Motor Vehicle Code prohibits a truck from exceeding 55 mph. Fuel efficiency benefits of trailer skirts are only realized at 50 mph, with optimal bene- fits gained at speeds of 65 mph. For example, a large national truckload carrier interviewed by the research team consid- ered the California trailer skirts regulation to be the result of good intentions combined with poor understanding of local operating conditions. This carrier cites the following three issues: 1. Carriers generally run three trailers per tractor, using a drop-trailer system. This rule requires installing skirts on all trailers (at a cost of 3 x $1,000). Yet the benefit only accrues to the one trailer being towed. So the cost is $3,000 for 100,000 miles per year. The carrier’s view is that the same $3,000 could be spent on the tractor with more beneficial environmental outcomes. 2. The skirt is most effective at high speeds, as noted. At 55 mph (the speed limit for trucks in California), there is little aerodynamic benefit. 3. The carrier also cited the reporting and administrative requirements associated with this regulation as being time consuming for the private sector. Concerns about the impacts of these requirements on inter- state commerce have been voiced, particularly as the regula- tion places cost and administrative obligations on interstate fleets that often do not know in advance which equipment will be used in a particular region on a given day. Many carri- ers contend that the regulation potentially curtails flexibility and efficiency as they may be required to shift loads to dif- ferent vehicles to meet regulatory requirements when trav- eling between different states. Concerns were expressed that trailer skirts present safety risks, because they can be dam- aged during situations such as while crossing railroad tracks and driveways, and during loading and unloading. Drivers face a liability risk of damaged devices detaching from the trailer while driving. Others contend that the operation of aerodynamic side-skirts under treacherous weather condi- tions could compromise device safety and result in failure at high speeds (Tata, 2009). One carrier interviewed stated that this and other regulations cause them to try to avoid Califor- nia altogether, although the research found no evidence that this is occurring on a widespread basis. According to staff at CARB, carriers’ attitudes are chang- ing as they realize cost savings as a result of improved fuel efficiency, and there has been no evidence of safety issues (CARB, 2012, pers. comm.). At-Berth Ocean-Going Vessels Regulation California has mandated that ocean-going vessels plug in to the electric grid or use an equivalent emissions-reduction option while docked at California ports, rather than using onboard auxiliary engines. This “cold ironing” or shore power requirement is intended to reduce port communities’ expo- sure to harmful NOx and PM emissions from diesel-fueled auxiliary engines. It offers the added benefit of reduced CO2 emissions. The regulation applies to container fleets making

60 25 or more annual visits to a California port. By 2014, the State of California requires that for 50% of container ship visits, vessels must either rely on shore power while ships are berthed at California ports, or make use of an equivalent emissions-reduction option. However, given that connect/ disconnect times are not included in emissions reduction calculations, this effectively means that over 50% of the ves- sels are required to use shore power in order to achieve a 50% emissions reduction (APL, 2012, pers. comm.). A leading container shipping operator expressed concern about the financial impacts of these regulations for ocean carriers—typically the most GHG-efficient of freight modes— required to make significant investments to convert vessels to enable them to plug in to the shoreside electric grid. This onboard infrastructure is only usable when vessels are docked at ports equipped with shore power facilities. According to APL, the equipment is typically used only about 1 month per year (APL, 2012, pers. comm.). The capital outlay, estimated by CARB to be approximately $1.5 million per vessel (Califor- nia EPA, 2007), reduces capital available for other sustainabil- ity innovations, argue ocean carriers. From a shipping line’s business perspective, the regulation also limits global vessel deployment options and flexibility to rotate vessels, given that not all vessels are outfitted with cold-ironing capability. In the future, if the adoption of shore power becomes more widespread with other ports providing at-berth shore power infrastructure, shipping lines will have more opportunities to plug in during port calls, thereby improving their return on investment over time, as well as their flexibility to rotate vessels. However, as is generally the case in global transporta- tion, the adoption of international standards is essential to ensuring full compatibility, and wider adoption and cost- effectiveness of the technology, and it will likely take some time for ports to become shore-power enabled. The reaction to this regulation on the part of ocean carri- ers is driven by concerns about the high capital