Catch Management Under Itqs

Ragnar Arnason*

Catch Management under ITQs:

Enforcement, Bycatch and Discards

A paper submitted at the seminar:

Management of Bycatch under an ITQ system

Buenos Aires

May 10-11, 2000

First Rough Draft

*Department of Economics

University of Iceland

0. Introduction

Ocean fish stocks have traditionally been arranged as common property resources. Common property resources are resources to which a group of people (possibly a whole nation) has access and unlimited extraction rights. So, common property resources are characterized by lack of private property rights. Thirty years ago the common property arrangement in fisheries was virtually universal. Today, at the outset of the 21st Century, it is still the most common arrangement in Ocean fisheries.

Common property resources, it is well known and established (Gordon 1954, Hardin 1968) are subject to fundamental economic problems of over-exploitation and economic waste. In fisheries, the common property problem manifests itself in:

(1) Excessive fishing fleets and effort,

(2) Too small fish stocks.

(3) Little or no profitability and unnecessarily low personal incomes.

(4) Unnecessarily low contribution of the fishing industry to the GDP.

(5) A threat to the sustainability of the fishery

The reason why the common property arrangement is so economically and biologically damaging is not too difficult to understand. Under the common property arrangement, the fishermen are basically forced to overexploit the fish stocks, even against their own better judgement. When many fishermen have access to the same fish stock, each has every reason to grasp as large a share of the potential yield as possible lest the other fishermen reap all the benefits the resource can offer. Prudent harvesting exhibited by one fisherman in order to maintain the stocks will, for the most part, only benefit other more aggressive fishermen without preventing the ultimate decline of the stocks. Thus, each individual fisherman, acting in isolation, is powerless to alter the course of the fishery. His best course of action is to try to grasp his share as quickly as possible while the resource is large enough to yield some profits. As a result, the fishery virtually inevitably evolves to excessive fishing effort, reduced fish stock ¾ even to the point of collapse ¾and little or no net economic benefits.

Property rights based approaches to fisheries management attempt to eliminate the common property problem by establishing private property rights over the fish stocks. Since the source of the economic problems in fisheries is the absence of property rights, this approach should in principle be successful in securing full economic benefits from the fishery.

Several types of property rights regimes have been employed to alleviate the fisheries problem. These include territorial use rights (TURFs), individual quotas (IQs) and community fishing rights (CFRs).

Individual quotas attempt to solve the common property problem not by defining property in the fish stocks themselves but by allocating individual harvesting rights in these stocks. Thus, individual catch quotas constitute at best an indirect property right in what really counts, the fish stocks and their natural environment. However, it can be shown (Arnason 2000) that this indirect property right, provided it is transferable goes a long way toward resolving the common property problem.

Transferable and divisible catch quotas are usually referred to as individual transferable quotas or ITQs. If the ITQs are also permanent they constitute a complete property right just like a building or a piece of land. In that case, standard economic theory should apply and, barring market imperfections, the fishery should automatically reach full efficiency.

With permanent and transferable catch quotas the quota holders will find it to their advantage to preserve and, if necessary, rebuild the marine resources. After all, larger fish stocks means more profitable fishing operations. Moreover, the market value of their permanent quota, as a share in the future TACs, depends on the state of the fish stocks and the sustainability of the fishery. The larger the fish stocks the higher the value of their permanent quota share. Thus, the ITQ system provides the fishing firms with a powerful incentive to preserve the fish stocks and, in fact, the marine ecology as a whole.

Since the ITQ system goes a long way toward eliminating the basic common property problem of fisheries and are widely applicable, there has now emerged a consensus among fisheries economists that this management system offers the most promising general approach to managing ocean fisheries. This does not mean, however, that ITQs are necessarily the best management in all fisheries. For instance, a prerequisite for this method to work is that the individual quota constraints should be enforceable. If that is not the case, some other management method may be preferable.

