kailin kroetz teaches economics at Arizona State University’s School of Sustainability.
Published July 26, 2021
Remember when codfish was cheaper than hamburger? Probably not, unless you’re old enough to remember the Beatles invasion of America. Today, due to a combination of rising global demand for high-quality protein, cheap air freight and a remnant of what-me-worry attitudes about the sustainability of fisheries, many wild species are in very short supply. But the times, they are a-changing — or more accurately, have been changing for several decades, thanks in large part to a fishery management tool called “individual transferable quotas” (a name only an economist could love). Read on for the story of why, barring damage to ocean fisheries from new sources (think climate change), there will be fish in your future — albeit fairly expensive fish. But don’t celebrate quite yet: to work well, such quotas require good science, good regulation and a commitment to flexibility.
Fishery Economics 101
The aforementioned individual transferable quota, or ITQ, is a policy tool that gives scientists sway in deciding how many fish can be caught sustainably, but defers to markets to determine who does the fishing and when. Policy wonks are aware that ITQs are really a form of tradable permit program that shares design characteristics — and goals — with other tools designed to offset the incentives to overuse scarce environmental resources.
For example, ITQs are conceptually close to programs that cap total emissions of air pollutants (notably carbon dioxide and sulfur dioxide), then apportion the rights to emit limited amounts from individual sources and — importantly — allow the polluters to buy and sell the rights in order to minimize their abatements costs while still hitting the collective abatement target.
The goal in implementing ITQs in fisheries — and tradable permit programs in other environmental contexts more generally — is to increase economic efficiency under ecological or environmental constraints. If markets are functioning well, then quotas will be purchased by those who can catch the fish most profitably. This will lead to maximizing the profitability of the catch, keeping in mind that regulators set the total catch to meet ecological sustainability criteria.
Individual Transferable Quotas Explained
Often simply called “catch share” programs, ITQs work by first establishing a cap on the maximum total quantity of a specific type of fish that can be harvested from a specific fishery, which is called the total allowable catch (TAC). The TAC is generally based on scientific assessments of the quantities that can be harvested without undermining future harvests. Then, the right to harvest portions of the TAC are allocated to fishers as individual quotas.
The shares are generally granted in perpetuity, giving the holder a percentage of the total harvest into the indefinite future — and incentives to invest in equipment for the long haul. But remember, the TAC is a target that must be regularly recalculated before ITQs are translated into pounds/kilos of fish that can be caught. The final, important step in ITQ development is allowing fishers to trade their allocations for a given season or for as long as the ITQ system endures.
Literally hundreds of fisheries defined by region and species around the world have made the transition from Wild-West-style free-for-alls to transparent implementation of ITQs. Before the advent of regulation, fish were initially relatively cheap and easy to access. That almost inevitably resulted in the well-known tragedy-of-the-commons scenario in which too many boats put in too much effort fighting over portions of dwindling total catches.
An economic explanation of this phenomenon focuses on individual incentives. Specifically, without management intervention, fishers have the incentive to enter and stay in the fishery as long as fishing generates profit — and, typically, to catch as much as they can as fast as they can, because otherwise another fisher may get the fish.
A first step in regulation often consists of establishing a country’s control over ocean fishing grounds in their “exclusive economic zone” (typically, as defined by a 1982 UN convention) by closing it to foreign fishing. Next, TACs for individual species are established with the goal of limiting the harvest to a sustainable level.
The process of setting TACs, often led by biologists, involves stock assessment and mathematical modeling of the dynamics of birth and death under the stresses of nature and, of course, ongoing fishing. To enforce the TAC, the fishery is typically closed once the annual catch limit is hit. If accomplished successfully, this will avoid unsustainable harvesting.
One can set a TAC that functions to sustain fish stocks, but that alone hardly guarantees fishing will be carried out in an economically efficient manner. Fishers still often have an incentive to enter the fishery and race to fish by expanding their operations along any margins possible (e.g., faster engines, bigger boats, more daring fishing tactics in dangerous seas) to secure a higher share of the available catch, provided fishers deem the extra effort to be profitable.
In some cases, limiting the total catch without limiting fishing creates absurd results. In one of the better-known examples, pressure from far too many boats increased to the point that Alaska’s halibut fisheries were open for just a few days a year in the late 1980s before the TAC was reached. The halibut boats (and fishers) were often idle for much of the rest of the year.
ITQs can time their catches to make it possible to sell them fresh rather than frozen. By the same token, they can time their harvests to seasonal changes in demand.
A step short of assigning ITQs, which is often opposed by fishers, is to restrict the number of boats that can fish by issuing a limited number of licenses — an approach dubbed “regulated restricted access.” However, the incentive to fish intensively (sometimes 24 hours a day or in terrible weather) in order to obtain fish before others use up the TAC exists under this regulatory structure as well.
ITQs, then, represent the next step, changing the incentive from racing to catch as many fish as is legally allowed to a system that maximizes the value of the resource. Specifically, assigning property rights to the catch to individual fishers eliminates the uncertainty over the quantity each will harvest. Taking the quantity they will harvest as given, fishers have the incentive to maximize the profit per unit of catch. Furthermore, because trading is permitted, less profitable operations have the incentive to sell their quotas to more profitable operations and exit, thus minimizing the total effort needed to land the allowable catch.
