Vessel scrappage and retrofit schemes
The average life of a vessel is approximately 25 years. So even if zero-emission ships were readily available as a cost-competitive alternative on the market right now, their share of the total vessel fleet would not become significant until some time in the distant future, provided that ships are not retrofitted. Decarbonising shipping will therefore depend a lot on the level of scrappage or early retirement of old vessels, influencing the speed of uptake of low- or zero-emission ships and the capacity to retrofit existing vessels.
Fleet renewal and retrofits can be subject to two different policy interventions: vessel scrappage or retrofit schemes that speed up fleet renewal or enhancement.
Scrappage schemes incite owners to scrap their vessels early and replace them with newer, more performant models. These schemes reduce the anticipated lifetime of the ships. Alternative measures are retrofit or repower schemes that encourage owners to improve the environmental performance of their vessels by retrofitting them with respective technological solutions or indeed replacing the entire powertrain of the vessel to allow a more sustainable energy source to power it.
So far, scrappage schemes have been implemented with various objectives and have been rare in the sector. In 2007, the European Commission approved an Italian scheme that provided tax breaks totalling EUR 12 million a year to help ship-owners scrap small, single-hull oil tankers older than 15 years. The programme aimed to speed up the transition to double-hull tankers, achieving higher safety standards and reducing environmental risks. Since 2009, China has implemented a scrap-and-build subsidy to decrease the environmental burden from shipping by replacing old fleets with new greener vessels under the assumption that new vessels are more energy efficient than old ones.
Scrappage schemes for road vehicles have been more common. They have mainly encouraged car owners to replace or enhance their cars. Much broader programmes, which incentivise the replacement and enhancement of motorcycles, cars, buses, and heavy-duty vehicles have also been introduced. These programmes have sometimes been linked to the introduction of low-emission vehicle zones and aim to help users to upgrade and replace their vehicles to meet the new restricted zone requirements.
Early retirements and retrofits in the aviation sector have mostly been in the context of noise pollution and to comply with regulations, usually driven by the private sector rather than as a result of direct policy intervention.
Schemes may be designed as a regulatory measure: vehicles that do not meet a certain environmental standard are scrapped or retrofitted; as economic measures where owners of vehicles that meet certain requirements are encouraged to scrap or enhance their vehicles; or as a combination of both.
Scrappage and retrofit schemes can be designed in many different ways. Schemes can differ in terms of:
- What vehicles are eligible or required to take part. Vehicles may need to be of a certain age or be below certain environmental standards, for example.
- What type of incentives are given to scrap or enhance. Tax relief or a direct financial subsidy can depend on the kind of enhancement or type of vessel, for example.
- Whether there is a requirement or incentive for scrapping or replacement.
- If a replacement is required or incentivised, what environmental standards need to be met.
- Whether the scheme ends after a certain duration, after a certain amount of vehicles have been scrapped or replaced, or after allocated funds have been depleted.
ITF (2018) provides an overview of technical measures available to improve the vessel energy efficiency and which measures can be applied as a retrofit. Examples include bulbous bow retrofits that can be applied for specific types of ships, hull surface coatings or the retrofitting of propulsion efficiency devices. Such measures could be the subject of a policy-driven vessel retrofit scheme.
The IMO has agreed in 2021 to introduce energy efficiency standards for existing ships, which include carbon intensity standards. If set at a sufficiently high level, such regulation could drive retrofitting and vessel scrapping.
The CO2 effects of scrappage and retrofit schemes will significantly depend on the scheme design, what vessels will take part, under what conditions and the requirements for the retrofits or replacement vessels.
The available literature provides insights into the CO2 effects of former road vehicle schemes or early retirement of aircraft. Most studies conclude that the CO2 effects are limited or even negative - with emissions increasing - particularly when life-cycle emissions are taken into account. Mainly, there are two reasons for these findings. First, schemes to date generally did not focus solely on reducing CO2 emissions and were therefore not optimally designed to achieve reductions. Second, many studies observed or assumed a certain rebound effect, that is the effect that newer or enhanced vehicles are driven more thanks to their improved efficiency and lower operation costs. An assessment of the Chinese scrap-and-build subsidy for vessels that aimed to decrease the environmental impact from shipping shows that CO2 impacts have not always been positive. This is because many single-hull vessels were replaced with double-hull vessels - to comply with IMO regulations - which are typically less energy efficient.
To achieve CO2 emissions reductions, scrappage and retrofit schemes must be thoroughly planned and accompanied by ex-ante impact assessments. If vessels are scrapped, there sneed to be very stringent requirements on the energy efficiency of replacement vessels. Replacement ships should be zero-emission and reliant on low-carbon energy sources only. Otherwise, a scrappage scheme risks delaying the transition to zero-emission vessels and will result in negative CO2 effects when accounting for the long lifetime of ships and respective market dynamics. Scrappage subsidy schemes also risk subsidising ship-owners for replacing ships that were slated for replacement soon in any case.
ITF (2018) provides insights into the CO2 reduction measures of technical solutions that can potentially be applied as retrofits to vessels. Most importantly, the CO2 reduction potential of many technical solutions will depend on the specific ship type and size. Some solutions may even lead to adverse CO2 effects on specific ship types of sizes.
Examples provided in ITF (2018) include the following:
- The installation of bulbous bows could lead to 3-7% in fuel savings on large cargo carriers; other devices or retrofits to reduce resistance can reduce CO2 emissions in a range of about 2-5%. However, for slower and large ships, the increase in wetted surface area due to a bulbous bow may increase the resistance of a ship.
