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This Week's Commentary Previous Commentaries Future Commentaries Objectives

October 22, 2007
Series Editor: Ian Parry
Managing Editor: Felicia Day
Assistant Editors: John Anderson and Adrienne Foerster

Welcome to the RFF Weekly Policy Commentary, which is meant to provide an easy way to learn about important policy issues related to environmental, natural resource, energy, urban, and public health problems.

This week our topic is on some important practical considerations in implementing regulatory reform of fisheries, and our invited experts are Harrison Fell, a new fellow at RFF, and Jim Sanchirico, an associate professor of environmental science and policy at the University of California-Davis and RFF university fellow. In particular, Fell and Sanchirico discuss to what extent fish processors might be justified in claiming compensation when a quota system is imposed on the catch of individual fishermen; assessing the appropriate amount, if any, of compensation is a critical component in the political dealmaking required to move forward with more effective, and badly needed, regulation.

Next week, RFF senior fellow Winston Harrington will discuss ways to improve federal spending on highways.

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The Political Economy of Addressing Overfishing in U.S. Waters

Harrison Fell and James N. Sanchirico

Overfishing is a classic example of the tragedy of the commons. Since no one owns the fish in the ocean, it's in everyone's interest to catch them as fast as possible, regardless of present or future damage to fisheries. Overexploitation and inefficient use of marine resources are the direct result of open-access conditions. For years, regulators have attempted to solve this problem by utilizing season-length restrictions, total allowable catch limits (TAC), and gear and vessel power restrictions. This has led to a cat-and-mouse game where fishermen adopt technologies and methods to work around these controls. The result is the infamous and wasteful, "race to fish," where fishermen catch the allowable limits for a season in hours rather than months.

An alternative approach to dealing with this issue--by addressing causes rather than symptoms--is to allocate shares of the TAC to individual fisherman and fishing vessels. With secured access to a portion of the TAC in a season, fishermen no longer need to race and they also have greater stewardship incentives. Individual fishing quotas (IFQs), or dedicated access privileges (the U.S. term), are an increasingly prevalent form of fishery management around the world, regulating more than 175 species in Iceland, New Zealand, Canada, and Australia. The United States, however, lags far behind in adopting IFQ systems.

Recent attention in the United States is focusing on how to move individual fisheries from the current regulated open-access setting to an IFQ system while minimizing the potential impact on fish processors and fishing communities. Concerns over the socioeconomic effects appear to be a barrier that may, at best, stall and at worst, threaten to derail implementation of IFQs. For example, some fisherman may find it more economically advantageous to sell their allocations rather than fish. But such actions have consequences: communities dependent upon fishing can be adversely affected by the resulting economic disruption that occurs when there are no longer large amounts of fish to be processed.

IFQ implementation could also affect the fish processing industry. Depending on the biological, economic, and market characteristics of a marine species, a shift in processing to fresher or higher-value products that maximize the value of the catch from IFQs is likely. For example, when the North Pacific Halibut fishery introduced IFQ management over 10 years ago, there was a shift from an almost exclusively frozen product to a predominantly fresh product. Such a dramatic change could require different product lines and techniques that might not be feasible with current processing equipment. As a result, existing firms or new entrants could acquire competitive advantages.

In addition, the contractual and organizational arrangements between fish processors and harvesters could change post-IFQ. One potential catalyst is the additional flexibility of fishermen to spread their trips out over time to maximize the per-trip return, rather than concentrating trips and catch in short intervals due to season-length regulations or the highly competitive fishing under TAC regulations. Consequently, fish supplies will be more spread out. This change can have both negative and positive impacts. The slower paced fishing may result in higher fish prices paid by processors as daily supplies are reduced. On the other hand, using data from the Alaska pollock fishery, a recent study by one of the co-authors of this piece, Harrison Fell, indicates that the slower paced fishing under IFQ management may improve processors' ability to react to changing market conditions.