But Do They Really Work?
A whole lot of people think so. First proposed in the 1970s, there are now over 200 ITQ programs and other variants of catch-share schemes worldwide. These programs cover some of the world’s most valuable commercial fisheries, mostly in developed countries.
In some instances, including the fisheries in New Zealand and Iceland, countries have used ITQs to manage the primary species they harvest. More commonly, however, countries or regions (think Alaska) have moved to variations of ITQ programs that differ fishery by fishery. Although no consensus definition exists for a fishery, they are often differentiated based on gear permitted, geographic area or one or more target species (e.g., Gulf of Alaska longline halibut).
Yuri Smityuk/tass via Getty Images
For reasons political and technical, the United States has taken the piecemeal approach rather than placing all species under ITQ management. Currently, the U.S. has about two dozen programs — generally referred to as catch shares — that have been implemented by regional fishery management councils chartered under federal law and tailored in design to specific fisheries based on stakeholder feedback.
The numbers and varieties of ITQs worldwide has led to a proliferation of academic and government research examining ITQ performance. Their conclusions largely validate the approach: ITQs generally result in longer fishing seasons (meaning less gear sitting idle) and safer fisheries, since fishers are no longer playing a zero-sum game with others and therefore take fewer risks (such as fishing in wretched weather).
Then, too, there is solid evidence that ITQs can improve the economic profitability of fisheries, increasing the value per unit of fish. This comes about in a variety of ways. For example, fishers armed with ITQs can time their catches to make it possible to sell them fresh rather than frozen. By the same token, they can time their harvests to seasonal changes in demand. In the case of the aforementioned Alaskan halibut example, seasons have lengthened to close to year-round. That made it possible to shift the delivered product from being exclusively frozen to mostly fresh, and to reduce the size of the fleet needed to harvest the TAC.
Glitches, Small and Large
Although ITQs have theoretical efficiency advantages that have generally been borne out in practice, new fishery management issues have emerged since ITQs were first introduced. And these are raising questions about their compatibility with current societal goals.
One set of challenges has to do with implementation. The steps of setting a cap on the seasonal catch, allocating shares among fishers (incumbent and novice), and tracking quota ownership, trades and catch-quota reconciliation is no small task. Setting the TAC requires scientific knowledge about fish species and the dynamics of local ecologies that can be costly to obtain, and doling out (often very valuable) shares is bound to be problematic.
ITQs are typically grandfathered, or given to past participants in the fishery, but what constitutes a past participant is subject to debate. For example, what years are counted in the calculation?
Lastly, administering an ITQ program — with the associated tracking of quotas and ensuring that quota owners do not exceed their allowance — is generally more complicated, costly and invasive then shutting down a fishery after a total estimated catch is reached. Although the collective costs of enforcement are generally modest compared to the increased profits flowing from a wellfunctioning ITQ system, the programs are not typically designed to tax fishers to cover the additional management costs. This increased burden (as compared to setting TACs and stepping back) is likely one reason ITQs are more prevalent in rich countries and for species that are concentrated in exclusive economic zones.
Another challenge that has arisen in practice is that economic efficiency is rarely the sole consideration in program design. Instead, efficiency must coexist with other goals, including biological sustainability and ancillary social goals. Social goals can include keeping small-scale (and inefficient) fishers in the game or making sure that the catch is landed and processed in places and ways that sustain communities.
In theory, a program could be designed to maximize economic profitability and then redistribute some of the profits to support ancillary goals. For example, the FONCOPES program — implemented in Peru with the anchovy catch-share program — included a mandatory fee, based on quota size and crew per vessel, to support a benefits program. The benefits program targeted early crew retirement (this is demanding, dangerous work), training in technical careers and assistance to start small businesses. Programs like FONCOPES are rare, though, and even in the case of FONCOPES, the size and impact of the program is relatively small compared to the size of the fishery.
When an ITQ is implemented, quotas are typically grandfathered (based on pre-ITQ catches), resulting in a windfall to the fishers who receive them. What about the next generation of fishers?
In addition, using just one management instrument, such as ITQs, to meet multiple objectives likely results in conflicts among goals that require trade-offs. A relatively common means of meeting social goals is designating different types of quotas and restricting trade between the types. Different quota designations may be by fleet (e.g., near-shore, offshore), boat size (e.g., grouped by vessel lengths) or geographic region.
These different quota designations effectively form submarkets for ITQs, with trading permitted within but not between the quota groupings. Note the economic tension here: restricting trading to submarkets may well mean that the fishers who can use the ITQs most profitably are ineligible. On the other hand, introducing these trading restrictions can further social goals and may also make it easier to move opponents of ITQs out of the way, resulting in quicker implementation of the program. The key — always a matter of judgment — is to prevent the best from becoming the enemy of the good.