- Coatings may achieve an engine fuel consumption in the range of 1-4%, depending on the type of coating, vessel size, segment, operational profile, and route. Hull cleaning can generate additional fuel savings. However, surface smoothness can decrease over time, thus reducing the associated fuel savings potential.
- Propeller upgrades may lead to efficiency gains between 8% and 15%. Other propulsion improving devices may provide CO2 reductions of around 1-25%. However, mechanical issues may limit the wider application of such measures in large-scale commercial shipping.
The costs of scrappage and retrofit schemes will heavily depend on the scheme’s design, including how many vessels can be expected to take part or whether monetary incentives are given to participating vessel owners.
For ship owners, costs will depend on technology costs and their retrofitting or the cost of retiring a vessel early. The costs of early retirement depend on the expected lifetime of the vessel that is being scrapped and the vessel owner’s retirement practices that would have been followed otherwise. These costs will be offset by potential monetary incentives provided by the scheme and the opportunity costs of not retiring a vessel early, or of not retrofitting it with new technologies. These opportunity costs will depend on the degree of operational efficiencies achieveable with new or retrofitted technologies and the reduced fuel costs. The policy framework will also define these opportunity costs. For example, ship-owners may be subject to carbon pricing, subsidies or port pricing, which may vary with the energy efficiency and resulting fuel use and related carbon emissions.
Economic assessments of scrappage schemes typically focus on road vehicle schemes. In general, cost assessments vary significantly, even when retrospectively assessing the same system. This is because the scope of assessments often vary, including about the timeframe considered, the degree to which longer-term impacts are taken into account, and the types of costs and benefits considered. Assessments typically conclude that scrappage schemes are among the less cost-effective policy options for reducing carbon emissions.
The available literature discussing CO2 reduction options in shipping often does not consider scrappage schemes or early retirements of vessels. Where such approaches to CO2 emissions reductions are mentioned, they are often considered an option of ‘last resort’ due to the expected high costs for ship owners and the public purse. Vessel scrappage schemes that solely seek to reduce CO2 and that provide stringent requirements in this regard are yet to be defined.
The impacts of scrappage schemes can be very diverse, and the reasons for their implementation can therefore vary. They may be introduced to achieve sustainability benefits other than CO2 reductions, like pollutant emissions reductions or safety improvements, for example. They can also provide economic or industrial benefits, including inciting economic activity in the respective vehicle manufacturing industry, boosting the respective job markets, and driving GDP.
Some retrofits in shipping can also enhance the manoeuvrability of the ship.
The available literature shows that the impact of scrappage schemes on desired outcomes is often contested and very difficult to foresee. To increase the probability that desired outcomes are achieved, they need to be considered very carefully. Typically, this will require detailed information on the existing vehicle fleet and its characteristics and on the likely replacement decisions that vehicle owners would take with or without a scrappage scheme.
A considerable amount of ship scrapping takes place in sub-standard facilities that have huge environmental impacts, so the way in which a ship is scrapped might need to be specified in ship scrapping schemes as well.
Receipts from a carbon-pricing scheme could fund ship scrappage or retrofitting programmes.
ITF (2021) Transport Climate Action Directory – Vessel scrappage or retrofit schemes
https://www.itf-oecd.org/policy/vessel-scrappage-retrofit-schemes
ITF (2018) Decarbonising Maritime Transport - Pathways to zero-carbon shipping by 2035, https://www.itf-oecd.org/decarbonising-maritime-transport
Bullock S. et al. (2020) Shipping and the Paris climate agreement: a focus on committed emissions, https://doi.org/10.1186/s42500-020-00015-2
Dray L. (2013) An analysis of the impact of aircraft life-cycles on aviation emissions mitigation policies, https://www.sciencedirect.com/science/article/pii/S0969699712001652
European Commission (2001) Scrapping of single hull oil tankers : Commission initiates investigation of proposed Italian State aid, https://ec.europa.eu/commission/presscorner/detail/en/IP_01_1884
Held M. et al. (2021) Scrapping Probabilities and Committed CO2 Emissions of the International Ship Fleet, https://doi.org/10.5957/SOME-2021-006
ICCT (2013) Long-term potential of increased shipping efficiency through the adoption of industry-leading practices, https://theicct.org/sites/default/files/publications/ICCT_ShipEfficiency_20130723.pdf
OECD (2017) Analysis of selected measures promoting the construction and operation of greener ships, https://www.oecd.org/industry/ind/analysis-of-measures-promoting-greener-ships.pdf
OECD (2017) Imbalances in the shipbuilding industry and assessment of policy responses, https://www.oecd.org/industry/ind/Imbalances_Shipbuilding_Industry.pdf
Reuters (2007) EU clears Italian aid to scrap single hull tankers, https://www.reuters.com/article/italy-shipping-eu/eu-clears-italian-aid-to-scrap-single-hull-tankers-idUKL0793035320070207
Ricardo Energy & Environment (2016) Consideration of the impacts of Light-Duty Vehicles scrappage schemes, https://ec.europa.eu/clima/sites/clima/files/transport/vehicles/docs/ldv_scrappage_schemes_en.pdf
TNO (2015) GHG emission reduction potential of EU-related maritime transport and on its impacts, https://ec.europa.eu/clima/sites/default/files/transport/shipping/docs/report_ghg_reduction_potential_en.pdf
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