No. C 247 May 2017 NOX Abatement in the Baltic Sea An Evaluation of Different Policy Instruments Rasmus Parsmo Katarina Yaramenka Hulda Winnes Erik Fridell Author: Rasmus Parsmo Katarina Yaramenka Hulda Winnes Erik Fridell Funded by: Vinnova (2014-03560) Report number C 247 ISBN 978-91-88319-65-4 Edition Only available as PDF for individual printing © IVL Swedish Environmental Research Institute 2017 IVL Swedish Environmental Research Institute Ltd. P.O Box 210 60, S-100 31 Stockholm, Sweden Phone +46-(0)10-7886500 // Fax +46-(0)10-7886590 // www.ivl.se This report has been reviewed and approved in accordance with IVL's audited and approved management system. Preface This report was written within the Vinnova project “New fuels and policy instruments for shipping; an analysis of the potential to reduce risks for the environment” number 2014-03560. Data for the analysis has been provided by the project partners The Swedish Shipowners Association, Stena and Chalmers University. We thank Carl Carlsson, Per Wimby, Selma Brynolf, Karin Andersson and Stefan Åström for their input. iii Summary In this report a number of policy instruments for controlling emissions of NO in the Baltic Sea have been X studied. The background is the decision to establish a NO Emission Control Area (NECA) in the region X requiring ships to follow Tier III NO emission regulations from 2021. To achieve further and more rapid X reductions of NO emissions than what is expected from the NECA, additional policy instruments have been X discussed. The policy instruments analysed in this study are assumed to be additional to the NECA requirements. Our study describes changes of emissions and costs for existing ships with Tier II engines when upgrading for lower NO emissions. Of the many existing technological alternatives to accomplish NO X X reduction, this study focuses on liquefied natural gas (LNG) engines and selective catalytic reduction (SCR) for after treatment of exhaust gas. Emissions of NO in 2030 are modeled for scenarios in which different X policy instruments are assumed. The use of LNG and abatement equipment is modeled with the assumption that ship-owners choose the most advantageous option from a cost perspective. The most effective policy instrument found in this study is the refundable emission payment (REP) scheme. The reduction of emissions depends on the fee and subsidy rate applied. For example, a subsidy rate of 60% and a fee of 1 €/kg NO is modelled to reduce the yearly emissions of NO from shipping in the Baltic Sea in X X 2030 by about 53 ktonnes. A NO tax will also have a significant effect on the NO emissions, but in this X X case the costs for ship-owners are significantly higher. Applying a CO tax or environmentally differentiated port dues in the model are found to have less impact 2 on the NO emissions. Introducing slow steaming has a potential to reduce NO emissions In another X X scenario the effects on emissions from a financial investments support for abatement technology or LNG engines are modeled. At an interest rate of 0 % emissions are reduced significantly. According to our model, an extended NECA, where also other sea areas than the Baltic and North Seas become NECAs, has no further impact on the NO emissions in the Baltic Sea. However, since the X abatement equipment is used for more hours in a global NECA it will reduce the abatement cost per kg NO . X iv Sammanfattning Ett antal styrmedel för att minska utsläppen av NO från sjöfart i Östersjön har studerats i denna rapport. X Bakgrunden är beslutet att inrätta ett ”NOX emission control area” NECA i regionen så att fartyg måste följa Tier III NO -utsläppskraven från 2021. För att uppnå ytterligare minskningar av NO -emissioner har fler X X styrmedel diskuterats. De som analyserats i denna studie antas komma i tillägg till NECA-kraven. Vår studie beskriver förändringar i utsläppen och kostnaderna för existerande fartyg med Tier II-motorer som uppgraderas för lägre NO -utsläpp. Av de många befintliga tekniska alternativen fokuserar denna studie på X motorer för förvätskad naturgas (LNG) och selektiv katalytisk reduktion (SCR) för efterbehandling av avgaser. Utsläppen av NO 2030 har modellerats för scenarier där olika styrmedel antas införda. X Användning av LNG- och reningsutrustning har modellerats utgående från antagandet att fartygsägare väljer det mest fördelaktiga alternativet ur ett kostnadsperspektiv. Det mest effektiva styrmedlet är systemet med NO -fond. Minskningen av NO -utsläppen beror av X X storleken på avgiften och subventionsgraden i systemet. En subventionsgrad på 60% och en avgift på 1 € / kg NO ger enligt modellen minskade utsläpp av NO från sjöfarten i Östersjön år 2030 med cirka 53 kton. X X En NO -skatt skulle också ha betydande inverkan på NO -utsläppen, men i detta fall är kostnaderna för X X fartygsägare betydligt högre. Att tillämpa en CO -skatt eller miljödifferentierade hamnavgifter i modellen har en mindre inverkan på NO - 2 X utsläppen. Att införa hastighetsbegränsningar har en potential att minska NO -utsläppen. Även effekterna X på utsläppen från finansiellt investeringsstöd för reningsutrustning eller LNG-motorer har modellerats och med en räntesats på 0% skulle utsläppen reduceras betydligt. Enligt vår modell har ett utökad NECA, där fler områden än Östersjön och Nordsjön blir NECA, ingen ytterligare effekt på NO -utsläppen i Östersjön. Men eftersom reningsutrustningen används fler timmar per X år i ett större NECA kommer kostnaden per reducerat kg utsläppt NO att minska. X v Table of contents Summary ........................................................................................................................................................... iv Sammanfattning ................................................................................................................................................. v 1 Introduction ............................................................................................................................................... 