(Or will the Hong Kong convention solve the world's ship recycling hot mess?)
Posted on: 6 July 2023
On 7 June 2023, the European Commission (the “Commission”) closed its consultation on the much-maligned EU Ship Recycling Regulation (the “SRR”) seeking views on its improvement from shipowners, recycling yards, national authorities and other industry participants. The consultation sought to evaluate how well the SRR is functioning against a backdrop of lacking recycling capacity and take-up of recycling at EU approved facilities, say in an article WFW’s Partner Nick Walker, Senior Associate Valentina Keys and Associate Lauren Buchan.
In the wake of the consultation and in eerily timely fashion, Bangladesh and Liberia ratified the Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships (the “Hong Kong Convention”). This triggered the criteria¹ for the Hong Kong Convention to enter into force in two years’ time, on 26 June 2025.
The SRR has long been viewed as the “stricter” version of the Hong Kong Convention and an attempt to plug the gap of a missing global framework for enforcement against poor standards of ship recycling. We now have this framework although, as discussed in this note, this does not automatically mean that the SRR will (or should) be redundant. The additional complicating factor in this regulatory miasma is the Basel Convention and the Ban Amendment in particular, which retains the potential to prevent a harmonised global system for the environmentally sound disposal of end of life vessels.
It seems likely the Commission’s consultation was prompted by the awareness that the Hong Kong Convention was close to being implemented; Bangladesh has been working towards the Hong Kong Convention standards for some time, and there have been rumours that one of the big flag states was about to accede for some time too. The Commission is also obliged to review and, if appropriate, amend the SRR no later than 18 months prior to the date of entry into force of the Hong Kong Convention.² It is certainly possible that as part of that review required in no later than six months’ time it will consider the consultation responses.
While the announcement is fresh and we have two further years to wait, this briefing note raises some of our immediate questions on what the global framework for ship recycling will look like.
The Ship recycling Regime: a recap
The Hong Kong Convention was adopted in 2009 and aims to improve the safety and standard of ship recycling so that it does not pose unnecessary risks to human health, safety and the environment as well as managing hazardous materials on a ship. It covers a ship’s entire life: from design and construction (with implications for the shipyard), operation through the now familiar Inventory of Hazardous Materials (“IHM”), preparation for recycling (both with related obligations on ship owners, managers and charterers) and ultimately the recycling itself (with obligations on ship recycling facilities).
There are now 22 contracting states: Bangladesh, Belgium, Republic of the Congo, Croatia, Denmark, Estonia, France, Germany, Ghana, India, Japan, Liberia, Luxembourg, Malta, the Netherlands, Norway, Panama, Portugal, São Tomé and Príncipe, Serbia, Spain, and Turkey.
Meanwhile, the SRR has been in place since 2013 coming into force incrementally up until 2020. It essentially transposed into EU law the provisions of the Hong Kong Convention. The scope of the SRR is legally enforceable against ships flying the flag of a Member State and has limited application to non-EU flagged vessels calling at a port or anchorage of a Member State.
ENFORCEMENT AND CIRCUMVENTION: EU vs the world
Financial instrument – Ship Recycling License (“SRL”)
Article 29 of the EU SRR required the Commission to submit a report to the European Parliament and the Council on the feasibility of introducing a financial instrument that would facilitate safe and sound ship recycling by end of 2016. A 2016 Commission study evaluated several forms of financial instrument, including guarantees, insurance and port levies. The conclusions favoured a SRL (or a hybrid financial instrument with the SRL) which would be required for entry into EU ports.
The Commission’s consultation put such an instrument to its participants. While making it clear that this is a work in progress, it would seem that the intention is to require ship owners to pay a contribution for the licence which may also incorporate upfront a premium for the revenue gap between the cost of sending the ship to an EU approved recycling facility set out on the European List³ (“Approved Recycling”) and the more lucrative option of sending the ship to a facility outside of the European List (“Non-Approved Recycling”). This would be held in a fund in the EU (we note that the consultation currently lacks detail of the logistics of managing and regulating such fund, as well as general regulatory oversight for the SRL).
“Unless the Commission takes the financial instrument, and expanding the scope of the SRR generally, forward, it will have a hard time preventing ship owners seeking to circumvent its higher standards.”
On sending a ship to a facility on the European List, which usually pay less, the ship owner would be compensated from the fund to cover such revenue gap – effectively subsidising the cost of recycling at approved yards. If Non-Approved Recycling is pursued, this amount would instead be forfeited as a penalty and retained in the fund. The fund would be used to disseminate sound recycling practices across the EU.
