Economic Incentives, Direct Controlsand Ecosystem Management of Fisheries:

Out with the Old and in with the New

James R. Kahn, Ph.D

Director, Environmental Studies Program

John F. Hendon Professor of Economics

Washington and LeeUniversity

and

Professor Colaborador

Centro do Ciências do Ambiente

Universidade Federal do Amazonas

June 7, 2004

DRAFT PAPER-Suggestions are welcome

Abstract:

ITQs, non-transferable quotas and other regulatory mechanisms have failed dismally in managing and protecting fishery resources. The vast majority of oceanic fisheries are in a state of collapse, as species-by-species regulation of catch had not been effective.

This paper looks at a new set of economic incentives that are capable of dealing with catch issues, but going beyond to consider species inter-relationships, incidental catch, habitat destruction and other fishing externalities. Policies that are evaluated include ecosystem reserves (marine or freshwater), fishery recovery or protection bonds, concession agreements, and performance bonds, among other policies.

(1) Introduction:

In a world of environmental catastrophes, the collapse of oceanic ecosystems stands out as a monumental failure of policy. Despite decades of regulatory oversight, the productivity of oceanic ecosystems continues to decline as the population of species after species collapses. Similar problems exist in estuarine and freshwater fisheries.

A convincing case can be made that the failure of fisheries management is due to quotas that are too high to be sustainable, illegal and unreported catch, and the simply unwillingness of fishing nations to enforce politically unpopular restrictions that limit catch. However, the lack of limitation of catch is only one factor in the collapse of fisheries. This paper will argue that both the underlying goals of fishery management and the methods of fishery management are fundamentally flawed because they do not recognize that fish are part of ecosystems. Impacts on a target species have impacts on the whole ecosystem, as do additional types of damages caused by fishing such as by-catch and destruction of bottom habitat.

Fishery management has focused on addressing what Tietenberg refers to as the contemporaneous externality and the inter-temporal externality, where both are forms of open-access externalities. The contemporaneous externality refers to the problem of an inefficiently high level of effort devoted to catching a given level of fish, and the intertemporal externality refers to catching an inefficiently high level of fish relative to the availability of fish in the future. A series of policies have been implemented over time, including both direct controls and economic incentives. Direct controls focus mostly on the intertemporal externality and include restrictions on how many fish can be caught, when they can be caught, where they can be caught and how they can be caught. Economic incentives such as individual transferable quotas limit either the number of fish that can be caught or the number of boats in the fishery, and also address the contemporaneous externality by limiting entry into the fishery.

Despite the implementation of complex restrictions on fishing activity, fishery management has failed. There are two primary sets of reasons for this failure, the first having to do with the targets of regulation and the second having to do with the actual implementation of the regulation.

The targets of regulatory efforts have been less than ambitious. Political considerations and lobbying efforts have lead to the setting of quotas which are much higher than the population can realistically support. Fishermen and fishing nations are constantly arguing that fish stocks are actually much greater than scientists estimate, so quotas can be correspondingly larger. Even though there is often no scientific evidence to support their claims, quotas are increased unless the scientists can prove that the populations are smaller than the fishing proponents claim. The onus is on scientists to prove that larger quotas are destructive, rather than the burden of proof being placed on the fishing industry to show that larger quotas are benign.

(2) Fishery management and the target level of catch

Even if we have good estimates of fish stocks, our setting of quotas is process that is conceptually flawed. We have relied on the goal of maximum sustainable yield as a target of fishery management, but if catch is only a small increment above maximum sustainable yield, it will begin the population on a downward spiral. Moreover, even if catch is equal to maximum sustainable yield for a typical season, natural shocks could cause the growth function to shift downward, making what was previously a maximum sustainable yield to become a collapse-inducing level of catch.

In fact, although all the population-catch combinations on the equilibrium catch function in Figure 1 are equilibrium catches, only those combinations with population levels greater than P1 are stable equilibria. If population levels are to the left of P1, a shock that temporarily reduces population combined with an unchanged level of catch will cause the population to collapse towards zero. In other words, if the equilibrium consists of (P2, C2) and a shock reduces population to P3 and catch remains at C2, then the growth associated P3 is only G3 (which is less than C2), causing population to further decline. If catch continues to exceed the equilibrium level for the lower population, then population will continue to move towards zero. If the equilibrium catch function is not logistic in nature and has an inflection point to the left of P1 (as in Figure 2) this movement towards collapse can be rapid. If the function has a minimum viable population level (as in Figure 3) the collapse may be irreversible.

