Low-sulfur fuel consumption: Marine policy implications based on game theory

Abstract

The tightening maritime regulations toward managing sustainability has heightened the demand for low-sulfur fuel (LSF) consumption. The price difference between high-sulfur fuel (HSF) and LSF poses a burden on ship operators’ profits pursuing sustainability. Therefore, it is paramount for policymakers to find ways to improve current market conditions in the pursuit of maximum social welfare. We address a novel pricing model for LSF and HSF under a government subsidy incentive system, considering two different market structures: monopoly and duopoly. A two-stage game model is developed, based on the choices of ship operators, the bunker suppliers and the government. Finally, the optimal level of government subsidy, optimal price for LSF and HSF, and the bunker suppliers’ profits are determined. The results show that government subsidy can encourage more consumers to purchase LSF. However, a larger environmental impact would be generated as the market total demand would increase. An optimal subsidy level can be derived to maximize total social welfare. In addition, social welfare can be affected by the market structure. For example, the social welfare in a duopoly setting is larger (smaller) than that in the monopoly setting when the environmental impact of the LSF product is low (high). The results imply that subsidizing policies for ship operators should be customized according to the objective of the government (i.e. to minimize environmental impact or maximize social welfare), technological maturity of ship engines built for LSF, and market structure of bunker suppliers.