Preliminary costs and shipbuilding
Building a ship from scratch requires a huge amount of capital related to design, materials, equipment, and construction (Fig. 2, https://commons.wikimedia.org/wiki/File:Shipbuilding.png). This amount of capital is indeed substantial and pertains to a main barrier to entry in the shipping industry. This barrier does not allow shipping to be concerned as a market with perfect competition.
Shipyards offer attractive projects and decrease labour and material costs so that final construction costs are lower and more appealing to potential customers and of course shipowners and investors need to know the estimated vessel’s cost before placing an order. The steel, other materials, engines, power generator, core equipment and labour hours are the main costs involved when building a new ship. Total cost can be changed due to variations during the preliminary design phase according to requirements. Concept design costs are the priority to a potential shipowner (Fig. 3, https://commons.wikimedia.org/wiki/File:CFD_Analysis_of_Aquarius_Eco_Ship.jpg).
Further details may be considered later. Dimensions, size, and general parameters are given prior to more complex characteristics and requirements. Rapid and flexible adjustments are crucial regarding the early stage of shipbuilding. Typically, labour and materials costs make up for approximately 70% of total shipbuilding costs. Steel usually accounts for approximately 30% of the material costs, the same as the ship’s main engine (Lin and Shaw 2017) (Fig. 4, https://commons.wikimedia.org/wiki/File:Monte_HM_k130.jpg).
A quantifiable structure consisting of principal features and individual sub-items leads to an estimation based on a combination of those principal features and can be easily adjusted according to secondary features. Calculations and issues that pertain to direct costs include length, breadth, depth, design, scantling draft, displacement, maximum speed, maximum continuous rating power (MCR), revolutions per minute (RPM), thickness of the self-polish antifouling (SPAF), deckhouse height, layers of the lashing bridge, number of (e.g.) reefer containers, and number of crew. Different type of steel, according to durability, flexibility and other crucial factors is a variable when estimating material costs. Here the focus is on total cost minimisation, but the very crucial parameter of dismantling cost should not be left out. Shipbreaking had migrated to the East because of increasingly stringent regulation in the West, a situation that is exacerbating total cost of ownership, as dismantling and shipbreaking is performed under dubious, if existent, standards.
Sustainable energy systems and their costs
The usage of sustainable energy is an increasing concern, worldwide (Fig. 5, https://commons.wikimedia.org/wiki/File:What_are_the_safest_and_cleanest_sources_of_energy%3F.png). Especially for the shipping industry, shipowners deal with yearly operational cost and annual investments costs, which are modified based on fuel prices, duration, and number of calls. A Mixed Integer-linear Programming (MILP) approach is a very reliable and fast method to solve problems full of combinations to proceed in finding costs for maritime operations.
There are many examples of investment costs’ analysis found on common engine energy conversion systems (Bernacki and Lis 2021). Ownership and operating costs increase with the reduction of GHG emissions (but on the other hand social and environmental costs increase with emissions). Unfortunately, the increase of costs is not linear compared to the baseline and consensus from the industry and beyond is required for sustainable priorities to be aligned.
Infrastructure investments
Improved seaport access and expansion of capacity can cause direct positive economic effects. A seaport (Fig. 6, https://commons.wikimedia.org/wiki/File:Tianjin_port.jpg) ensures seamless continuity between land and sea (Li et al. 2020). Sustainable impact due to port changes concerns external costs, energy consumption, operating costs, and transit time. Shipping operators, shipowners, and shippers benefit from reduction in transit and operational costs. Reductions in operating cost often leads to increased vessel sizes (cf. jumboisation), using economies of scale, which account for a big percentage of the total discounted economic effects (Baldi et al. 2019). Increase in vessel sizes triggers the need for adjustments and port investments to accommodate new vessels. Upgrading a port’s facilities is a costly project which helps keeping up with market changes.
Such an investment to a port’s fixed assets provides improved quality and transport efficiency. An upgraded port has as a result shorter service times and lower cost for freight carriers and economic benefits for port operators. Total generalized transport costs are reduced, given that everything else remains unchanged, thus affecting the route decision by freight carriers in favour of the upgraded port (Alamoush et al. 2021). Indirect effects are also passed through price mechanisms on to other companies. Generalized maritime transport costs consist of shipping operating costs and transit time costs, two sectors where port investments are crucial (Brooks et al. 2022). Infrastructure improvements either reduce travel time or in-port congestion allowing larger ships, making transportation services more efficient (Alamoush et al. 2021). Again, cost minimization can be directly associated with social and environmental costs, as ports and related transportation infrastructure a priori cannot be sustainable, as for this infrastructure to materialize, an ecosystem must be destroyed. Here, concepts of mitigating externalities can be explored, along with more research to find sustainable solutions for port and transportation infrastructure to coexist with nature.
