I.Introduction

Each year, hundreds of large ships are sold for dismantling on the tidal beaches of South Asia. The negative impacts of this practice on the environment and human health have been extensively documented. Difficulties in enforcing the Basel Convention with regards to ships, as well as the European ban on exports of hazardous waste outside the OECD, led to the adoption of the Hong Kong Convention in 2009 and the European Ship Recycling Regulation in 2013 respectively. Using the possibility offered by Article 1(2) of the Hong Kong Convention, the Ship Recycling Regulation sets more stringent requirements than the Convention, notably with regards to health, safety and the environment.

Article 29 ('Financial incentive') of Regulation (EU) No 1257/2013 on ship recycling calls on the Commission to report on "the feasibility of a financial instrument that would facilitate safe and sound ship recycling and, if appropriate, accompany the report by a legislative proposal". This report is submitted to comply with that reporting obligation. It first summarises the current regulatory approach to the issues stemming from ship recycling (I). It then presents the state of play of research on the feasibility of a financial incentive for safe and sound ship recycling (II), introducing a new concept, the Ship Recycling Licence (III). The report also contains a summary of stakeholders' feedback (IV) and ends with a conclusion (V).

The Ship Recycling Regulation introduces a clear sequence of instruments. The primary instrument, with a timeline for establishment and a set of related obligations explicitly set in the text of the Regulation, is the European List of ship recycling facilities. From a date to fall at the latest on 31 December 2018, EU-flagged ships may only be recycled in listed facilities. A first list of 18 compliant facilities located in the EU was published in December 2016. Additional facilities located outside the EU might be added to the List from 2017. Because it is underpinned by assessments and site inspections independent from business interests, the European List creates unique reputational added-value to the sector. Ship recyclers may gain exclusive access to the recycling of EU-flagged ships in return for reaching high performance standards. Similarly, ship owners may reinforce their corporate social responsibility credentials and limit their liability related to substandard recycling by having their ships dismantled in facilities on the List. Furthermore, the European List being the only instrument of its kind, it could provide incentive for improvement beyond EU-flagged ships, which could contribute to levelling up the international playing field.

In its Article 29 and Recital 19, the Ship Recycling Regulation alludes to a potential second instrument of a financial nature as a contingency measure against possible risks of circumvention of the European List. Circumvention would consist in ships changing flag to non-EU flags to facilitate dismantling in a yard not included on the European List. Central to this risk is profit maximisation: the market for ship recycling has mostly been captured by sub-standard yards able to offer better prices for end-of-life vessels as a result of low labour costs, high health, safety and environmental externalities, inadequate investment in machinery and little to no hazardous waste management capacity. The result, it has been observed, is that "the polluter pays principle is usually not applied" in ship recycling. A financial incentive would aim to cancel out the profit gap between dismantling in substandard yards and dismantling in yards listed on the European List.

The 2008 Communication proposing an EU strategy on ship dismantling and the 2012 Impact Assessment had both anticipated the staged approach reflected in the Regulation.

II.State of play of research on a potential financial instrument

A financial instrument was already considered in the lead up to the adoption of the Hong Kong Convention. A 2005 study called for a "Ship Recycling Fund" tasked with collecting fees and disbursing funds for environmentally sound scrapping. It also considered the establishment of an "obligatory life insurance" to cover the costs of clean recycling. Taking a different approach, the Hong Kong Convention contains a "funding" clause in its article on technical cooperation, on the basis of voluntary contributions. The clause does not refer to the "polluter-pays" principle. Outside the EU, China introduced a combined financial scheme for the building and recycling of Chinese-flagged ships in 2013; the scheme was renewed in 2016.

In December 2014, the Commission ordered a study to inform the present report. The study was to build on earlier studies and address research gaps, including on the financial means to be generated and disbursed, effects on competition, administrative burden and legal implications with regards to e.g. World Trade Organisation and EU rules. The study also aimed to inform the design of an operational instrument to facilitate safe and environmentally sound ship recycling.

The study was published in June 2016. It discarded several options investigated in past studies on the following grounds: