Mapping marine economics (5): Getting the incentives right

On October 23, 1924, Canada and the United States of America signed their first Halibut Convention. Halibut fishers had long pressed for an international treaty to regulate the fishery, but it had taken a few years before Canada was finally allowed by its former colonial ruler, Great Britain, to sign its own international treaties. It was an important step to prevent overfishing of halibut, because the convention provided for a three-month closed season in winter. After a few years, however, those three months turned out to be insufficient. New fishers had entered the halibut fishery, and many fishers had invested in bigger vessels. So fisheries managers shortened the fishing season to compensate for the increased fishing capacity. What did the fishers do? They bought even bigger boats. Small wonder what the fisheries managers did in response. Around 1990, the Alaskan halibut fishing season comprised no more than a few 24 hour periods, spread over the year. In those few days the fishers caught all the fish they used to catch in nine months. It was a textbook example of what fisheries scientists call a derby fishery.

What went wrong here? No matter the good intentions of the fisheries managers, they overlooked an essential factor in the system they were supposed to manage: human ingenuity. Animals can be inventive (ever seen your cat figure out how to open your fridge?), but humans are champions at this. When fishing days were limited, they bought bigger boats. When boat length was limited, they built wider boats. Human ingenuity has brought us the wheel, the steam engine, the Internet, and the smallpox vaccine, but it has also exaggerated overfishing. So how do we make sure it works only in our benefit?

Enter ITQs (and discards)
In Alaska the policy makers introduced Individual Transferable Quota, or ITQs. ITQs work much like tradable water rights, or tradable pollution permits: the government sets the maximum allowable catch, and ITQ owners have the right to catch (mostly, actually, to land) a share of that maximum. The possibility to trade ITQs allows inefficient fishers to sell their share to more efficient fishers at a price that makes both better off than without the trade. In the Alaska halibut fishery it worked: the derby fishing was over while the catch of halibut remained within limits. ITQs are now all the rage all over the world, as they seem to be the best instrument so far that fisheries scientists have come up with. But that does not mean they are perfect.

The problem is that ITQs limit landings, not catch. Monitoring catch is very difficult unless you send a police officer with every fishing vessel. So instead of monitoring how much fishers catch out at sea, managers monitor how much fish fishers bring to shore, in ports, auctions and so on. But landings are not the same as catch. If you run out of plaice quota while having plenty of sole quota left, you'd be sorely tempted to throw back your catch of plaice and keep your catch of sole. What is being thrown back is called discards. Discards have been in the news lately due to the proposed EU discard ban, for reasons good and bad. Nobody likes throwing away food, and throwing away half the catch of edible fish, as happens in some fisheries, comes across as criminally wasteful. Moreover, discards distort fishery statistics because by definition, they are the difference between catch (which fisheries scientists want to know) and landings (which they actually measure). But let's not forget that estimates of the survival of discarded fish vary wildly and depend on the type of fishing gear, the species, and how long the fish stays on board before being thrown back into the sea. In other words, not all discarded fish die. Moreover, the quota system is at least as much to blame as the fishers themselves. If you introduce ITQs in a mixed fishery like the Dutch cutter fleet, where fishers catch many different species in one single haul, but you do not consider the ratios in which those species are caught, you are bound to put fishers in a situation where taking your unused quota back to shore seems more of a waste than discarding fish. Perhaps you say it is wrong to discard fish. Well, it is also wrong to steal a bike, but that doesn't mean you shouldn't lock yours.

There is no panacea
The bottom line is that fisheries management does not manage fish - it manages people. So to do it properly you need to understand how people think, how they make their decisions, and why. This holds not only for fisheries management, but also for other ecosystems where human activity is a key player, like rangelands. Coastal ecosystems are rarely untouched by humans, because by definition they are located where people are most likely to settle first; they are also important holiday destinations. So to manage mangrove ecosystems you need to consider how, why, when, and where shrimp farmers cut, pollute, or otherwise degrade mangroves. To manage coral reefs you need to understand how, why, when, and where clumsy divers do the most damage.

The research in this domain has provided us with innovative policy instruments like ITQs, TURFs (territorial use rights for fishers), and PES (payments for ecosystem services). What these instruments have in common is that each was once hailed as the answer to all the problems in marine and coastal management, and that each turned out not to be. Every medicine has side effects; there is no panacea. What is needed is the right medicine for the right situation.

So what do I do?
This year I had a paper in Ecological Economics on policy instruments to manage transgenic maize - not exactly a marine topic, but still an example of how applied economic models can give quantitative insights into the effectiveness and efficiency of policy instruments. My contribution to this year's EAERE is about certification as an instrument to nudge fishers in a more sustainable direction. In BESTTuna we analyze, among others, how instruments like ITQs and Vessel Day Schemes can manage Pacific tuna stocks. I have been involved in the supervision of Diana van Dijk, who investigates the performance of multiannual quota and limits on adjustment of quota in a volatile fishery with costly capital adjustment.

And there is still plenty to do. The debate on ITQs and PES is far from over, and there are plenty of questions on how to consider human behavior in the design of policy instruments. There is a theme session on modelling human behavior coming up at this year's Annual Science Conference of the International Council for the Exploration of the Sea (ICES), which I organize together with Jan-Jaap Poos of Wageningen IMARES and Olivier Thebaud of CSIRO. One of the more difficult, and therefore more interesting, questions is how we include institutions and social norms in our analyses: can we model it? Or should we leave it to other social sciences that have better, qualitative tools to analyze these issues?

Should one species be allowed to choke a fishery?

The North Sea bottom trawl fishery is a typical multispecies fishery. A single haul catches many different species, including plaice, sole, cod, turbot, red mullet, tub gurnard, and monk fish. These species tend to associate with other species instead of swimming together in schools, so it is almost impossible to catch one species without also catching a lot of others. Fisheries scientists like to call this a technical interaction between the species: they interact not through predation or competition, but through ending up in the same net.

If a bottom trawl fisher runs out of cod quota he can do three things: buy additional cod quota from other fishers, stop fishing, or keep on fishing but throw all cod that he catches back into the sea (which is what we call discarding of fish). So if this fisher is not allowed to discard his cod catch, and there is nobody who can sell him any cod quota, he is forced to stop fishing altogether. Cod is then called the 'choke species': the species that stops you from fishing when its quota runs out. If you were allowed to discard fish you would continue fishing as long as there is at least one species that can still be caught. As far as I know there is no term for this sort of species, but I kind of like the term slack species.

The EU is about to introduce a ban on discarding, and to set TAC (Total Allowable Catch) levels for a number of species whose catch has so far been unrestricted (for instance red mullet, brill, and sea bass). Unsurprisingly, fishers are adamantly opposed. To them 'more species under a TAC regime' means 'more potential choke species'. They prefer fisheries policy to regard a few major species only, and to accept the bycatch of all other species.

MSY is flawed in two ways...

I admit that my first reaction was something like "oh, so these guys just want the right to fish a species to extinction if it suits them". But on second thought they point towards two flaws in the principle of Maximum Sustainable Yield (MSY), which is currently the guiding principle in fisheries policy worldwide. MSY is the largest possible annual catch you can get sustainably. If a stock is never fished, it is at its maximum possible size, but you don't catch anything. If you fish a little every year, the stock will be a bit smaller, and you catch a little bit every year. Fish some more, and the stock will be somewhat smaller while your catches are larger. As you keep on intensifying your fishing, however, you reach a point where not only the stock declines but also your catch. The maximum catch you can have every year without depleting the stock is called MSY.

The first problem with MSY is that it is based solely on biological principles. Economists have long argued for Maximum Economic Yield to be the guiding principle: this is the annual catch that maximizes, in a sustainable manner, the total revenues minus the total costs from fishing. MEY means that you take into account not only biological growth, but also the costs of fishing and the price of the fish. In the simple text book models this actually means fishing a bit less than under MSY to take advantage of the fact that more abundant fish is easier, and hence cheaper, to catch.

Second, the principle of MSY does not only ignore costs and prices, but also technical interactions. If you took these into account, a policy that maximizes the sum of the MEY over all species would allow fishers to overfish some species, and to underfish others. Mind you: 'overfishing' does not necessarily mean depleting a fish stock. It simply means that fishing pressure is higher than the fishing pressure that would lead to MSY. So you can sustainably overfish a stock! It's just that in general you shouldn't do that, because it gives you less fish under higher costs than you would have under MSY. In a multispecies fishery, however, it may be more efficient to overfish some species because that would allow more catch of other species that are more valuable, more productive, or both.

Note that trading quota could relieve some of the pain, but not all. If cod quota are very low compared to other quota, cod will eventually become a choke species, trade or no trade.

...but what is the alternative?

Ideally TACs should be set taking technical interactions into account. Fisheries biologists are working on this problem, but I suspect that it remains a very complex issue. On the other hand, current TACs are certainly not realistic in multispecies fisheries, so any consideration of technical interactions would be welcome.

Then there is the issue of discarding: the EU can either allow fishers to discard unwanted catch, as has been the policy so far, or ban discards, as the EU is about to do. In theory, if discards are allowed, fishers can keep on fishing as long as there is a 'slack species'. It sounds horrible that fishers go on fishing, throwing over board everything they don't need, but be aware that not all discarded catch is dead or dying, although the survival rate can be very small. A discard ban will have the advantage that the researchers who do stock assessments have better catch data, because so far they had only very crude estimates of how much fish were discarded. This matters, because stock assessments lean heavily on landings data, which underestimates catch if part of the catch is discarded. On a longer term a discard ban may also give a strong incentive to develop more selective fishing technologies, although it is highly unlikely that bottom trawling will ever be 100% selective.

Additionally, perhaps the current system of catch quota could be complemented with the possibility to rent additional quota from the government for, say, the first few choke species. Under such a policy you would indeed catch a bit more of the choke species and a bit less of the slack species, because catching all species would become too expensive. The rental price would still give an incentive to fish more selectively, but the fishery would not be shut down completely as soon as the choke species quota run out. The problem, of course, is setting the right prices: they should reflect the value of the loss of future catches of the choke species, which depends not only on biological growth, but also on the price of the choke species, the costs of catching it, and the discount rate. A daunting task indeed.