Since the general extension of national exclusive economic zones to 200 miles in the 1970s there has been a clear trend toward the adoption of property rights-based fisheries management systems worldwide. Although there are some notable cases of territorial use rights and community fishing rights, the development has primarily been toward regimes of individual quotas (IQs) and individual transferable quotas (ITQs).

IQs are already quite common. They are widely used in Europe, Russia, Southern Africa, America and even Japan. An interesting aspect of IQs is that they tend to evolve over time into fully fledged ITQs. Having secured valuable property rights in the form of IQs, the holders soon push for permission to trade these rights. After all, this possibility only enlarges their opportunity set. This path of evolution has taken place for instance in Iceland, Holland, Greenland and Namibia.

ITQs have been implemented in several hundred ocean fisheries around the world. With the recent addition of Chile to the countries basing their fisheries management on ITQs, over 10% of the global ocean fish harvest is currently taken under ITQs.

The first ITQ systems were implemented in the 1970s. Currently, at least seven significant fishing nations — Australia, Canada, Chile, Holland, Iceland, Namibia and New Zealand —employ ITQs as a major component of their fisheries management system (OECD 1997, Arnason 1996). Several others, including Mosambique, Greenland, Portugal, Mexico and the United States, use ITQs in some of their fisheries (OECD 1997). Important fishing nations such as Peru, Argentina and Morocco are preparing the introduction of ITQs in some or all of their fisheries.

Thus, the ITQ fisheries management system can hardly be said to be experimental any longer. A great deal of experience with the system has been accumulated in numerous fisheries all over the world for the past 25 years.

The experience with ITQs has generally been quite positive. Fishing effort has usually decreased and fishing fleets contracted. Depleted stocks have recovered and the quality of landed catch has increased. In fact, due to the increased emphasis on product value and quality, total employment in the fishing industry has usually not been found to contract. Finally, economic rents have generally greatly increased. It seems that ITQs are the only fisheries management system currently employed around the world that can claim this degree of general success. As a result, ITQ managed fisheries are getting more numerous every year.

1. Enforcement of Fisheries Regulations: General Considerations

As all other fisheries management systems, ITQs need enforcement. Without enforcement the system will simply not function. The ITQ enforcement problem is fundamentally the same as any other enforcement problem. By this I mean that the same basic enforcement structure must be in place and the same basic laws of enforcement apply. To this we now turn.

1.1 Components of the enforcement system

All enforcement consist of two components; (i) the observation and control activity and (ii) the sanctioning activity.

The purpose of the first component, i.e., observation and control, is to observe the subjects, induce them to act in accordance with the rules, detect violations and, if necessary, bring the violators in for sanctioning. The police is a typical institute conducting observation and control in the enforcement system on land. In fisheries, the observation and control activity is usually referred to as MCS for “monitoring, control and surveillance” which is an old FAO terminology that has established itself in the fisheries management jargon.

The purpose of the second component of the enforcement system, i.e., sanctioning, is to process alleged violations of the rules and, if the accused is found guilty, to impose the appropriate sanctions. In fisheries this component is generally referred to as the Fisheries Judicial System or FJS (Arnason 1994).

Along with the fisheries management system, two enforcement components form what ahs been referred to as the fisheries management regime (FMR) (Arnason, 1994). Thus the fisheries management regime as a whole consists of the fisheries management system (FMS), monitoring, control and surveillance (MCS) and the fisheries judicial system (FJS) as illustrated in Figure 1.

It is important to realize that all three components of the fisheries management regime are crucial to its success. If one of them fails the fisheries management regime as a whole fails. Thus, for instance, a wonderful fisheries management system will accomplish nothing if its rules are not enforced. Similarly, a wonderful fisheries management system combined with a great MCS but a very weak FJS (fisheries judicial system) will not be effective. The rules will be violated at will because non-compliance will not be discouraged by the necessary sanctions. Thus, it is just as important to carefully design and implement the MCS and the FJS as the FMS itself. All three components of the fisheries management regime are links the same chain, so to speak. The overall quality of the FMR can not be greater than that of its weakest link.