costs, associ- ated with shore power technology combined with the lack of technological alternatives and perceived lack of flexibility in the regulation. For example, APL supports seawater scrub- ber technology, arguing that this technology is effective in emissions reduction and is cheaper than shore power. The At Berth Ocean-Going Vessels Regulation permits operators the use of alternative emission-control strategies, provided the requisite emissions reductions can be obtained. However, seawater scrubber technology, although effective in reducing PM, SOx, and VOC emissions, is less effective at reducing NOx emissions (e.g., APL reports that technology is expected to reduce diesel particulate emissions by 80 to 85%, SOx emis- sions by 99.9%, VOCs by more than 90%, and NOx by just 10%) (APL, 2012; APL, 2012 pers. comm.). The regulations also place limitations on carriers changing from cold ironing to an alternative technology. Ocean carriers are required to choose the equivalent emissions reduction (EER) approach early in the program, and may not switch from cold ironing to EER (APL, 2012, pers. comm.). Nevertheless, ocean carriers are reportedly adopting inno- vative approaches to the adoption of shore power technology. For example, NYK proposed to deploy 38 container ships with shore power capability at a total cost of $22 million (or a cost of $600,000 per ship, or $900K less than the costs estimated by CARB). This cost is based upon placing the necessary shore power equipment (transformer, switchgear, and associated controls) in a container at the berth. This container can then be placed on each ship equipped to use shore power, and the necessary equipment can be moved from ship to ship on an as-needed basis instead of fully retrofitting each ship. Given that the cost to modify the ships represents about 80% of the capital costs for shore power, reducing the shipside costs can significantly reduce overall costs (California EPA, 2007). Nevertheless, when combined with the costs of other regula- tions in California such as low-sulfur marine fuel requirements and the North American ECA, the shore power regulation can add significantly to ocean carriers’ costs. It is, at present, too soon to assess whether the shore power regulation in combi- nation with other regulations has had unintended impacts in terms of the diversion of cargo away from Californian ports as a result of higher costs, and whether these costs outweigh the benefits of shipping via California. Ocean-Going Vessel At-Sea Low-Sulfur Marine Fuel Requirements Several ocean carriers interviewed expressed concern about overlapping regulation that applies to the use of low-sulfur marine fuel, particularly in California. The MARPOL North American ECA came into effect on August 1, 2012, bring- ing in stricter controls on emissions of SOx, NOx, and PM for ships trading off the U.S. coast. All vessels sailing within 200 nautical miles of much of the North American coast are required to use 1% low-sulfur fuel (falling to 0.1% after Janu- ary 2015). For a vessel on a 1,700-nautical-mile route, this regulation will increase ship operating costs by an estimated $18 per TEU container (U.S. EPA Office of Transportation and Air Quality, 2009). Nevertheless, CARB’s Low-Sulfur Marine Fuel Regula- tions, which took effect in July 2009, will still apply since the low-sulfur fuel required by the North American ECA does not presently satisfy California’s requirements. CARB regu- lations require ocean-going vessels within 24 miles of the California Coast to use distillate fuels such as marine gas oil (MGO) with a sulfur content of 1% or less or marine diesel oil with a sulfur content of 0.5% or less. This adds an esti- mated $30,000 per vessel to the cost of a California port visit (estimated at about $6 per TEU). In their Initial Statement of

61 Reasons, CARB considers this to be a small proportion of the overall transportation costs (estimated at about 1%) of a voy- age from Asia to the U.S. West Coast for a typical container (California EPA, 2008). Although the initial regulation was subject to legal challenge on the basis that its requirements impose a “non-uniform and costly regulatory regime on the maritime industry,” the courts found that notwithstanding the costs of compliance, the State of California has a compelling interest in protecting the health of its citizens. The regulation has helped achieve a 91% reduction in SO2 levels, a 90% reduction in PM emissions, and an unexpected 41% reduction in black carbon levels (California EPA’s Air Resources Board, 2011). Despite these air quality benefits, international ocean carri- ers like APL are concerned about having to use three different types of fuel during a single voyage requiring separate fuel stor- age, crew time, and recordkeeping (APL, 2012, pers. comm., May 23). CARB has acknowledged that uniform national and international regulation is preferable to individual state regu- lation, and the Low-Sulfur Marine Fuel Regulations include a sunset clause that provides for the termination of this regulation once CARB determines the federal government has adopted, and is enforcing, requirements that will achieve equivalent emission reductions in California. Efforts