@ilovejedd: It's an option for the *cover* being generated for the sleep screen (in the Kobo driver). (Also applies to the rest of the Library thumbnails).
(Which is why what Jon proposed is so roundabout. If you have ImageMagick on hand, you can do the same thing manually [
-grayscale Rec709Luma -ordered-dither o8x8,16]
).
Other than that, no-one has ever bothered with adding any sort of image processing during the conversion/upload pipeline, probably with good reason. (i.e., there are much better tools for the job (KCC?), because you usually want something very very specific depending on the device, and that wouldn't gel well with the rest of what Calibre's doing anyway).