8 1.1 Policy Instruments for NO ................................................................................................................ 8 X 1.1.1 NECA ......................................................................................................................................... 9 1.2 NO Emissions in the Baltic Sea ....................................................................................................... 10 X 1.3 Abatement Technologies................................................................................................................. 10 1.4 Methods .......................................................................................................................................... 11 2 Methodology ........................................................................................................................................... 12 2.1 General Methodology ..................................................................................................................... 12 2.1.1 Ship Categories ....................................................................................................................... 12 2.1.2 Cost Model .............................................................................................................................. 13 2.1.3 Emission Model ....................................................................................................................... 14 2.1.4 Share of Fuel Consumption being LNG ................................................................................... 14 2.2 Different Policy Instruments ........................................................................................................... 15 2.2.1 NECA ....................................................................................................................................... 15 2.2.2 NECA with Extended Geographical Boundaries: NECA5500 ................................................... 15 2.2.3 Slow Steaming ......................................................................................................................... 15 2.2.1 Financial Investment Support ................................................................................................. 16 2.2.2 Environmentally Differentiated Port Dues.............................................................................. 17 2.2.3 CO Tax .................................................................................................................................... 18 2 2.2.4 NO Tax ................................................................................................................................... 18 X 2.2.5 NO Fund ................................................................................................................................. 21 X 3 Results ..................................................................................................................................................... 24 3.1 Direct Regulations ........................................................................................................................... 24 3.1.1 Baseline: NECA ........................................................................................................................ 24 3.1.2 NECA5500 ............................................................................................................................... 24 3.1.3 Slow Steaming – Results from Literature Review ................................................................... 25 3.2 Market Based Regulations ............................................................................................................... 25 3.2.1 Financial Investment Support ................................................................................................. 25 3.2.2 Port Dues with LNG rebate ..................................................................................................... 26 3.2.3 CO tax ..................................................................................................................................... 27 2 3.2.4 NO tax .................................................................................................................................... 28 X 3.2.5 Refundable Emission Payment (NO -fund) ............................................................................. 29 X 3.3 Comparison of Results ..................................................................................................................... 31 4 Sensitivity Analysis ................................................................................................................................... 33 4.1 LNG Engine Price ............................................................................................................................. 33 4.2 Price Difference between LNG and MD .......................................................................................... 33 4.3 Private Perspective on Cost Annualisation ...................................................................................... 34 4.3.1 NECA and No-NECA ................................................................................................................. 34 4.3.2 NO tax .................................................................................................................................... 35 X 4.3.3 Refundable Emission Payment (NO -fund) ............................................................................. 