to Address Port Operational Practices State legislation aimed at addressing emissions can be slow to take effect and may not always address issues in the most responsive manner. For example, of the 17 bills aimed at regu- lating port operating practices put before the California state legislature since 2000, only 3 have passed (Giuliano, 2008). AB2650, introduced in 2003, focused on changing dock oper- ational practices at the Ports of Los Angeles and Long Beach in order to reduce truck emissions in the vicinity of the ports. Marine terminal operators (MTOs) were required to pay fees for trucks idling more than 30 minutes at terminal gates, or could avoid fees by extending operating hours or offering gate appointments for trucks dropping off or picking up contain- ers. No terminals opted to extend gate hours (due to the costs involved), with most implementing an appointment system. However, surveys indicate that drayage operators made few appointments, and that the appointment system was being used to achieve compliance and avoid fines, rather than to promote efficiencies. There was also no evidence that appoint- ments generated time savings for carriers, and the measure proved difficult to enforce (Giuliano, 2008). By contrast, the more successful OffPeak Program (also known as PierPASS) introduced by the Ports of Los Angeles and Long Beach in 2005, was based on collaboration between the ports, MTOs, and steamship lines. The program is run by PierPASS, a not-for-profit company created by the ports and MTOs to address common issues of congestion and air qual- ity. The PierPASS Program provides financial incentives to move cargo outside of the peak daytime traffic hours. A Traf- fic Mitigation Fee (TMF) of $61.50 per TEU, as of August 1, 2012, is applied to cargo. Revenues are returned to the MTOs to cover the costs of extended hours of operation. The initia- tive shifted 22% to 30% of cargo to the off-peak period in its first year of operation. It has resulted in redistribution of heavy truck traffic from the midday (peak) period, shifting it to nighttime (Giuliano, 2008). The shift also enabled growth in container activity to be accommodated without adverse impacts on CAP emissions. Nevertheless, the program has had some unintended con- sequences, with those in weaker positions finding themselves somewhat disadvantaged. For example, drayage operators are now required to work nights with no change in pay, and no evident improvement in turn times. Distribution centers, warehouses, and exporters are required to modify their oper- ations (e.g., by adding a night shift), thereby incurring addi- tional costs. Further downsides include increased nighttime truck traffic and noise in local communities (Giuliano, 2008). Technology Availability Concerns Regulators often push industry to adopt new technologies by setting emissions standards that speed up the development and deployment of new technologies, frequently referred to as “technology forcing.” This presents a delicate trade-off between encouraging innovation and pressing for solutions where the technology is not yet proven or, in the worst case, not feasible. One shipper with which the research team spoke urged regula- tors to review regulations that in their perception restrict com- panies in their ability to implement sustainability innovations. On the other hand, several interviewees criticized well-intended regulations for overestimating the available technology. Rail operators, for example, express frustration about the lack of available technology to meet new EPA Tier 4 locomo- tive emission standards. Tiers 3 and 4 standards were intro- duced in the 2008 Locomotive and Marine Diesel Engine Emissions Standards. The Tier 3 standard is already effective. The Tier 4 standard applies to newly built engines and is based on the application of high-efficiency catalytic after-treatment technology (ECOpoint Inc., 2012). According to the railroad industry, Tier 4 technologies are not yet commercially avail- able, even though they are mandated for introduction by 2015. Currently, the only way to meet these pollutant emis- sions standards is through processes that increase locomotive fuel consumption. Thus, although this federal policy seeks to improve air quality, the practical effect will be to increase GHG emissions, effectively conferring a local benefit but applying a global cost. Rail sources indicate these regulations

