Article: (for context)

Looming new environmental regulations are triggering sharp divisions in the shipping industry between vessel operators investing billions of dollars to reduce emissions and others who want to stave off the financial impact by simply slowing down ships.

More than 100 shipowners, including some big Greek and German charter businesses, have signed a letter to the International Maritime Organization, an arm of the United Nations that works as the global marine regulator, calling for slower sailing speeds to cut greenhouse gas emissions.

If adopted, the measure could ripple across international supply chains, with products taking more time to be delivered and cargo owners paying more for transport costs because of the longer sailings.

Critics, including some of the world's biggest container lines and their big retail-industry customers, say it would also delay investment in new, cleaner vessel technology. It also could increase overall shipping emissions in the meantime because some ocean carriers would add ships to their schedules to make up for slower, less frequent services. The carbon footprint for each individual vessel could decline, they say, but emissions for the broader industry would increase.

The idea behind "slow-steaming" is to push back the hefty costs that would come from turning to expensive new fuel and equipment to meet environmental targets, and from investing in a new generation of ships that would use hydrogen, batteries or biofuels for propulsion.

The IMO is scheduled to take up the proposal at a meeting next week in London, putting it at the heart of continuing fractious debates between shipowners, regulators and the world's biggest cargo customers over efforts to reduce pollution from oceangoing vessels. If the proposal gains traction it could become law as soon as late next year.

Ships move the world's commodities like oil, iron ore and grains and the vast majority of manufactured goods, including cars, home appliances, clothing and food.

They also contribute around 3% of the world's global pollution, an amount comparable to major emitting countries, according to Oceana, a group of independent foundations that monitors ocean pollution.

A new maritime environmental target takes effect Jan. 1, 2020, when vessels will be required to slash sulfur emissions that come from burning the heavy oil that powers ships. IMO members have also agreed to improve ship fuel efficiency by 30% by 2025 and pledged to slash greenhouse gas emissions by half by 2050, compared with 2008 levels.

Much of the sulfur-emissions reduction will come from using new low-sulfur fuel that oil refiners are preparing for the market. Operators also are buying equipment known as scrubbers that treat engine exhaust.

Ship operators say the shift will add up to $15 billion a year to fuel costs industrywide and that the expenses will be passed down to cargo owners and eventually to consumers.

Hapag-Lloyd AG Chief Executive Rolf Habben Jansen told an investor conference call this week that the new low-sulfur mandate would add up to $1.3 billion to the German container line's annual fuel bill.

Container carriers generally oppose the slow-steaming plan, which they believe would undermine their efforts to improve service in the time-sensitive supply chains of their big consumer-goods customers.

"We would have to add more ships to match our business model with contractually fixed berthing slots at container terminals," said Hapag-Lloyd spokesman Tim Seifert, costing the company more to maintain its level of service.

Bulk carriers, tanker operators and others hauling raw materials that move with less urgency generally back the effort.

"Recent history shows that reducing the global fleet's speed after the 2008 economic crash led to dramatic reductions in greenhouse gas emissions," the letter to the IMO said. "This speaks to the real-world effectiveness of a potential prescriptive speed measure in helping achieve reduction targets."

Slow steaming, in which ships travel far below their potential speed and so burn less fuel, became popular among carriers after global trade crumbled in the wake of the 2008 financial meltdown. Ship operators viewed it as a way to keep their assets moving in revenue-producing trade while effectively limiting capacity on the water because vessels are at sea for longer periods, reducing the number of sailings over time.

Data from maritime broker Clarksons show vessel speeds fell by around 21% across all ship types over the past 10 years, slashing total fuel consumption and carbon dioxide emissions by 18%.

Seaborne trade volumes also have grown by 37% over the same period and critics say any further speed reductions would make cargo movement more expensive and hamstring international supply chains.

"The letter came out of the blue," said Jon Gold, vice president for supply chain and customs policy at the National Retail Federation, a trade body representing America's biggest retailers. "If more ships are added to compensate for slow steaming, it will cost significantly more to move cargo and I don't know how this will help the environment,"

Mr. Gold said shipping customers likely will have to pay for the longer sailings.

"It's a move that will benefit one side at the expense of all others and won't work," Mr. Gold said.

Phone calls for comment to a dozen signatories of the letter weren't returned.

The IMO said in a 2014 report that slow steaming was a major factor in the reduction of CO2 emissions. The agency said ships contributed 2.8% of total greenhouse gases in 2007 and 2.2% in 2012. The report said the average speed of ships fell 12% over the period and fuel consumption fell 27%.

Maritime officials say the shipping contribution has likely increased as global trade has grown in more recent years.

Lars Jensen, chief executive of Copenhagen-based SeaIntelligence Consulting, said tighter capacity from slow steaming will trigger more vessel orders in the short term, which will delay investments in a new ships that would use cleaner fuel.

"Ships have a 20- to 25-year lifespan and the industry can't spend the same money twice," Mr. Jensen said. "It will either go to develop sustainable ships, or to build more conventional ships to adhere to an artificial speed limit."

Based on the article "Shipowners Seek to Slow Services to Meet Emissions Limits" from the May 10, 2019 issue of the Wall Street Journal, please respond to the following questions:

a.According to the article, ocean transport vessles emit sulfur from the burning of heavy oil for fuel.Illustrate a market equilibrium for ocean transport shipments, assuming no government intervention (e.g. a free market). Identify the equilibrium price and quantity for those shipment services as P0 and Q0, respectively.

b.Identify the socially optimal (allocatively efficient) price (Ps) and quantity (Qs) for ocean shipment services on the same diagram you drew in part (a). Explain the rationale behind your answer. Do we have a negative or positive externality issue here?

c.Identify and label the external cost or benefit per unit of ocean shipment services in your diagram.

d.Identify and label the efficiency loss associated with the free market outcome you identified in part (a).

e.Given the new maritime environmental target for sulfur emissions, how will firms attempt to meet it? Illustrate and explain how that would affect the diagram from part b.