Transport costs can be separated in sub-categories. Operating costs will include administration, repairs and maintenance, staffing, stores, lubricants, and insurance. Voyage expenses will include fuel cost (Fig. 7, https://commons.wikimedia.org/wiki/File:MSC_Preziosa,_WPAhoi,_Kaiser-Wilhelm-Hafen,_Hamburg_(P1080387).jpg) and port dues and lastly, capital costs include interest and capital repayments. The daily shipping cost can be calculated with the daily operating cost, the daily voyage cost, and the daily capital cost. The bigger the vessel, the less fuel costs contribute to total voyage expenses, again, because of economies of scale. Yet, these economies tell us nothing of the social and environmental costs that are maximized when accounting cost is minimized. Worse still, these costs may be very difficult to uncover due to the scope of the shipping industry. A factory can maybe do little to cover the pollution it instigates, and a vessel is a polluting factory constantly on the move. Again a collective consensus from the industry and beyond is required to redefine what profit and cost is, as with the present context, in order to minimize the cost for a specific profit and loss account, the industry is creating an ocean of social and environmental costs.
The environment
Ship exhaust emissions (Fig. 8, https://commons.wikimedia.org/wiki/File:Ship_Tracks_off_the_California_Coast_-_NASA_Earth_Observatory.jpg) are a very important element of shipping externalities and costs. Emissions from every vehicle, vessel, or factory are an economic and social burden causing adverse environmental effects. For many countries, emissions play an important systemic role due to heavy ship traffic and dense port traffic (Tzannatos Ernestos 2010). Premature deaths related to shipping are most likely caused by PM emissions whereas most shipping externalities refer to global temperature rise, acidification, eutrophication, and reduced quality of life. For shipping emission externalities close to shore, one may consider the equivalent of damages imposed to rural areas.
Plastic is one of the most used materials worldwide, although destructive in terms of ecosystemic balance, as it is responsible for causing marine ecosystem degradation. Plastic debris (Fig. 9, https://commons.wikimedia.org/wiki/File:Plastic_Pollution_in_Santa_Luzia,_Cape_Verde.jpg), making up for more than 80% of marine pollution, is posing a great threat to the marine environment (Aretoulaki et al. 2021). Plastic waste usually originates from inland sources, although many ships might carry plastic parts as cargo or dump microplastics. Marine litter dumping, either deliberate or not, and accidental loss of cargo bears a potential direct cost associated to marine litter, while lost containers are a threat due to their size and ability to float. Smaller particles of litter might interfere with propellers, being responsible for engine shutdown or propeller damage and subsequent repairs, which translate into urgent expenses for the shipowner. It is of great importance that all ships follow necessary regulations regarding dumping so that socioeconomic impact from plastics and waste in the oceans is minimized (Argüello 2020). Unfortunately, as mentioned above, only a small percentage of plastic originates from ships, thus limiting plastic dumping from vessels might not have direct positive results overall.
Noise is one of the external costs transportation modes must deal with. Road hauls and inland terminals are usually a noise source impacting the surrounding environment and ecosystem. More specifically, noise is considered an environmental pollutant which impairs health of residents, seafarers, and wildlife. Unfortunately, noise pollution is not yet treated as the threat it really is, although it has been recognised by the World Health Organization as a threat for health and a factor for reduction of property values. In the maritime sector, ports are rarely built near residential areas, thus have reduced consequences compared to inland modes, with reference to noise (Sun et al. 2022).
Onboard ships, the engine room is the principal noise generator. On most ships, noise levels over 100 dB(A) and even up to 110 dB(A) are present. A result of noise exposure combined with vibration and heat, is anxiety symptoms on the crew. Seafarers exposed to loud noises such as engineers in the engine room, are also at risk of hearing loss. The SOLAS convention includes additional requirements regarding noise levels on board ships. Noise is not yet perceived as an existing danger; social awareness has a long way to go until the industry fully understands noise related costs and impact. Raising awareness for noise related risks and other external costs related to ship operations is urgent (Tzannatos Ernestos 2010; Vukić et al. 2021).
