Sustainable Economics in the Management of Fisheries and Natural Resources in the North Atlantic Nordic conference on the protection of the sea and living marine resources in the North Atlantic Tórshavn June 2001 Ragnar Arnason

Content of Talk 1.How natural resources should be utilized - All natural resources - not just living marine ones - General principles of optimal utilization - Fairly theoretical but (hopefully) still practical 2. Two dimensions: - Resources under national jurisdiction - Resources co-utilized by foreign nations

Background

North Atlantic Communities Six main communities: –Northern Norway, –Shetland, –Faroe Islands, –Iceland, –Greenland –Newfoundland Small and isolated Similar cultural background (except Newfoundland) Various degrees of political independence

Heavily dependent on natural resources For production activity (industry) –Living marine resources (all) –Farmland (all) –Forest and forestry (Northern Norway, Newfoundland) –Oil and minerals (N. Norway, Shetland, Greenland, Newf.l, Faroes) –Hydro- and geothermal energy ( N. Norway, Iceland, Newf.l) –Tourism (all) For the quality of life –Pristine and clean natural environment –Maintenance of cultural traditions and identity Dependence on Natural Resources

New industries depend on natural resources directly and indirectly –Power intensive industries –Tourism (pristine environment and culture) –Services and commerce (partly based on natural resource activities) –Even high tech industries (people  environment) Without their unique natural resources the North Atlantic communities could hardly exist Dependence on natural resources has not diminished substantially

Optimal use of natural resources Social importance implies the need for optimal use Optimal use = maximization of flow of benefits from the resources over time (Nota bene: market and non-market benefits) Optimality is crucial –Anything else implies social waste

Optimal use and Sustainability Optimal use may or may not imply sustainability –Renewable resources only –Optimality sometimes implies depletion However….. –Maximum present value of benefits usually implies sustainability –Communities’ desire to last implies sustainability –International pressure for sustainable resource use In a sense North Atlantic communities are custodians of their natural resources on behalf of the global community  Sustainability!

Resources under Domestic Jurisdiction

Good Resource Use Optimal utilization paths –Not constant utilization over time Identification of optimal paths –Science (geology, biology, engineering, economics, mathematics, statistics, sociology etc.) Implementation of these paths –The art of resource management (system design, politics, administration, management, enforcement technology, judicial processes)

Identification of optimal paths Find feasible utilization paths –Science, biology, geology etc. Select the optimal path –I.e. the one that maximizes present value of benefits over time –Economics, mathematics, statistics

Time Quantity T Extraction path Optimal non-renewable resource use: An example

Time Quantity Long term sustainable extraction rate Extraction paths Optimal renewable resource use: An example

Implementation of optimal paths Management system –Rules influencing resource use ( E.g. turfs, quotas, taxes, licences etc.) Enforcement system –Methods to enforce the management system (monitoring, inspection, policing) Judicial system –A system for sanctioning violators (courts, penalties etc.)

The Management System 1.Quantity constraints (commands) 2.Corrective taxes/subsidies (price corrections) 3.Property rights Three categories of methods

Quantity Constraints Aim: Alter natural resource use by commands Examples: –Restrictions on investments –Equipment requirements –Material restrictions –Restrictions on operating days –Production restrictions Generally economically inefficient –Do not generate social benefits –Costly to implement –But may conserve natural resources

The Simplest Natural Resource Model Resource use Values, $ Marginal costs Marginal benefits Q* Q0Q0 Maxmum Benefits

Quantity Constraints Resource use Values, $ Marginal costs Marginal benefits Q*=Q restricted Q0Q0 New marginal benefits

Corrective Taxes/Subsidies (Green taxes/subsidies) Aim: Alter incentives for natural resource use Examples –Tax on pollution (green taxes) –Tax on fish catch –Subsides for pollution abatement equipment –Subsidies for reduction of land improvement Can be economically efficient in theory –But difficult to administer correctly Nota bene: Increased government revenues?

The effect of corrective taxes Values, $ Resource use Marginal costs Marginal benefits Q* Q0Q0 Tax

Property Rights Aim: Alter incentives for natural resource use Examples –Mining rights –Territorial use rights (land use) –Fish quotas (IQs/ITQs) Economically efficient in theory (... and practice) –But often administratively demanding –Sometimes not feasible to implement Nota bene:Property rights are in many ways socially natural Property rights are foundation for the market system

Effects of property rights Resource use Values, $ Marginal costs Marginal benefits Q* Q0Q0 Property price

Property Rights and Equity The institution of property rights is often assumed to be inequitable However, property rights are compatible with any desired distribution of benefits – Initial allocation of property rights –Taxation and redistribution of resource rents

The International Dimension

Influences from other countries None of the North Atlantic communities has full control over their natural resources Examples of external impacts: –Water and airborne emissions (pollution) –Fishing from common stocks –Mining (from common resources) –Competing uses of resources (transport, military activities, turism etc.)

International shared resources Lead to common property problems Just like unmanaged use of domestic resources  Potential huge losses (of all possible economic gains)

The international situation Values, $ Resource use Marginal costs Marginal benefits Q* Q0Q0

Other international influences Political pressure for utilization of resources –Often induced by environmental organizations Amounts to extortion –Either you do it right, or else Extortion is generally economically inefficient Much better to “purchase” conservation (….from harvesters) Or, for that matter, “purchase extraction rights (….from conservationsists)

Q* is trading equilibrium Values, $ Resource use Marginal costs Marginal benefits Q* Q0Q0

How do deal with international resources: ? Particularly difficult because lack of management authority (unlike within nations)  need super-national authority that unifies management responsibilities If so, we are essentially in the single country management framework  Similar management solutions

International resource management National property rights as widely as possible –Benefits the whole –But note problems with distribution of benefits  Often difficult bargaining games But technical (and perhaps political) limits to property rights  Need also commonly managed areas  common property rights, international taxes

Conclusions North Atlantic communities are heavily dependent upon continued use of natural resources May also be regarded as custodians of a global natural resource heritage Morally obliged to utilize these resources as efficiency as possible 

This implies two things: Implement sensible resource management system domestically (i) Property rights (ii) Corrective taxes/subsidies Work toward international agreement on the sensible use of shared resources –This should be based on the same general management principles

End

System of current in the North Atlantic