The critical point here is that maximum sustainable yield should not be a target of management, because its pursuit can lead to collapse. In the fisheries economics literature, it is also emphasized that maximum sustainable yield should not be the target of management, but for another reason. It is argued that an equilibrium catch should be chosen to maximize the present value of the stream of income. However, it is likely that this catch-population combination could be a point on the equilibrium catch function to

the left of P1. This makes the fishery even more likely to enter a regime characterized by population collapse. Therefore, a guiding principle for choosing a target level of catch must be the precautionary principle. In this case, the precautionary principle means that the population of the fish stock must be greater than the population level associated with maximum sustainable yield and the catch level must be less than maximum sustainable yield. This proposition will be examined in greater detail in the Section 2.

Additionally, an important shortcoming of fisheries policy is that is has focused only on regulating the catch of fish on a species-by-species basis. This assumes that the growth function of one species is exogenously determined, and the only choices are where to move along the function. In fact, the growth function is endogenous to fishing activity for two reasons. First, different fish populations are related through a complex set of ecological relationships. Although some conceptual models of fishery economics explicitly recognize predator-prey relationships, fishing activity has impacts on the ecosystem independent of the removal of a particular species or set of related species.

3.0 Ecosystem Impacts:

In addition to the contemporaneous and intertemporal externalities, there are a host of environmental externalities associated with fishing effort that must be addressed by policy. These include:

  • Ecological ties across species
  • By-catch
  • Destruction of habitat through contact with fishing gear

Since ecological relationships can be quite complex and far-reaching, it is difficult to predict the total ecosystem impacts associated with removing a large proportion of the biomass of a particular species, particularly when the species may be an apex predator (e.g. tuna, sailfish, swordfish or shark) or an important forage species (e.g. menhaden, anchovies, shrimp, squid or sardines). These ecosystem effects may be slight for relatively low levels of catch, but nonlinearities in ecological relationships and the existence of thresholds or bifurcations may lead to collapse for small additional increments in catch. This is illustrated in Figure 4, where the health of the ecosystem is measured along the vertical axis, and the population of the target species is represented along the horizontal axis. Since ecosystem collapse occurs in the vicinity of Pc, the precautionary principle would indicate that the target level of catch should be at a level to keep population above Pc , with an adequate margin of safety. Of course, if Pc is less than the maximum sustainable yield level of population, the goal of fishery management should be to keep population greater than this level, rather than Pc.

By-catch is also known as incidental catch, but its consequences are hardly incidental. By-catch is associated with many different fishing technologies, including purse seines, gill nets, long-lines and trawling. An example of the significance of the impact of by-catch can be found by looking at trawling for shrimp. In addition to the well-known impacts on marine turtles, the shrimping activity kills an incredibly large number of fish, both adult and juvenile. For the purpose of analysis, we will focus on the impacts on juvenile species. First, even if the fish that is being killed is not a commercially important species, it could have impacts on the ecosystem, of the type diagrammed in Figure 4. Additional policy implications occur if the juvenile fish that is being killed is also commercially harvested as an adult.

Although there may be some compensating reductions in natural mortality associated with the by-catch kill, the by-catch will have an impact on the population dynamics of the species. This is illustrated in Figure 5, where the removal of a large proportion of the juvenile population implies that there will be less growth associated with a given adult population, shifting the equilibrium catch function downward. The more severe the depletion of the juvenile fish, the more severe the downward reduction in the equilibrium catch equation.

The interaction of the downward shift in the equilibrium catch function with policy is quite significant. If policy is made without taking into account the impact of the depletion of juvenile fish through by-catch, then policy will be made with the idea that the equilibrium catch function more closely approximates E1 than E2. Of course, if this is the case, then what is thought to be an equilibrium catch will in actuality be an excess catch and the population will crash towards zero.

Environmental impacts from fishing gear would have the same type of impact as illustrated in Figure 5. Disruption of bottom structure, benthic communities, submerged aquatic vegetation and coral reefs through contact with fishing gear would make shift the equilibrium catch equation as in Figure 5, with a diminution of the carrying capacity and a reduction in the amount of growth (and thereby the equilibrium catch) associated with a given population level.

(4) Policy Recommendations

Based on the analysis presented above, fishery regulation and fishery policy must deal with the following set of issues, as whole:

  • Establishment of an appropriate target level of harvest, taking into account the precautionary principle.
  • Elimination of illegal and unreported catch and other cheating and enforcement issues
  • Ecosystem impacts through overly aggressive harvesting policies, by-catch and disruption of ecosystem habitat.