36 X 4.4 Budget Constraint for REP ............................................................................................................... 36 5 Discussion ................................................................................................................................................ 38 5.1 Direct Regulations ........................................................................................................................... 38 5.2 Market Based Policy Instruments .................................................................................................... 38 5.2.1 CO Tax .................................................................................................................................... 40 2 5.2.2 NO Tax and REP ...................................................................................................................... 40 X 6 Conclusion ............................................................................................................................................... 42 Bibliography ..................................................................................................................................................... 43 Abbreviations and currency rates .................................................................................................................... 47 Appendix A – General Input Data ....................................................................................................................... 48 Appendix B – Costs of Different Abatement Technologies ................................................................................ 50 Selective Catalytic Reduction (SCR) ............................................................................................................. 50 Exhaust Gas Recirculation (EGR) .................................................................................................................. 52 LNG ......................................................................................................................................................... 53 Appendix C – Main Results for Selected Policy Instruments .............................................................................. 54 Appendix D – Sensitivity Analysis for some Policy Instruments ......................................................................... 55 Comparative Sensitivity Analysis ................................................................................................................. 55 Changes in the No-NECA and NECA scenarios ...................................................................................... 55 Price of LNG Engine ...................................................................................................................................... 55 Price Spread between LNG and MD ............................................................................................................. 56 Interest Rate and Investment Lifetime in the Private Cost Perspective ...................................................... 57 Appendix E – Relation between Port Fee and Engine Size ................................................................................. 59 Appendix F – Calculating distribution for NO tax .............................................................................................. 60 X Report C 247 NOX Abatement in the Baltic Sea – An Evaluation of Different Policy Instruments ­ 1 Introduction The purpose of this study is to analyse policy instruments and measures in order to reduce the emissions from shipping in the Baltic Sea. The introduction of a NO Emissions Control Area (NECA) from 2021 will X mean that in a long-term perspective the emissions will decrease but there is a need for methods to reach a more rapid decrease (see e.g. Winnes et al. (2016), Yaramenka et al. (2017)). A set of possible policy instruments have been chosen for analysis and the potential for reducing emissions is modelled by using abatement costs in combination with costs/subsidies inherent in the different instruments. The results are also discussed from a cost-efficiency perspective. 1.1 Policy Instruments for NO X For road traffic, mobile machinery and other sectors using combustion engines the tightening of emission regulations have been fundamental in reducing NO emissions. Tighter NO emission standard has e.g. cut X X the road transport sector’s NO emission with two thirds in Sweden since 1990 (Naturvårdsverket, 2017). X Also the industry in Sweden has managed to reduce their emissions with one third since 1990; one reason for that is probably the charge on NO that was introduced in 1992. This charge was originally set to X 5.7 €/kg NO 1 and the money was refunded to the industry based on their output (Sterner & Isaksson, X 2006). For shipping there are less stringent emission regulations than for other sectors. The reason lies mainly in that these regulations are decided internationally by the International Maritime Organization (IMO) where agreements sometimes take a long time compared to what individual countries or states have achieved for road traffic. There have during the years been discussions about other policy instruments such as emission trading with NO , but this has not been realized (Nikoloulou, et al., 2012; IIASA, 2008). The following is a list X of policy instruments that are or have been in place targeting NO emissions from shipping. X • Tier I and Tier II emission standards (World), Tier III (US Caribbean NECA) • Emission regulations for marine engines used in inland waterway traffic (EU, US) • The Confederation of Norwegian Enterprise NO fund, in Norwegian “Næringslivets X Hovedorganisasjon” (NHO) • Environmentally differentiated port and fairway dues Emission regulations have been decided by IMO for marine diesel engines. The first regulations (Tier I) applies