Why Maintaining Growth, Protecting Container Marketshare, and Fighting Discretionary Cargo Diversion at US West Coast Ports is Imperative to Air Quality Improvements – Globally and Locally

Mike Jacob, Vice President & General Counsel

It is hard to underestimate the importance of steady and predictable growth in the container marketspace to seaports in the United States. This is primarily because – aside from the interstate system – the federal government is not in the business of providing centralized government funding for critical freight and intermodal facilities in our country. That means that the funding obligations for the freight infrastructure that moves our international, intermodal supply chain has fallen almost entirely to state and local government authorities – who most often rely directly on revenue bond financing backed by private revenues or direct operating private user fees – or to private sector players.

And that means in America we will almost always suffer from an underinvestment in our seaport infrastructure – because local governments, state governments, revenue bond underwriters, and private companies can never capture or capitalize on all the national economic benefits of trade. One of the unpleasant but obvious systemic answers to the oft-heard question posed during the pandemic of “where is the additional capacity in the system to account for these types of shocks” is that unless the government were to pay for it itself, why would anyone ever expect the system to finance additional infrastructure and capacity that it doesn’t actually anticipate using?

This underinvestment is compounded further still when one considers the net impacts of the imposition of the Harbor Maintenance Tax on certain ports, which do not receive federal investment dollars commensurate with the revenues they pay into the fund. As a result, in some cases, not only is the federal government absent from the equation of funding seaport infrastructure, sometimes it is actually driving investment away from US seaport infrastructure entirely (Seattle and Tacoma vs Vancouver, BC) or compounding the problem by transferring the revenues from this tax to competitor and rival seaports (Los Angeles and Long Beach vs every other port).

We operate in a volume business which is dependent on bringing economies of scale to bear. When financing is required from the private sector in our industry, it is imperative that we are able to forecast and rely on future volumetric growth - the key for making a successful investment into intermodal supply chains. Intermodal container growth is a driver of a classic virtuous cycle of re-investment: when average and marginal costs for marine terminals and ports per container are decreasing, then the cost per unit for cargo owners decreases, which then means more cargo can move across those same docks which in turn lowers average and marginal costs for marine terminals and ports.

This is especially important when ports and marine terminals face growing non-revenue-generating infrastructure costs – chief amongst those now are clearly the costs of environmental improvements. And, in this way, as the costs of non-revenue producing overhead keep increasing, the best way to offset those costs are to continue to grow revenues.

But if the opposite occurs – and volumes are decreasing while non-revenue producing infrastructure costs are increasing – then that is the opposite of a virtuous growth cycle. Thus, the financing of new infrastructure and new environmental upgrades gets more difficult. As costs

per unit increase, ports and marine terminals see higher average and marginal costs per unit for customers, and they lose discretionary cargo, which in turn sees higher average and marginal costs per unit for customers, and so on.

We are seeing these impacts in the form of loss of competitiveness on the US West Coast. And the timing couldn’t be worse. The immediate outcome is that there is less capacity in the market for financing and funding available for non-revenue generating investments – environmental improvements – at a time when the need for direct investment in these technologies is growing, along with the cost of money itself through higher borrowing rates, and inflation-induced cost increases for equipment.

But, cargo volumes still need to underwrite these expenses. So, when lower volumes are anticipated, or the ports and marine terminals underperform existing financing, the costs of underwriting current and immediate infrastructure and environmental improvements squeeze out all future room for additional revenue bonding. This is just simple math; the same or lower amounts of business cannot underwrite greater and greater levels of capital when there are no new revenue streams, current revenue streams are underwater, or the cost of capital itself is rising faster than the market can bear.

With respect to local air quality, this results in a less than ideal outcome. First, without volume growth to offset the significantly increasing costs of cleaning the air in California and Washington for ports and marine terminals, it inevitably slows the already substantial pace of industry progress towards ever-cleaner operations and blunts the cost-effectiveness of state and federal incentive funds for cleaner equipment. But it also means that local air quality at other ports around the country, which have not yet met the same air quality benchmarks as the Ports of Los Angeles, Long Beach or Oakland, for example, are actually getting worse. If one views all potential exposures of US citizens to the impacts of DPM-based air toxics as being on equal footing, then just moving the pollution around to other ports is truly just resulting in an increase in toxicity for impacted communities. And why should those ports that do not have controls benefit economically at the expense of the self-help ports that have made the investments to reach significant reductions? Obviously, there’s a reasonable business explanation, but from an air quality perspective, this does not make local air quality better – it just increases at a different rate at a different port.

With respect to global air quality, this situation is resulting in higher average emissions of Greenhouse Gasses (GHGs). The Pacific Merchant Shipping Association just commissioned a study that demonstrates that, when discretionary cargo bound for the Midwest market is diverted from US West Coast ports to US Gulf and Atlantic ports, GHG emissions actually increase by an average of 19%. That means if US West Coast ports invest in cleaning the air, and those costs continue to result in a loss of cargo, then from a GHG and Climate Change perspective the industry is actually going backwards. This needs to stop.

The policy solutions here are daunting in their simplicity: Ensure federal and international rules that level the playing field for the imposition of costs across the intermodal supply chain. Avoid local regulations that drive up costs and ultimately crowd out the private financing needed for the development of new infrastructure and environmental projects. Use public subsidies to actually subsidize operations and accelerate investments in ports and marine terminals that will result in lower operating costs, not as band aids or feel-good measures that actually commit ports to higher operating and capital costs.

The bottom line is that we need to adopt state, federal, and international policies that can both yield greater investments in a low growth market and still successfully meet long term goals. It is obvious that we must establish growth and financing goals which are integrated with the needs for investment, and award and prioritize public subsidies and incentivize funding for those ports which can demonstrate the highest rates of return without punishing those who have made significant investments already.

And finally, hard caps on emissions or on total cargo volumes, like those recently floated by the South Coast Air Quality Management District in its concepts for a new Indirect Source Rule, should be viewed for what they are: short-sighted efforts that do not improve air quality, but instead move localized emissions to other port communities and increase global greenhouse gasses. In other words, a mistake of the highest order in an industry that needs growth in order to finance new technologies.