An alternative to mandating a marketbased approach like ITQs is to allocate nontradable quotas to groups, who can then make their own decisions of who wins and who loses. Although these more communityoriented approaches have been implemented successfully in smaller-scale fisheries with relatively low numbers of stakeholders, programs with this structure in larger commercial fisheries have generally had later been changed to more market-based approaches. This has occurred in the U.S. with the Northeast Multispecies Sector program, which covers most bottom-dwelling species off New England, and in international settings including Peru and Chile.
In addition to shorter-run considerations related to social outcomes, the longer-term impact of ITQs also needs to be considered. As discussed previously, when an ITQ is implemented, quotas are typically grandfathered (based on pre-ITQ catches), resulting in a windfall to the fishers who receive them. What about the next generation of fishers?
Quotas are required to fish, and leasing or buying a quota can be expensive, depending, of course, on the potential for profit. Therefore, a prospective fisher needs access to capital beyond the cost of fishing boats and equipment to enter the fishery. This serves as a constraint for potential new entrants, particularly those from poorer communities, raising concerns about equitable access.
A newer set of challenges for ITQs is arising as the scope of program design and evaluation is expanding. Just as biologists led the way in advocating for single-species TACs, with economists later contributing ideas related to maximizing the value of the catch, biologists and ecologists recently began advocating for a “general systems” perspective to setting catch limits. This perspective follows from the reality that the multiple species living within a fishery are interdependent; ignoring that connectivity may undermine overall fishery health.
Yao Feng/vcg via Getty Images
For example, fish relatively low on the food chain that survive by foraging may be targeted individually as a commercial catch. But the species may also be a critical food source for higher-level predators in the system, which may also be commercially fished. Accounting for sufficient availability of forage fish for higher-level predators may result in a lower TAC than if a single-species perspective to TAC-setting for the forage fish were taken.
Catch shares change the incentives that fishers face in the target fishery. But as they respond to these incentives, the impact may ripple through other fisheries — not to mention the communities that depend on them.
For example, less efficient fishers may exit fishery A when ITQs are first implemented because the quotas are more valuable to others, but then move on to fishery B, where they would not have otherwise fished. This raises a question: Do ITQs solve the problems of overcapitalization (too many boats) and low economic efficiency in one fishery, only to shift the problem to others? It is also possible that shifting effort from one fishery to another can have adverse social consequences — say, by dislocating smaller-scale, relatively inefficient incumbents who are nonetheless mainstays of remote communities.
Another consideration here relates to diversification of individual fishing “portfolios.” Recent research shows that catch-share systems can lead to a decrease in fisher portfolio diversification — that is, in the number of species and fisheries where individual boats operate. Specialization can be positive in terms of efficiency, with fishers using their knowledge and equipment to minimize catch effort. However, increasing specialization makes the enterprise riskier, since fishers become more vulnerable to the revenue variability that follows from fluctuating market prices for individual species and changes in fisheries’ TACs.
Unlike farming, say, corn or soybeans, there is no revenue insurance (public or private) available to protect fishers from low incomes in bad years — a problem that is magnified by the reality that fishers’ hardware costs don’t fall just because revenue diminishes. Hence, portfolio diversification across species, fisheries and even fishing method is their best bet.
The impact of climate change on where the fish will be (and in what quantity) raises questions about the capacity of ITQ programs to manage the sustainability of stocks that are moving in and out of legally defined management areas.
Retrospective analyses of ITQs and other catch-share programs have typically analyzed one ITQ at a time. What’s really needed is a better understanding of the consequences of multiple ITQs being implemented in a broad ecosystem affecting fish species, fishers and their communities. For example, do fishers place all their bets on a single ITQ — and, if so, why? Does the design of the fishing programs encourage or discourage cross-ITQ participation? More generally, we need to know how to design fishing incentives to maximize the collective interests of all the stakeholders.
An important step here is to gain better understanding of ITQs’ impact on the resilience of fishing communities — in particular, on the viability of local fish processers and other supply-chain actors. It’s already clear that more diverse portfolios can reduce the risk of economic dislocation of communities as well as of fishers themselves. This raises questions about the problematic nature of single-species ITQ programs that have high fixed costs to join — and the potential societal gains from flexibility to support movement between target species.
Much of this new thinking at the ecosystem scale meshes with planning to minimize the consequences of climate change. Climate change is already shifting fish stocks geographically and increasing variability in stocks in many regions. Shifts can occur between or within exclusive economic zones and therefore have implications at a local or regional scale.
Indeed, the impact of climate change on where the fish will be (and in what quantity) raises questions about the capacity of ITQ programs to manage the sustainability of stocks that are moving in and out of legally defined management areas. Again, the issue points toward the importance of “hardening” the fishing industry against volatility through diversification as a means of resilience.
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Looking back on close to a half-century of fisheries management following the initial introduction of individual transferable quotas as a management tool, it’s clear that the catch-share approach has succeeded in slowing unsustainable races to the bottom. And it has gone a long way to align the incentives facing fishers with practices that maximize sustainable fishery profit. But optimal fishery management remains a moving target. Although the ITQ is inarguably one of the most substantive policy contributions that resource economists have ever made, climate change (among other variables) implies that the task of designing optimal fishing incentives will remain a work in the progress.