REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the feasibility of a financial instrument that would facilitate safe and sound ship recycling
Date: 2017-08-08
Institutions: Directorate-General for Environment, European Commission
Subjects: EU financial instrument, environmental standard, hazardous waste, marine pollution, prevention of pollution, recycling technology, ship's flag, vessel, waste recycling

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 8.8.2017  COM(2017) 420 final   REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the feasibility of a financial instrument that would facilitate safe and sound ship recycling  
 
 
I. 

INTRODUCTION 

Each  year,  hundreds  of  large  ships  are  sold  for  dismantling  on  the  tidal  beaches  of  South 
Asia1. The negative impacts of this practice on the environment and human health have been 
extensively  documented2.  Difficulties  in  enforcing  the  Basel  Convention3  with  regards  to 
ships, as well as the European ban on exports of hazardous waste outside the OECD4, led to 
the  adoption  of  the  Hong  Kong  Convention  in  20095  and  the  European  Ship  Recycling 
Regulation  in  20136  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 recycling7 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  20168. 
Additional facilities located outside the EU might be added to the List from 20179. Because it 

1 NGO Shipbreaking Platform, List of all ships scrapped worldwide in 2016, 
http://www.shipbreakingplatform.org/shipbrea_wp2011/wp-content/uploads/2017/02/Stats-Graphs_2016-List_FINAL1.pdf 
2 See notably Science for Environment Policy, Issue 55, June 2016, 
http://ec.europa.eu/environment/integration/research/newsalert/pdf/ship_recycling_reducing_human_and_environmental_impacts_55si_en.p
df  
3 Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal was 
adopted on 22 March 1989; http://www.basel.int/theconvention/overview/tabid/1271/default.aspx 
4 Regulation (EC) No 1013/2006 of the European Parliament and of the Council of 14 June 2006 on shipments of 
waste, http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1454069470717&uri=CELEX:02006R1013-20160101 
5 Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships. To enter 
into force, the HKC requires ratification by 15 States representing no less than 40% of the world fleet’s tonnage 
and a combined maximum annual ship recycling volume of not less than 3% of the tonnage of the fleet of the 
ratifying states. As of February 2017, the HKC was yet to enter into force, having been ratified by five countries, 
including EU Member States France and Belgium and no major ship recycling state 
http://www.imo.org/en/About/conventions/listofconventions/pages/the-hong-kong-international-convention-for-the-safe-and-
environmentally-sound-recycling-of-ships.aspx 
6  The  Regulation  has  a  specific  focus  on  all  ships  trading  in  EU  waters  and  ships  sailing  under  the  flags  of 
Member States of the Union. The Regulation not only mirrors the requirements of the HKC, it also adds stricter 
environmental and safety requirements, as authorised by Article 1(2) HKC. 
7 'The Ship Recycling Regulation' - Regulation (EU) No 1257/2013 of the European Parliament and of the 
Council of 20 November 2013 on ship recycling; http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32013R1257 
8 http://ec.europa.eu/environment/waste/ships/pdf/list_ship_recycling_facilities.pdf 
9 The Commission is currently reviewing 22 applications for inclusion on the List received from ship recycling 
facilities located in China, India, Turkey and the USA. 

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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 List10. 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 recycling11. 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  dismantling12  and  the  2012 
Impact Assessment13 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 study14 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 

10  Article  29  contains  the  reporting  obligation;  Recital  19  goes  in  greater  details,  underlining  the  flag-neutral, 
shipowner-focused approach of the potential incentive. 
11 See also Milieu&COWI, Study in relation to options for new initiatives regarding dismantling of ships – Note 
on the ship dismantling fund, Pros and cons of the three options, p. 17, August 2009 
http://ec.europa.eu/environment/waste/ships/pdf/fund_note.pdf 
12 Communication COM (2008) 767 final of 19 November 2008 presenting an "EU strategy for better ship 
dismantling", and its impact assessment in Commission Staff Working Document SEC(2008) 2846: "if it turns 
out that the […] reactions by market participants do not deliver the desired result, the option of a funding system 
implementing the 'polluter pays' principle should be reconsidered" 
13 Impact Assessment accompanying the proposal for a Regulation on ship recycling (SWD(2012) 47 final), 
http://ec.europa.eu/environment/waste/ships/pdf/Impact%20Assessment.pdf "Should compliance problems 
continue, further actions could be undertaken at EU level like the setting up of an EU ship dismantling fund." 
14 The Ship Recycling Fund – Financing environmentally sound scrapping and recycling of sea-going ships, 
Ecorys (2005) http://www.shipbreakingplatform.org/shipbrea_wp2011/wp-content/uploads/2011/11/ECORYS-
survey-on-a-ship-recycling-fund.pdf 