Internalizing external costs
Shipping belongs to an intermodal transport network, as there are numerous two-way flows of products between ships, inland waterways, rail, track, and aviation. During decision-making there are many costs such as social and environmental which are not considered due to their unspecified nature. Congestion, accidents, and noise costs are only some of the problems slowly starting to get recognition (Dominguez-Péry et al. 2021). Keeping in mind that demand for transport is expected to grow in the following years, a corresponding increase of externalities and their costs is unavoidable.
The European Commission suggests an 25% increase of inland waterways and short sea shipping transport to minimise road transport externalities. Full impact caused by the transport sector can only be realized when we internalise all external costs. Principles such as the ‘polluter pays’ carbon pricing, emission trading schemes, and infrastructure charging mechanisms, can help internalising costs and accounting full costs of transportation in decision making. The Eurovignette system is an effective example of covering part of vehicles’ external costs. A similar system can be used in maritime transportation to reduce external costs and overall social impact. Papers emphasizing short sea shipping and external costs are rather scarce in comparison to road or rail alternatives.
The concept of external costs was developed by Arthur Cecil Pigou, who published the book ‘Economics of Welfare’ in 1920, although Alfred Marshall had already proposed the same concept. After the abovementioned study, more work has been conducted in this field (cf. Stavroulakis et al. 2021a, 2021b, 2020; Koliousis et al. 2019, 2018a, 2018b, 2017; Stavroulakis and Papadimitriou 2017, 2016). Externalities in general can be either positive or negative. More specifically, regarding the transport sector, we are talking about significant negative externalities, known as external costs (Vierth and Merkel 2020; Ramalho and Santos 2021). External costs can be categorised in accidents, congestion, noise, air pollution, climate change, well-to-tank (WTT) emissions and infrastructure land take. Only variable external costs can be internalised. Ship accidents can be considered as rare events and although an accident has significant impact, it only represents a small percentage of total costs and externalities.
Congestion costs found in most transportation modes include time costs, costs related to reduced reliability and missed activities due to delays. Air pollution accounts for impact on health, especially caused by particulates, nitrogen oxides and sulphur.
When cost of transportation includes externalities, it is easier for travellers to choose the greener, less harmful route. Paying for social costs is more likely to lead to an optimal outcome when making haul decisions. Taxes and charges are the main ways companies can fairly internalise travel externalities. Usually, the user is charged with an extra fee equal to the price of marginal external costs created by their decisions. A one hundred €/tonne of CO2 fee is suggested by the EU handbook to polluters.
Corrective taxes, fees and regulations can internalise external maritime services costs. Taxing a service will enable decision-makers and buyers to consider the full cost and effect of their consumption movements. Sweden is an example of a country which has chosen to internalise the biggest percentage of shipping costs. Sweden’s tactic is a unique regulatory system of fees based on ships’ environmental performance. The European Commission has stated the need for internalization of external costs through regulations, fees, charges and taxes, also known as the ‘polluter pays’ principle. Taxes should include socioeconomic costs related to transport activities. Further research is needed due to uncertainty and various hypothetical circumstances found in shipping. Internalization is a complex procedure with a wide margin of error.
Aviation and the maritime sector are both international industries and face difficulties in coordinating their externalities. Most of their external costs measured are related to air pollution and GHG emissions (Willer and Johns 2021). The State of California adopted a trading scheme in 2002, triggering engine modifications to reduce harmful emissions and thus minimise external costs. Combining several countries’ systems to calculate fees and charges, is a difficult and complex challenge due to differing taxing mechanisms.
Regular hauls cause damage to infrastructure, which constantly needs maintenance and re-investments. Free, public infrastructure is rarely respected due to the absence of a total cost approach and the ‘curse of the commons’. Regarding Sweden’s effort to contribute to greener shipping and internalization of costs, the Swedish Maritime Administration will issue SOx certificates to ships using low Sulphur fuels and have installed NOx abatement technologies. On the one hand the shipping industry’s importance cannot be overstressed, but on the other, an army of very serious problems arise from the way this industry is governed, i.e., the culture of cost minimization. And the present literature review has not even gone into the matter of ethical treatment of shipping employees, where the industry also faces serious issues, albeit with its gender representation, and general HR practices. Based on the above, a total cost framework seems to surface (Fig. 10). In order for shipping to be actually profitable, all tenets of total cost have to be taken under consideration.