62 are mostly driven by concerns in Southern California where CAP emissions concerns are particularly acute, yet the EPA rules will apply nationwide. Industry Views of Potential Local Regulatory Impacts on Operations Industry views on the impacts of regulation on operations vary. It is recognized that in some cases, the private sector has been known to overstate the adverse impacts of regulation on their ability to do business, and that comments should not always be taken at face value. Nevertheless, the research team did come across instances where private-sector interviewees identified specific regulations as being particularly restric- tive. At one extreme, a motor carrier and one of the shippers interviewed stated that they would prefer to avoid operat- ing in California if they could, due to the tougher environ- mental regulations in the state. A manufacturer stated that Californian air (and water) emissions regulations have led them to minimize the number of plants in the state. A motor carrier also told the research team that California’s renewable fuel regulations have required them to run different fleets in the state and, in some cases, to avoid it altogether. Were other states to follow the Californian regulatory example, several interviewees claim that doing business would become more difficult. Some carriers claimed that they might have to signif- icantly alter their operations and ultimately become less sus- tainable in the process (e.g., by increasing journey distances to avoid transiting these high-regulation states entirely). Several interviewees mentioned particular triggers or breakpoints that could result in major changes to their operations, rang- ing from equipment deployment decisions to port gateway selection. One third-party logistics provider (3PL) stated that if other individual states were to embrace California’s aggres- sive clean air approach, they would have to significantly adjust their operations. In the view of one motor carrier, California’s regulations are potentially shifting CO2 emissions to other states, and a unified federal (rather than state-level) approach to GHG emissions regulation is required. Despite these claims the research team did not uncover any quantitative evidence through the literature or interviews that such shifts in the location of business or cargo routing had actually occurred to the extent that this is having an impact on CO2 emissions. An ocean shipping industry association expressed the view that environmental requirements in certain states (e.g., those pertaining to ballast water discharge in California and New York) are examples of “chaos” created by state regulatory agencies that, in the view of the interviewee, lack the nec- essary depth of expertise. In general, according to this view, states should not be involved in decisions affecting the inter- national shipping arena. Even when states have the technical knowledge, such regulations are viewed as damaging the fed- eral government’s credibility in international forums. In this view, as sustainability issues increasingly come to the fore, such conflicts are becoming more common. A motor carrier claimed that the combination of reduced highway infrastructure investment and curtailed hours of service for drivers (which require more vehicles on the high- way to deliver the same level of service) has an adverse impact on economic efficiency and freight emissions. This carrier supports the regulatory change to permit the use of doubles, triples, and other alternative truck configurations to improve efficiency and cut emissions. In the view of this carrier, this solution could make better use of existing infrastructure and potentially removes trucks from the highway. The role of public agencies, in the industry view, should either be to improve the capacity of freight corridors or allow carriers to operate more efficiently on existing highways. It is not only air quality and GHG regulations that are of concern. For example, a container shipping line cited changes in ballast water regulations would require them to shift their operations and strategies. Additionally, they mentioned that they would need to modify their operations if regulations (already in place for certain port approaches) relating to pro- tecting North Atlantic right whales and decreasing vessels’ acoustic output became more widespread. Several carriers and shippers referred to the high cost of fuel as a potential future breakpoint, driving them to switch to alternative fuels, as well as to improve optimization and efficiency. However, other stakeholders told the research team that they do not have a specific regulatory breakpoint in mind because their supply chain networks are fairly balanced and large scale in nature and are unlikely to change significantly. Lack of Evidence Regarding Shifting Coastal Cargo Shares Due to Local Regulatory Actions In the United States, one of the major potential unintended consequences of local regulatory action could be the shifting of transportation activity between nodes and corridors. That is, although federal environmental regulations would be expected to affect all regions equally, stricter state or local regulations could impact supply chains passing through multiple regions. One of the oft-cited examples of the potential for such dis- ruption to established supply chains relates to stricter air and water quality requirements on the West Coast, California in particular, than in other parts of the country. Although there is no doubt that California and other West Coast states have enacted environmental regulations over the past decades, often in advance of federal regulators, there is no clear evidence that this regulation, even in combination with other factors, has driven business away from Pacific Coast ports. A review of Association of American Port Authority (AAPA) data on container freight by coast over the past 20 years indi- cates there is little overall change in coastal shares. The U.S.