to engines from 2000; Tier II applies from 2011. There is also a Tier III that only applies in special NO emission control areas and with different starting years. There is a North American NECA where Tier III X applies from 2016 and in the Baltic and North Seas it will be applied from 2021. This is further discussed in Section 1.2.1. Within the EU there are also emission regulations for marine engines used in inland waterway traffic (Directive 2016/1628/EU). The emission regulations are mandatory and are important drivers of methods and technologies to fulfil the standards. However, they apply to new engines only and thus significant reductions of emissions will not occur until older engines are phased out. Since marine engines and ships have lifetimes on the order of 30 years this period can be significant (see Winnes et al. (2016) for an analysis of the Baltic Sea NECA). In Sweden there is since several years a system with rebate on fairway dues for ships with low emissions of NO . There was also a similar system for fuel sulphur content. The rebate system has stimulated ship X owners with ships that operate in Swedish waters to invest and use NO abatement techniques. There are X also several examples of ports giving rebates for ships with good environmental performance. 1 All currency rates in the report are first recalculated to correspond to 2016 prices and then converted to Euro 8 Report C 247 NOX Abatement in the Baltic Sea – An Evaluation of Different Policy Instruments ­ In Norway a NO -fund was created by the industry in 2008 as a response to the newly introduced NO tax. X X The original tax was set to 2.2 €/kg NO , but has been revised several times. This tax was perceived as X rather high and the industry also argued that they could lower emission further if the revenue was refinanced to the industry. The industry and the state therefore signed an agreement in 2008, Environmental Agreement on NO 2011-2017, which exempts all members of the agreement from the tax. X All members instead pay a lower fee which goes directly to a fund (Hagem, Holtsmark, & Sterner, 2015; Sjofartsdirektoratet, 2011). The money in the fund finance investment and operation of NO reducing X technologies. This policy instrument is called refundable emission payment (REP) and is further described in Section 2.2.8. There are a number of indexes used for different purposes. They can be used for scoring to decide port fee rebates, fairway dues and in public and private procurement of transport services. Such indexes can thus be an important basis for different policy measures. 1.1.1 NECA NO emissions are currently regulated by the International Maritime Organization (IMO). The regulation is X divided into three different emissions standards depending on geographical area and which year the ship is built. The current regulatory framework for NO emission standards is illustrated in Figure 1.1. Tier I rules X applies to all ships that are built between 2000 and 2011, while Tier II rules applies on all ship built from 2011 and onward. Since 2016 Tier III rules are applied in certain NO Emission Control Areas (NECAs). The X North and Baltic Seas will most probably be a part of NECA in 2021 (MEPC 70/5, 2016). However, the decision to include Baltic Sea in NECA has not been officially finalized yet, that decision is expected to be taken in 2017. 18 Tier I 16 Tier II 14 Tier III h W12 k / g10 t, mi 8 Li x O 6 N 4 2 0 [rpm] Figure 1.1 – NO emission standards for marine engines on ships in international shipping. The emission standard X depends on engine speed (rpm) and which year the ship was built. 9 Report C 247 NOX Abatement in the Baltic Sea – An Evaluation of Different Policy Instruments ­ 1.2 NO Emissions in the Baltic Sea X The total emission of NO from shipping in the Baltic Sea 2014 has been estimated to 320 ktonnes X (HELCOM, 2015). The amount of NO emitted from shipping has been rather stable between 2008 and 2015 X as can be seen in Figure 1.2. This is different from the land-based emission trend, where emissions have been decreasing steadily during the same period. The land based emissions in Sweden have, for example, dropped from 183 ktonnes in 2005 to 130 ktonnes in 2015 (Naturvårdsverket, 2017). The most significant drop has been due to reduced NO emissions from heavy vehicles. X Figure 1.2 – Emissions and transport work for shipping in the Baltic Sea (Johansson & Jalkanen, 2016) 1.3 Abatement Technologies Currently there are four fundamentally different ways to reduce NO emissions from marine engines: after X treatment, combustion modification, fuel switch and reduced fuel consumption. A description can be found in Winnes et al. (2016). In this section the technologies studied in the analysis are described briefly. The most frequently used after treatment method for NO abatement for ship engines is selective catalytic X reduction (SCR) where NO is reduced over a base metal catalyst with an added reducing agent – normally X urea which decomposes to form ammonia. The method has high activity for NO reduction and high X selectivity towards forming N . The method works also for high-sulphur fuels although lower sulphur levels 2 give better performance. There are some problems with operating SCR at low engine loads since the exhaust temperature needs to reach a certain temperature for the catalytic reactions to take place. SCR can reach 90% conversion of NO when the exhaust gas temperatures are 350° C and above, typically at high X engine loads. The costs associated with SCR are the investment, the consumption of urea and intermittent replacement of the catalysts due to deactivation. On the other hand, the engine may be tuned to the most fuel efficient settings; this is often associated with high engines out NOX emissions which then are dealt with in the SCR system. 10