Although individual transferable quotas are often touted as a way of limiting entry and protecting the fish stock, they simple cannot deal with all these issues.The two major problems associated with ITQs are that they are not successful in restricting catch (because of high-grading, off-loading and other forms of cheating) and they simply do not address the broader ecosystem impacts of fishing effort. Enforcement is virtually non-existent, as there is no political will to do so in developed countries, and in developing countries there is the same problem coupled with a lack of enforcement resources. However, a wide range of economic incentives and command and control techniques are available to deal with both catch restriction and the more far-reaching consequences of fishing effort. Economic incentives include:

  • Fishery Recovery Bonds
  • Performance Bonds
  • Leasing of fishery areas to sole operators

Important command and control techniques include:

  • Prohibition of fishing techniques that generate by-catch
  • Establishment of marine reserves (and similar areas in freshwater)
  • Increased enforcement and penalties for illegal fishing, illegal off-loading of catch, high-grading and unreported catch

An immediate question comes to mind and that is why these techniques have the potential to be successful, whereas traditional command and control techniques or ITQs are not successful. The answer is that the techniques suggested in the above two sections of bullets can treat the fishery as an integrated ecological community and do not just attempt to regulate the catch of a particular fish species.

For example, fishery recovery bonds have been suggested by Steve Sloan as a means of restoring a degraded fishery. The basic concept underlying fishery recovery bonds is to pay the fishermen not to fish in order to allow a depleted and degraded fishery to recover. The first step is the creation of the fund, which could be established by an international agency (e.g. FAO, UNEP, World Bank or regional development bank), a national government (if the fishery is freshwater or contained entirely in the Exclusionary Economic Zone) or a sub-national government. An additional possibility is that a private corporation or group of corporations establish the fund in exchange for either future payments (from higher fishery income after the fishery recovers) or for exclusive rights to sustainably operate the fishery in the future. Of course, it could be established as a public investment opportunity sold on the stock market where shareholders would benefit from future fishery income.

The fishery recovery bond would need to generate income to provide a sufficient level of income for the fishers who will have to cease fishing until the fishery recovers. As Sloan stresses, an important determinant of the sufficiency of income is that it be high enough to maintain the payments on the fisher's boat. This is important because the fisher's house is often collateral for the boat. If he or she cannot make the payments on the boat, the house is lost as well.

In terms of the diagrams presented earlier in this paper, a fishery recovery bond would move the equilibrium catch/population relationship rightward along the equilibrium catch function. In addition, since other types of ecosystem damages could have time to heal, it could shift the equilibrium catch function up and to the right.

Contracts to lease exclusive rights to exploit a resource in a sustainable fashion have been discussed at length in the tropical forestry literature. Kahn has shown how a combination of performance bonds and contractual leasing of harvesting rights can be designed with the potential to generate sustainable forestry and protection of forest ecosystems. The same type of system can be used to generate sustainable fisheries.

The basic premise behind such a system is that firms pay for the right to sustainably harvest, but must follow restrictions to protect the ecosystem. Such restrictions take the form of limitations on the volume of the stock that is harvested in each time period. In addition, restrictions on how the stock is harvested serve to prevent collateral ecosystem damages. For example, restrictions could be placed on gear to limit by-catch and to limit impacts on bottom habitat. Fishery territory could be worked on a rotational basis, including fallow periods where no harvesting activity takes place.

Economic incentives are structured to make sure that both types of restrictions are followed. The first type of economic incentives would be performance bonds. A sum of money is placed in an escrow account and subject to forfeiture. If firms are in compliance with the environmental restrictions or harvest restrictions in the current period, the bond is not forfeited and they are allowed to move into the next period of the contractual lease. If firms are not in compliance, they forfeit the performance bond and lose the right to continue their leased harvesting rights.

Direct controls are likely to be less effective, as has been demonstrated in the pass. The exception to this is the creation of marine reserves. Marine reserves operate in a similar vein to fishery recover bonds, in that they eliminate both harvest and disturbance in a given area. More importantly, they allow the existence of an area where fish stocks and the marine environment can remain undisturbed and serve as a site where biomass can be grow and disperse to non-reserve areas.

Marine reserves should be used in conjunction with other policies. In particular, marine reserves could be used in combination with a leasing/performance bonding system as diagrammed in Figure 6. The marine reserve serves as the core of the fishery management area, and absolutely no disturbances are allowed in this area. The marine reserve could be surrounded by a catch and release sport fishing area. In addition to the catch and release restrictions, there should be other restrictions such as absolutely no bottom contact (no anchoring). The catch and release area could then be surrounded by a leasing area for sustainable commercial fishing, where different parts of the sustainable fishing area are left fallow for periods of time.

(4) Conclusions

It is clear that current fishery policy is ineffectively constructed and ineffectively implemented. A fundamental part of this problem is that it focuses on regulating catch on a species-by-species basis, and ignores important ecosystem-wide effects. Additionally, current regulations are inadequately enforced, with cheating occurring on a massive scale. In areas where they have been applied, individual transferable quotas have not led to fishery recovery.