63 Pacific Coast ports maintained exactly the same share (53%) of total U.S. container traffic, measured in TEUs, in 2010 as they did in 1990, according to AAPA data. Also, the South- ern California ports of Los Angeles and Long Beach substan- tially increased their share of U.S. container traffic over this period, rising from 24% to 33% of the U.S. total. Although the POLA/POLB share increase was particularly dramatic during the late 1990s, it continued to rise through 2005 and has been stable since then (AAPA, 2012). There is no overall evidence, in terms of port-specific or coastal shares, to support the argument that environmental regulations in California and on the West Coast have driven freight to other ports. Even if there were some variations in share, it would be difficult to isolate the impact of environmen- tal regulations from the effects of differing rates of transport cost increases, transport technology developments, and dif- ferential regional economic growth rates. In short, although the research has described various unintended consequences from environmental regulatory initiatives, the research team does not see a broad pattern of distortion within the nation’s overall supply chain system, as regards ocean container flows at U.S. ports. 6.3 Conclusions and Implications The Need for Integration Between Public Policy and Regulation Demand for freight transportation and associated increase in freight miles and freight air emissions are affected by a range of policies and regulations, many of which are exter- nal to the environmental regulatory context. Although the focus of this section is air emissions regulation, the impor- tance of ensuring that the range of policies and regulations affecting freight transportation are aligned and supportive of supply chain sustainability cannot be overlooked. In particu- lar, there is a need for integration across all public policy ini- tiatives such that they are supportive of freight air emissions reduction and avoid unintended consequences. In locations such as Chicago, Kansas City, Port of Houston, and California where public agencies responsible for planning, infrastruc- ture development, and air emissions regulation are working together in pursuit of mutually beneficial outcomes, air emis- sions are being managed and even reduced while economic growth and freight traffic continue to grow. Balancing CAP and GHG Emissions Concerns about public health and climate change have resulted in the tightening of CAP and GHG emissions regula- tions. However, in some cases, these regulatory efforts can under- mine one another. Regulations, standards, and policies aimed at reducing CAP emissions can have the effect of increasing GHG emissions, and vice versa. As the evidence presented in this chapter suggests, locally defined regulations that are inconsistent across geographies can create difficulties for carriers that are required to cope with a range of different requirements as they transport freight between jurisdictions. Nevertheless, because CAP emissions have localized health impacts, there is an argument that these emissions are best managed at the local level. The potential alternative involves the universal application of stricter CAP regulations (in response to the needs of those jurisdictions with the poorest air quality) across a wider geography, even where air quality standards are presently being met. How- ever, this would result in unnecessary costs to industry with- out commensurate public health benefits necessarily being achieved at the local scale. A critical objective for regulatory agencies is to fit the regulation to the need and to mitigate any adverse impacts in supply chain operations, noting, in some cases, these adverse impacts will be unavoidable. Longer term, the move to a zero- and near-zero-emission freight system, as being contemplated by the Southern Cali- fornia Association of Governments (SCAG) in their Regional Transport Strategy (RTS), is likely to be the only way to accom- modate economic growth, protect public health, and reduce GHG emissions, particularly along corridors with high con- centrations of population and poor air quality. Evidence from International Experience Outside the United States, other countries have attempted to address supply chain emissions issues in various ways, many of which present stark lessons for regulators and poli- cymakers stateside, should they be considering similar paths of action. Evidence from studies undertaken in Europe indi- cates that allowing longer combination trucks can have sig- nificant