Fish processors also argue that the transition to IFQs exposes them to stranded costs. When the race to fish was on, processing facilities were designed to handle a large volume in a short period of time. Capital investments made under the old regulatory regime cannot be recovered if fishermen are going out on their own timetable. Important factors in measuring stranded costs are the potential changes to the quantity supplied, product mix, price in the future, relative share of the stranded costs, and the number of years over which the fish processors suffer said losses. The magnitude of these factors depends on the relative bargaining power of fishermen and processors. If, for example, fishermen can extract higher payments for a pound of fish post-IFQ, then the ability of processors to recover stranded costs diminishes.

Fell
Harrison Fell
Fellow, Resources for the Future

Fell's research interests lie in quantitative analysis of marine resource issues, particularly those related to fishery rationalization, industrial organization, the economics of property rights, and game theory.

James Sanchirico
James N. Sanchirico
Associate professor, University of California-Davis;University Fellow, Resources for the Future

Sanchirico's research applies quantitative empirical and theoretical methods to study the conservation of natural resources.

IFQ implementation, however, does not necessarily mean that the returns from fishing will transfer completely to the harvesting sector. This result was highlighted in another study by Fell; in an analysis of fishermen's bargaining power in the Alaskan sablefish fishery post-IFQ implementation, Fell estimated that while fishermen's bargaining power did increase, the fishermen and processors of this particularly fishery now appear to be evenly sharing the gains.

Regardless of these findings and other similar arguments, the U.S. processing industry wants to make IFQ implementation contingent on having some kind of mechanism in place that will give them funds sufficient to cover their perceived stranded costs. Even though IFQs are few and far between in U.S. waters, there is some precedent for accommodating their concerns. In the Alaska Crab fishery, for example, the mechanism was the creation of individual processor quotas that guarantee a fixed supply. Regulators in the West-Coast groundfish fishery are contemplating a requirement that up to 50 percent of the initial allocation will go to processors. Such a demand is not uncommon these days.

While allocating quota to offset hypothetical stranded costs is hardly efficient from an economic standpoint, the U.S. experience to date seems to imply either that the processing industry is politically powerful or that the stakeholders involved have made a decision that these costs are worth addressing, or both.

Of course, the fishermen object to this allocation because it dilutes their share of the pie. Unfortunately, both parties in this debate seem to have forgotten that the IFQ instrument is meant to address the causes of overexploitation, not as a free hand-out for all sectors of the fishing industry. Because quotas based on past catch histories have been the approach to make IFQs politically viable around the world, it is easy to forget that societal benefits are maximized when the quota are auctioned, not given away. Benefits are maximized for reasons including the quota going to their highest valued use and the ability to recycle the revenues to offset other taxes and pay for management.

If policymakers decide to capitalize on the changes in fishery management that go with the transition to IFQs in order to address the impacts of years of inefficient regulation on fishing communities and processors, there are policy mechanisms other than an initial allocation of quota to processors. The list includes quota allocation to vulnerable communities, mandatory sunset contracts between harvesters and processors that guarantee fixed supplies of the product over a set length of time, and levies on quota owners for processor and community compensation funds.

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Views expressed are those of the author. RFF does not take institutional positions on legislative or policy questions.


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Further Readings:

Fell, H.G. 2007. "Estimating Time-varying Bargaining Power with Nonlinear Kalman Filters: An Application to the Alaskan Sablefish Fishery." in PhD dissertation Essays in Empirical Industrial Organization Using Time Series Techniques: Applications to Natural Resource Markets. University of Washington, Department of Economics.

Fell, H.G. 2007. "Rights-based Management and Processors' Supply" in PhD dissertation Essays in Empirical Industrial Organization Using Time Series Techniques: Applications to Natural Resource Markets. University of Washington, Department of Economics.

Newell, R., Papps, K., and J. N. Sanchirico. Asset Pricing in Created Markets for Fishing Quota. American Journal of Agricultural Economics. 89(2) (May 2007): 259-272.

Sanchirico, J. N. and R. Newell. Catching Market Efficiencies: Quota-based Fishery Management, Resources, No. 150, Spring 2003.

Sanchirico, J.N., D. Holland, K. Quigley, and M. Fina. Catch-quota balancing in Multispecies Individual Fishing Quotas. Marine Policy, 30(6): 767-785, 2006.

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