Can Environmental Compliance Be Cost Effective?

During our MAX1 study effort we focused on optimal environmental operational practices, but after we issued our MAX1 final report, the National Fish and Wildlife Foundation asked us to perform a follow-up study that focused more tightly on operating costs.

In the initial effort we avoided this task, because we felt that it would be near impossible to come up with a simple answer. However, Hannah van Hemmen was intrigued by the question and decided to give it a shot.

She collected cost data but knew that cost data by itself does not provide an economics case and she also needed to balance the cost data against the economic benefit of compliance and this is where things became really complicated.

Economic benefit in the case of environmental analysis is very difficult to measure, since what benefit does a shipping company really get from spending money on environmental compliance? In the original MAX1 study we found that dry bilge operations may actually reduce overall operating costs, but this is not the same as figuring out what it costs to install and operate IMO required equipment properly. IMO equipment purchase and operational compliance is a sunk cost and there is no income.

On the other hand, non-compliance can result in very significant fines and ECP costs, and by evaluating these costs and the risk of getting caught, the cost of compliance can be weighed against the cost of non-compliance.

With assistance from the USCG, DOJ, class societies, shipowners and equipment suppliers, Hannah started to put the puzzle together. And, as usual, when you go down the rabbit hole, you start to see unusual things and these findings are provided in the final report.

When mulching all the numbers, there were interesting indications that dumb compliance (I buy the equipment, I spend money on calibrations, maintenance and operations by following the herd) is not always cost effective when weighed against the risk of incurring the cost of being fined for non-compliance.

In essence, this argues that non-compliance fines still were not high enough to clearly make non-compliance economically ineffective.

Hannah arrived at this conclusion by exercising different cases through a complex spreadsheet that she built, but in building the spreadsheet, she discovered that environmental compliance is not a one size fits all exercise and varies from ship to ship and from shipowner to shipowner. Interestingly, some compliance cost approaches are much more cost effective than others. The study indicated that if a shipowner optimizes its compliance approach on an individual ship level, in most cases, compliance can be competitive with, or even outcompete, non-compliance.

These trade-offs vary from shipowner to shipowner, and this is why NFWF asked us to publish the spreadsheet so shipowners can perform their personal evaluation. Like all software, the software start-up effort can be daunting, and if you would like our assistance in running the evaluation, please do not hesitate to give us a call.