efficiency gains in the trucking sector, resulting in GHG emissions reductions. However, these studies also indi- cate that there is a risk of a “rebound effect,” where fuel savings result in reduced road freight costs, hence, an increase in road ton-kilometers. Such cost reductions also can result in mode shift from greener modes, such as rail and short sea/inland shipping, with detrimental effects on GHG emissions. Similarly, reducing speed limits may have fuel consump- tion and GHG benefits. However, reducing speed limits also may result in more trucks required to move the same amount of freight due to reductions in the distance that can be covered in a single day. Further review of potential impacts on costs and safety are required if reduced speed limits are to be con- sidered. Reduced speeds also can undermine the effectiveness of various SmartWay-approved technologies. Further inves- tigation is required to assess which option offers the greatest potential for supply chain sustainability improvements. Efforts to promote mode switch to greener modes, such as encouraging switching from truck to rail modes via intro- duction of truck tolling, have had varying and ambiguous

64 benefits. Many have not achieved their mode shift targets. Because of the inherent logistical advantages of trucking for certain shipment types, and because the overlaps between the truck and rail freight markets tends to be relatively small, the potential for freight mode shift is relatively limited. Several shippers are already taking advantage of the cheaper costs of non-truck modes without the need for incentives. How- ever, transit time and delivery reliability tend to be the main impediments to mode shift from trucking. Careful consider- ation of the full extent of potential benefits from mode shift initiatives is required prior to program development, includ- ing assessments of whether such benefits may be attained at lower cost through other means. It is preferable for international agencies to develop pro- tocols and regulations for global carriers (e.g., in respect to aviation and shipping GHG emissions). The EU aviation ETS provides a case study of the impacts of particular jurisdictions “going it alone” where global agreement cannot be reached. Other locations, such as China, appear to be following suit. If China’s procedures are vastly different than those in the EU, this could significantly add to airlines’ administrative requirements. Nevertheless, despite resounding opposition to the EU aviation ETS from non-EU states, compliance levels have been high, and the EU aviation ETS is not expected to constrain growth in the U.S. aviation or airfreight business. However, there is a risk that by focusing on transport carbon emissions, the EU aviation ETS can, in some cases, result in distortions. For example, this could occur by adding to the costs and reducing the market share of imported products that may actually have a smaller carbon footprint than locally sourced products. The California Experience Given the amount of recent regulatory activity in Califor- nia, it is not surprising that the carriers and shippers con- sulted as part of this research provided the most examples of what they perceived to be unintended consequences from their experiences in that state. This can be ascribed to the following two factors: 1. California has had to take significant steps in response to its acute air quality issues and has, at the same time, made strides forward in efforts to address GHG emissions. 2. The state has exceptional authority under the federal Clean Air Act, which allows it to adopt emissions standards stricter than federal standards, subject to the submission of a waiver petition to the EPA. Several states have expressed an interest in using their author- ity under Section 177 of the Clean Air Act to adopt California standards. Some consider the adoption of California standards to be a safety net in case EPA delays similar federal standards (National Research Council, 2006). Because the Clean Air Act allows other states to adopt California standards with- out any alteration, it is vital that before adopting these stan- dards, states understand both the context for the California regulations, as well as the unintended consequences that have resulted, to avoid potential replication of these problems else- where. Further, the research did not find any indication that California’s cargo share has shifted to other locations because of the uniqueness of the Californian economy and context. The size of the local Californian