E.U. Ship Recycling: No Financial Instrument, For Now

A 2016 E.U. study identified a the Ship Recycling Licence as a promising way to ensure that E.U.-flagged ships were recycled responsibly – avoiding the environmental and labor issues that have plagued the industry on the Indian sub-continent. 

The 2016 report was based on the study conducted by Ecorys, DNV-GL and the University of Rotterdam/Erasmus. The Licence would involve ships calling at E.U. ports obtaining a prior licence and pay a fee that would be accumulated to bridge the financial gap between dismantling in a substandard yard and dismantling in a yard included on the European List at the end of the ship's lifetime.

At the time, shipowner organizations European Community of Shipowners Associations (ECSA), Asian Shipowners Association (ASA) and the International Chamber of Shipping (ICS) voiced their concern that the licence would disrupt efforts to ratify the Hong Kong Convention and that the legalities of the proposal were incompatible with the U.N. Law of the Sea Convention (UNCLOS), with World Trade Organisation rules and the Principle of Common but Differentiated Responsibilities. 

In contrast, the NGO Shipbreaking Platform argued that the Licence would not cause the "hindrance to trade" feared by the shipowner organisations as the key argument for incompatibility with World Trade Organisation rules, be it trade in goods, trade in vessels or trade in steel at end of life. 

The European Commission has now issued a report indicating that the issues deserve further analysis and concluding that “the need for additional measures on FI will be reassessed at a later stage.” 

Dr Nikos Mikelis, Non-executive Director of cash buyer GMS, has this to say:

In line with the requirements of Article 29 of the European Regulation on Ship Recycling (EUSRR), the European Commission in September 2014 invited tenders and then employed consultants to study and report on the establishment of a financial instrument (FI) that could be enacted to supplement the EUSRR so as to discourage the avoidance of the regulation through flagging out. 

The report of the consultants was published in June 2016 proposing the establishment of a Ship Recycling Licence whereby ships, of any flag, would have to pay a monthly or annual licence that would permit them to enter E.U. ports. The money collected in this way would make up a ship recycling fund which would accumulate between 2.5 and 4.5 billion Euros by the 25th year of the operation of the scheme. This fund would then pay around $22 per LDT to E.U. flagged ships that are recycled in line with the EUSRR. Conversely, E.U. flagged ships sold outside the E.U. would loose their share of the fund, as also will E.U. flagged ships that have not been recycled in line with EUSRR.

During the development of the Hong Kong Convention, the idea of an FI was proposed on two separate instances to IMO by NGOs, and on both occasions it was decided to reject the proposal as impractical. Later on, the first draft of the EUSRR that was produced by the Commission in 2012, attempted to deal with the problem of flagging out through a provision for severe financial penalties to shipowners whose ships are sold and flagged outside E.U. in the six months prior to being recycled. These provisions did not survive the scrutiny of the European Council, but as a compromise with the Green Party’s Rapporteur of the European Parliament, further analysis was called for. 

Anybody with a sound understanding of the shipping industry could have told the Parliament’s Rapporteur that the establishment of an FI to discourage flagging out and to encourage compliance with the EUSRR would be an unworkable and wasteful bureaucratic nightmare. In fact, I tried to do just that in 2013 when I met the Rapporteur, but his focus was political and not rational. Although the European taxpayer could have been spared a million Euros in unnecessary research and studies, at least the Commission has come to the logical conclusion to do nothing (for the time being). 

Casper Andersen, Director of E.U. affairs for Danish Shipping, has this to say:

We see great challenges and many loose ends to the practical transposition of the licensing idea. Especially the calculation of the cost-gap between recycling at an E.U.-approved and a nonapproved facility, when the ship is to be recycled 10-15 years from now, is problematic. The Commission suggests it will be this difference that determines the size of the licence premium, but what happens when the ship is sold and who ensures that the market value of the ship will not degrade compared to ships not covered and therefore cheaper to buy.

Danish Shipping fears retaliation from third countries as also ships flagged outside the E.U. are included as soon as they call at an E.U. port. This was the case when the Commission tried to include international aviation in the E.U.’s emissions trading system.

We can only envisage that third country shipowners, with support from their flag-state, will reject paying into the licence scheme, which will be tremendously distortive to the competitiveness of Danish shipowners, who make a third of all their calls to European ports.

The Commission proposes to first assess the use and effects of the white list of approved facilities before recommending new legislation. We support the Commission’s wait-and-see approach, as the list rightfully needs time to work. It is essential that facilities with significant environmental and safety improvements make the list – even if they are geographically situated in areas generally associated with unacceptable conditions. We need better conditions for recycling here and now – not only in many years’ time until the licence scheme takes effect.

The NGO Shipbreaking Platform has this to say:

The Platform urges the E.U. to take action now, as it is well documented that shipowners will with ease be able to circumvent the E.U. Ship Recycling Regulation by simply swapping the flag of their vessel to that of a non-E.U. state.

All E.U.-flagged vessels will have to be recycled in an E.U.-approved facility starting from the end of 2018 at the latest. Only once it is clear what the effects of the E.U. List are on the recycling choices of shipowners, will the Commission consider whether to go ahead with introducing the Ship Recycling Licence. Therefore, if shipowners choose to recycle their vessels responsibly in a facility on the E.U. List and do not flag out in order to circumvent the Ship Recycling Regulation, the Commission believes that it will not be necessary to introduce a financial mechanism.

However, flagging out at end-of-life is a practice which is already widespread. Most shipowners sell their obsolete vessels to cash buyers. These scrap-dealers become the new owners of the ships and both re-name and re-flag the vessels for their last voyage to the beaching yards in South Asia. Swapping the flag of a ship is easy and makes it very simple for cash buyers and shipowners to circumvent the law. The motivation for doing so is also simple: dirty and dangerous shipbreaking brings higher profits due to the lack of investments in infrastructure, illicit handling of hazardous wastes and extremely poor working conditions. 

For these reasons the NGO Shipbreaking Platform urges the E.U. Commission to not wait for the effects of the E.U. List, but instead show that it intends to take all measures possible to change the current deplorable shipping practices and commit now to making a legislative proposal to introduce a FI.

“The huge benefit of this licence scheme is that it will also apply to non-EU flagged ships, meaning that the scope of the EU Ship Recycling Regulation will be much wider and will truly be a driving force for change in the shipping industry”, says Ingvild Jenssen, Director of the NGO Shipbreaking Platform. “Those shipowners that are already taking responsibility for their end-of-life fleet should be supportive of the Ship Recycling Licence, as it will create a level playing field ensuring that also their competitors pay the price of clean and safe ship recycling,” she adds.

Legislation based on flag state jurisdiction alone is far too easy to circumvent. That is why more policies aimed at improving the social and environmental performance of shipping are being enforced via port state control. The Ship Recycling Licence is as such in line with international trade law. Taking also into account the widespread acknowledgement that FIs are key in ensuring the success of environmental policies, it seems obvious that a return scheme for ships is needed to change the behavior of shipowners that currently earn profits at the detriment of workers’ health and lives and the environment.  

The E.U. report is available here.