In fisheries, the MCS consists of several distinct activities. There is MCS at sea. This may be conducted by special patrol vessels sometimes belonging to the coast-guard or the navy, on-board observers, remote sensing and other means. MCS on land is conducted by observers at landing places, in shipyards, and in processing factories and along the trading and retrading route of fish products. It is of considerable importance to have one institute coordinating the diverse MCS activities. In many fishing nations this co-ordinating function is carried out by a special institute called the Fisheries Directorate, the Fisheries Management Service or something else along these lines.

The purpose of the FJS is to determine the guilt or innocence of alleged violators of the fisheries rules and, subsequently to impose penalties on those found to be guilty. In most fishing nations this function is carried out by the normal courts system. These, however, generally have little expertise in the area of fisheries and, besides, often work slowly so, depending on the circumstances, it may be preferable to set up special fisheries courts or fisheries magistrates to deal with fisheries offences. Under some legal systems it may be possible to implement a system of impose administrative penalties for fisheries violations.

1.2 The cost of enforcement

The enforcement activity is costly. This applies in particular to the MCS part of the enforcement, especially MCS at sea. The judicial part is generally much less expensive. Estimates of MCS costs in various fishing countries indicate a wide range of costs. However, typically, the costs of fisheries enforcement in advanced fishing nations ranges from 2-10% of the gross value of landings (Arnason et al. 2000, Flaaten and Wallis 2000).[1]

Thus, enforcement costs are typically a considerable fraction of the gross value of the fisheries. Compared to the maximum profits or fisheries rents attainable from the fisheries, these costs are even more significant. It follows that it is of great importance to economize on enforcement costs just as it is important to save on harvesting costs. At the same time it is not a good idea to reduce enforcement. For the fisheries management system to be effective a certain, usually quite high, level of compliance to the rules is required. What we seek then is a given level of compliance at the minimum costs. To accomplish that, however, we have to understand some fundamental aspects of enforcement in general. This, curiously, is closely related to the theory of crime (see e.g. Becker 1968). To this we now turn:

1.3 The simple theory of violations and compliance

It stands to reason that rational agents ¾ and fishermen are nothing if not rational ¾ will violate the rules to the extent that the expected benefits exceed the expected costs. The higher the expected costs of committing a violation the less violations will be committed. This relationship is illustrated in Figure 2.

As illustrated in Figure 2, violations will fall with increased expected costs of violations. However, even at quite high expected costs, we would still expect some violations committed by whom economists would call risk lovers and the general public hardened criminals.

The expected cost of committing a violation is simply the corresponding penalty multiplied by the probability that a penalty will actually have to be paid. Let us write this as the expression:

(1) w = f×p,

where w represents the expected cost of committing a violation. f is the penalty for such a violation (usually a fine) and p is the probability that the penalty will have to be paid if the violation is committed. This probability, obviously, is a function of the enforcement activity. The greater the enforcement the higher will this probability be.

Now, p, the probability that a penalty will have to be paid is the probability of detection multiplied by the probability of actually having to pay the penalty if detected.[2] Let us write this simply as

(2) p = p1×p2,

where p1×is the probability of the violation being detected and p2 is the probability of having to pay the penalty if detected committing a violation.

It is clear that the first probability, the probability of detection, increases with level of the MCS activity. However, even with immense MCS activity, there will still be some probability of violations not being detected. Thus the probability of detection can never be unity. Hence, the relationship between the probability of detection and the level of the MCS activity may look something like that illustrated in Figure 3.

The second probability, that of actually having to pay the penalty if detected violating the rules, i.e., p2. depends very much on the quality of the fisheries judicial system (FJS) , i.e. its ability to successfully prosecute, obtain a guilty verdict and to impose a penalty on those convicted. If the FJS is of high quality in this sense, then this probability is high and vice versa.