market, its proximity to Asian markets, and its well-established road and rail infra- structure (which reduces the costs of transporting goods to destinations beyond state borders) add to the advantages of doing business there. Other states do not benefit from such advantages and therefore run a greater economic risk with the application of “copycat” standards and regulations. The research established that some of the underlying rea- sons behind the unintended consequences of air emissions regulations in California lie in, for example, specifying tech- nologies (e.g., trailer skirts, shore power, ballast water treat- ment technology) that may be less than optimal given the circumstances, and that can add to carriers’ (and ultimately shippers’) costs, while the benefits are, in some cases, over- estimated or unsubstantiated. A further issue is the layers of regulation at the international/ national level (e.g., the North America ECA) and the state level (e.g., the California low-sulfur marine fuel requirements). In addition, regulation may have been less effective because it was developed without the benefit of deep and wide consulta- tion, and as a consequence did not get to the heart of opera- tional practices and was not enforceable (e.g., the Port Gates Appointment System). Cost-Effectiveness of Regulation Cost-effectiveness estimates consider the ratio of the cost of compliance per ton of pollution reduced and allow differ- ent regulations to be compared. They are useful to compare alternative options for a given location, but are context- specific and therefore not as useful as a comparative yardstick against other jurisdictions. Public agencies would do well to pursue the most cost-effective solutions first, thereby priori- tizing elimination of the lower cost emissions units from the supply chain. The cost-effectiveness of California regulations vary widely. For example, CARB’s estimates of the average cost of air emissions regulations recently implemented vary from between $15,400 to $320,000 per ton of PM per year. The Low-Sulfur Marine Diesel Rule is comparatively cost effi- cient, at $31,000 per ton of PM per year (U.S. EPA Office of Transportation and Air Quality, 2009a). By comparison, full implementation of the Shore Power Rule is expected to cost

65 between $200,000 and $550,000 per ton of container ship PM removed, making this regulation particularly expensive. Part of the reason for the high costs of emissions reduction under this rule is that the previously adopted regulations for auxil- iary diesel engines had already reduced PM emissions from hoteling ships by 70% (California EPA, 2007). Similarly, the Low-Sulfur Marine Diesel Rule is expected to cost around $3,200 per ton of NOx and SOx per year (U.S. EPA Office of Transportation and Air Quality, 2009a). Full implementation of the shore power regulation is estimated to cost between $5,500 and $16,000 per ton of container ship NOx reduced (California EPA, 2007). The incremental costs of emissions reductions can become progressively expensive with successive regulations. Cumulative Costs California generally does a good job of assessing the costs of compliance and cost-effectiveness of individual regulations prior to implementation. However, assessments are undertaken on a regulation-by-regulation basis, while the cumulative impact on carriers and shippers is not assessed. For example, the cost to comply with the North American ECA is estimated at $18 per TEU; the cost of the Low-Sulfur Marine Fuel Regula- tions is estimated at $6 per TEU; and the Port of Los Angeles/ Port of Long Beach Traffic Mitigation Fee is $61.50 per TEU. Though individually each fee is a small proportion of the overall cost of a trans-Pacific voyage, collectively they repre- sent a much more significant portion and are not exhaustive. The cost of equipping a ship with shore power technology— estimated at $1.5 million per vessel, the Alameda Rail Cor- ridor surcharge of $18 per loaded TEU, and the capital costs for regulatory compliance such as the heavy-duty vehicle GHG emission reduction regulation also impact total cumula- tive costs. Combined, these costs can result in simultaneous financial, technical, and administrative compliance impacts on the private sector. The private sector has felt these impacts more acutely since 2008 with revenues already down due to the global economic recession. A regulatory approach that assesses the cumulative regulatory costs facing the private sector would go some way toward enabling a better understanding of the full costs of regulation.