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"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 studies15 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  201616.  It  discarded  several  options  investigated  in  past 
studies on the following grounds: 

Category of option 

(Non-financial instruments) 

Instruments obliging 
shipowners to collect the 
required capital through a 
privately managed 
mechanism that is attached 
to a unique ship 

Option 
(Non-financial 
measures, e.g. 
penalties on 
penultimate owner) 

Ship Recycling 
Guarantee 

Ship Recycling 
Account 

Ship Recycling 
Insurance 

Instruments obliging 
shipowners to contribute to a 
public regime (a fund) based 
on payments to be made 
when accessing EU ports. 

Port levy 

III.  THE SHIP RECYCLING LICENCE  

Main shortcoming 
(Easy  to  circumvent  or  stimulating  additional 
lack  of 
circumvention  behaviour,  and/or 
suitable enforcement mechanism.) 

Difficult to transfer in case of change of 
ownership; disproportionate to ships with low 
frequency of calls at EU ports. 
Difficult to transfer in case of change of 
ownership; disproportionate to ships with low 
frequency of calls at EU ports. 
Lack of “insured object” due to lack of 
unforeseen event, other than loss of the vessel 
due to an accident. Not feasible as separate 
instrument. 

High administrative burden for ports; potentially 
not WTO compliant; possibly considered as tax 
outside the competence of the EU. 

The  2016  study  identifies  a  new  option  –  the  Ship  Recycling  Licence.  The  Licence  is  an 
attempt  at  combining  the  strengths  of  the  discarded  options  while  overcoming  their 
drawbacks. Its key principles are the following:  

15 See notably Ecorys 2005 for Greenpeace, COWI/Milieu 2009 for the Commission's Impact Assessment, 
Profundo 2013 Financial mechanisms to ensure responsible ship recycling, Milieu 2013 for the European 
Parliament. It should be noted that existing studies– except for the 2016 study carried out to inform the present 
report – all pre-date the adoption of the Ship Recycling Regulation in its final form. 
16 Ecorys, DNV-GL, Erasmus School of Law, Financial instrument to facilitate safe and sound ship recycling, 
June 2016. http://ec.europa.eu/environment/waste/ships/pdf/financial_instrument_ship_recycling.pdf 

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1.  Ships calling at EU ports would obtain a prior licence from a centralised agency (e.g. 
an  existing  European  agency).  The  licence  would  be  an  instrument  of  a  public, 
administrative law nature;  

2.  When  applying  for  the  Licence,  ship  owners  would  be  charged  a  contribution.  The 
contribution  would  cover  a  small  administrative  retribution  (0.8%)  and  a  premium 
earmarked to the individual ship (99.2%); 

3.  The premium levied would depend on the capital amount that needs to 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. The premium 
would also depend on the timeframe within which to accumulate the capital;  

4.  The full capital amount would be paid to the ultimate owner of the ship on a condition  

that the ship was sent to a ship recycling facility on the European List;  

5.  The  penalty  for  not  opting  for  recycling  in  a  facility  included  in  the  European  List 

would be a forfeiture of the accrued rights; 

6.  To  avoid  a  system  working  disproportionally  against  ships  with  either  very  high  or 
very  low  port  call  frequency,  the  Licence  validity  would  be  time-based  rather  than 
based  on  the  number  of  calls  (i.e.  a  one-month  licence  would  be  cheaper  than  an 
annual  licence,  but  provide  for  a  lesser  right  to  payment  at  end-of-life).  Refined 
criteria could be envisaged, e.g. to benefit ships designed for easier recycling. 

The study identifies some of the potential impacts17 of establishing a Ship Recycling Licence 
and  outlines  considerations  for  implementation18  including  the  role  of  a  European  Agency 
(new  or  existing),  the  use  of  forfeited  funds  and  a  simple  scheme  for  third-country  flagged 
ships. 

IV. 

