On the Toxic Trade-offs in Ship-Recycling

Problem definition: Three-fourths of the world's retired vessels, amounting to nearly 100\% of the gross tonnage dismantled globally, were broken down by hand on beaches in the South Asian ship recycling yards in 2021. Apart from the detrimental environmental impact, this business is also plagued with problems of child labour, workplace death and injuries, ocean pollution, carbon emission and habitat degradation, etc. Many regulations have been proposed to encourage more responsible ship recycling choices, but none seemed to work. We develop a framework for analyzing and explaining the trade-offs in the end-of-life (EOL) recycling decision in order to understand why so many shipowners chose to recycle their vessels in a dangerous and polluting environment.Academic/practical relevance: We contribute to the literature of the close-loop supply chain management, considering the case when the salvage value of a product is high, and recyclers (or processors) are heterogeneous. We also draw parallels between our model and the ship recycling industry to highlight the practical relevance of our paper.Methodology: We use an equilibrium framework to capture potential shipowners' investment choices and analyze the incentive issues confronting the shipowners who make decisions on how to recycle their vessels.Results: There are much fewer irresponsible shipowners than what the aforementioned three-fourths statistic may imply. In the presence of unethical ship recycling yards, irresponsible recycling behavior has an amplified effect -- the percentage of irresponsible shipowners in the EOL market is much higher than that among all potential shipowners. Meanwhile, many responsible shipowners actually benefit financially from unethical ship recycling operations through the higher second-hand vessel price in the secondary market.Managerial implications: We offer insights into why the regulations that forbid unethical ship recycling were ineffective and why many stakeholders in the shipping community seemingly shut their eyes to the deaths and pollution caused by the beaching practice in the EOL vessel recycling business