The consultation looked at all ships trading in the EU, not just EU-flagged ships.⁴ Requiring non-EU flagged ships to hold an SRL to call at an EU port would by implication require that ship to be recycled at an EU-approved facility if it is to get back the premium paid upfront. Non-EU shipowners may, and probably will, claim that this goes far beyond the scope of the EU SRR – particularly in view of the Hong Kong Convention coming into force.
The Hong Kong Convention – gaps and cracks
But just how effective will the Hong Kong Convention be on implementation, not to mention on enforcement? A shipowner can largely avoid the SRR by flagging out. When the Hong Kong Convention comes into force, flagging out becomes more limited but is still an option.
Either the government of the flag state, or the state from which a ship is operated (in either case, defined as the “Administration”), will govern compliance with the Hong Kong Convention. Some NGOs have already expressed concerns about the adoption of “flags of convenience” towards the end of a ship’s life and particularly for a voyage to a shipbreaking yard. Sanctions against a ship for violating the Hong Kong Convention requirements are published and enforced on a state-by-state basis by the Administration. By adopting the flag of a state not party to the Hong Kong Convention, sanctions are still avoidable.
Approved ship recycling facilities will also be regulated under the Hong Kong Convention. There is no guarantee that the facilities approved under the Hong Kong Convention will mirror those on the European List, although the SRR indicates that as part of its review in six months’ time, it will consider including the facilities authorised under the Hong Kong Convention.
The approval process of facilities under the Hong Kong Convention is currently under question. There has been a proliferation of “statements of compliance” (“SoCs”) being issued by classification societies to confirm that the requirements of the Hong Kong Convention are met.⁵ However, the SoCs do not necessarily carry the degree of weight sought by other sector participants – financiers, for example.
The Hong Kong Convention would instead require “competent authorities”, being governmental authorities or authorities designated by a state ratifying the Hong Kong Convention, to approve ship recycling facilities in line with the requirements under the Hong Kong Convention. Arguably, the interpretation of whether those requirements are being met is still subjective, as is the level of expertise of the “authorities” approving the facilities in each jurisdiction.
There is therefore still risk of fragmentation between contracting parties under the Hong Kong Convention in relation to enforcement action, penalties and the standards of recycling facilities.
The Commission’s consultation did consider whether ships with Hong Kong Convention certification should automatically be included in the European List. Currently, a recycling facility must apply to the Commission to be included in the list demonstrating its compliance with the EU SRR standards. In view of the above certification practises, the EU – holding its stricter line – might still want to keep in place its own European List of facilities it knows are meeting the required standards; and the ability to remove facilities when they are not meeting those standards, as happened recently with a number of yards in Turkey. This is particularly in view of the Basel Convention’s stance on beaching, discussed below.
However, unless the Commission takes the financial instrument, and expanding the scope of the SRR generally, forward, it will have a hard time preventing ship owners seeking to circumvent its higher standards.
Interaction with other frameworks – ships as waste
The Basel Convention for the Transboundary of Movement of Hazardous Waste (the “Basel Convention”) and treatment of ships scheduled for recycling as “waste” could assist with circumvention. The application of the EU Waste Shipment Regulation⁶ and Basel Convention is not subject to the flag of the ship but its location when it becomes “waste”. The interaction between the ship recycling framework and that governing the transboundary movement of waste, including hazardous waste, is, however, complex. Complying with both is also likely to be burdensome because each framework requires specific processes to be followed (i.e. prior informed consent and approval of a ship recycling plan) and documentation to be produced (i.e. notification and movement forms and IHM).
The SRR has gone some way to address this: where EU-flagged ships are covered by the SRR, the Waste Shipment Regulation shall not apply, while ships that are not covered by the Hong Kong Convention nor the SRR will be subject to the Waste Shipment Regulation. Whether this can be replicated on a global basis while closing loopholes remains to be seen.
“What is clear is that the Hong Kong Convention cannot just be dusted off and implemented without changes in the near future.”
The Basel Convention also prescribes the use of impermeable floors for facilities used for the treatment of “waste” and necessarily, any substances within it. Such restriction is absent in the Hong Kong Convention, casting further doubt on its effectiveness as a global enforcement tool to clean up ship recycling’s act alone or in place of the Basel Convention.
It is unlikely that the Hong Kong Convention text will be re-opened to address some of the gaps and developments that have arisen over 14 years – including the questions raised in this note – in the next two years. What is clear is that the Hong Kong Convention cannot just be dusted off and implemented without changes in the near future that consider the new global framework regulating ship and waste disposal that it is slotting into.
WFW will be tracking the Commission’s consultation response in view of its obligation to review the SRR in the next six months, alongside the developments of the Hong Kong Convention, with keen interest and publishing a follow-up article. We hope at that stage we will have more answers than questions, but should you have any questions in the meantime please refer to our key contacts below.
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