STAKEHOLDER FEEDBACK  

The  European  Economic  and  Social  Committee  (EESC)  and  a  variety  of  stakeholder 
associations have expressed a position on the Ship Recycling Licence. 

The  EESC  adopted  an  opinion  on  the  matter  on  19  October  201619.  The  opinion  labels  the 
Ship  Recycling  Licence  "a  progressive,  enforceable  financial  mechanism"  and  calls  on  the 
European  Commission  to  establish  it.  The  NGO  Shipbreaking  Platform  –  an  umbrella 
organisation  for  various  NGOs  involved  in  ship  recycling  –,  trade  union  confederation 
IndustriAll and SEA EUROPE (the Shipyards and Maritime Equipment Association), issued a 
joint statement supporting the conclusions of the EESC opinion on 20 October 2016. 

17 See section 4 of Ecorys, DNV-GL, Erasmus School of Law June 2016 (a matrix of impacts depending on the 
cost of the Licence can be found page 83). 
18 See section 5.2 of of Ecorys, DNV-GL, Erasmus School of Law June 2016. 
19 EESC opinion: Shipbreaking and the recycling society, EESC-2016-00456. Adoption: 202 for, 2 against, 3 
abstentions. http://www.eesc.europa.eu/?i=portal.en.ccmi-opinions.38327 

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ESPO, the association of European ports, withdrew its opposition to the financial incentive in 
2015, considering that the Licence avoids the main drawback of an earlier concept whereby 
ports would collect the contributions.  

Shipowner  organisations  ECSA  (European  Community  of  Shipowners  Associations),  ASA 
(Asian Shipowners Association) and ICS (International Chamber of Shipping) reacted to the 
publication of the study in July 2016. Their position is that the Ship Recycling Licence would 
disrupt  efforts  to  ratify  the  Hong  Kong  Convention.  A  legal  opinion  commissioned  by  the 
shipowner  organisations  further  describes  the  Ship  Recycling  Licence  as  a  "primary  fiscal 
measure",  suggests  that  the  EU  would  have  no  competence  to  administer  an  EU  ship 
recycling  scheme  and  infers  an  incompatibility  with  the  UN  Law  of  the  Sea  Convention 
(UNCLOS),  with  World  Trade  Organisation  rules  and  the  Principle  of  Common  but 
Differentiated Responsibilities. It should be noted that several of these points are addressed in 
the 2016 study ordered by the Commission20. 

In  contrast,  the  NGO  Shipbreaking  Platform  published  a  position  paper  in  October  201621 
supporting  the  legal  arguments  of  the  2016  study.  The  analysis  stresses  that  the  Ship 
Recycling  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 analysis also notes that 
the  Ship  Recycling  Regulation  constitutes  a  complement  of  action  to  the  Hong  Kong 
Convention,  as  authorised  in  the  HKC  itself  and  as  generally  encouraged  under  the  UN 
Convention on the Law of the Sea (UNCLOS),  where the shipowners' organisations tend to 
see a conflict of legal regimes. 

V.  CONCLUSION 

The  Commission  acknowledges  the  merits  of  a  potential  Ship  Recycling  Licence,  which 
represents the most promising option investigated thus far. Nevertheless, the Commission is 
aware  that  a  number  of  issues  deserve  further  analysis,  including  with  regard  to  the 
compatibility of such a potential financial instrument with EU and international law. 

In line with the gradual approach first described in the 2008 Commission Communication and 
2012 Impact Assessment and reflected in the final text of the Ship Recycling Regulation, the 
need for additional measures on financial incentives will be reassessed at a later stage, based 
on an analysis of the use and effects of the European List of ship recycling facilities. 

20 Annexes B ("WTO compliance") and C ("Extraterritoriality and the SRL") of the 2016 study underline that (a) 
there is a clear legal case not to identify the SRL with a "fiscal measure", (b) the EU would be acting within the 
remit of its competence, (c) the SRL precisely avoids discriminating against ships flying under the flag of third 
countries and (d) case law points to the strong likelihood of compatibility with WTO rules. 
21  NGO  Shipbreaking  Platform,  Make  the  Polluter  pay!  Why  we  need  the  EU  Ship  Recycling  Licence,  
http://www.shipbreakingplatform.org/shipbrea_wp2011/wp-content/uploads/2016/10/Position-Paper-
FINANCIAL-INCENTIVE-Final-Version.pdf 

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