Case Study: Enforcement and Economics of Fisheries

Thomas Sterner

Successful monitoring and enforcement are essential for any fishery management regime. Nevertheless, monitoring and enforcement of fisheries are costly and account for 25% of the public expenditure on fisheries (Sutinen and Kuperan 1999).

In some cases monitoring is financed by the fishing industry. For instance, in the U.S. halibut and sablefish fisheries, fishermen are required to enter catch information at landings on debit cards. Halibut fishermen are also required to record landings on fish tickets, which are checked against buyers' records. Capacity limitations and economic vulnerability of fishermen make this solution less feasible in developing countries.

Factors requires for regulatory compliance include content of the regulation, its distributional impact, and its design and implementation. Absent any of these factors, the resource users might consider the regulation illegitimate (Jentoft 1989). Eggert and Lokina (2010) studied regulatory compliance in the Tanzanian part of Lake Victoria fisheries, finding that the decision to comply is related to traditional deterrence variables like probability of detection and punishment, but also to legitimacy and social variables. In their study, a small but substantial part of the fishermen reacted neither to normative aspects not to traditional deterrence variables, instead persistently violating the regulation and using bribes to avoid punishment. When regulation is perceived as illegitimate or the economic incentives to violate are large, violation can be ubiquitous. Since in many developing, corruption is rampant (TI 2009), any attempt to increase enforcement might be offset by more frequent use of bribes. Enforcing officers may also accept bribes to avoid social disapproval, adding another level of complexity (Akpalu, Eggert, and Vondolia 2009).

References

Akpalu, W., H. Eggert and K. G. Vondolia. 2009. The enforcement of exogenous environmental regulation, social disapproval, and bribery. Journal of Socio-Economics 38(6): 940-945

Eggert, H. and R. Lokina. 2010. Regulatory compliance in Lake Victoria fisheries. Environment and Development Economics 15(2): 197-217

Jentoft, S. 1989. Fisheries co-management: Delegating government responsibility to fishermen's organizations. Marine Policy 13(2): 137-154

Sutinen, J. G. and K. Kuperan. 1999. A socio-economic theory of regulatory compliance. International Journal of Social Economics 26:174-193

TI (Transparency International). 2009. The 2009 global corruption barometer. Report by Riaño J., R. Hodess and A. Evans.

Case Study: Water Tariffs in Chile

Thomas Sterner

In recent decades, Chile has pursued neoliberal, market-oriented policies in the water sector. Chilean authorities have set out to privatize previously public water management services. The argument is that the role of the state should be to regulate services, not provide them. Currently, only a small percentage of urban water and sanitation services are provided by private enterprises. Rather, municipal water services are commonly provided by public corporations that operate as independent legal bodies.

Departing from the more traditional rate-of-return and price-cap regulations, prices of public water utilities in Chile are set using a particular form of yardstick regulation in which the benchmarking is based on hypothetical efficient firm (Montero 2005). The tariffs are based on calculations for “model enterprises” that allow for cost recovery and profitability (7% return on capital) for efficient firms and must avoid cross-subsidies between user categories. The recommended tariff structures include fixed charges for fixed costs (such as metering), capacity charges (depending on seasonal costs), consumption charges and charges for waste treatment. All of these charges vary by region (and season, where applicable), depending on the actual levels and costs of water supply, infrastructure, treatment, transport, sewage, and so forth.

When the new tariff structures were applied beginning in 1990, the rate increase was particularly dramatic for the low-volume consumers, who previously had the most heavily subsidized rates (e.g., more than 450% for users of <20 m3/month in the Atacama Region). To soften the blow, the reform was implemented slowly over four years. In addition, a system of subsidies still exists for consumers who are unable to afford their water bills. To achieve transparency in public affairs, this subsidy is not automatic in the form of a reduced “lifeline” tariff but is a direct, means-tested subsidy. To receive this subsidy, consumers must submit a written application to the local municipality explaining their inability to pay. Successful applicants must meet several conditions. For example, one condition for eligibility is that a water bill for 20 m3 must cost more than 5% of the household income.

In 1995 more than 15% of customers received subsidies. This subsidy arrangement effectively targets poor individuals while preserving transparency in the public use of money. However, the system does not incur administrative costs for the public agencies and time costs for poor consumers, and it may be somewhat humiliating for those who are forced to apply for the subsidy.

References

Montero, J. P. 2005. A model of final offer arbitration in regulation. Journal of Regulatory Economics 28(1): 273-291

Case Study: Willingness to Pay and Visit Parks

Thomas Sterner

One of the most emblematic of all nature conservancy is the creation of national parks. They have, however, often been controversial for a number of reasons. Parks take land away from agriculture, forestry and other activities, and on more than a few occasions local inhabitants have been quite forcefully displaced by park creation. Furthermore, national parks require quite sizable budgets to maintain and monitor.

The case is made that national parks are very important for biodiversity, ecosystem services, option and existence values, and the more concrete: They attract tourists. But what have the parks actually got to provide all this? Critics who want to see revenue note that revenue from parks has often been low. The main reason for this is often that fees are low – partly for reasons of social justice, because if they were higher, local residents with low income would be excluded. In recent years, however, both a considerable amount of research and a change in practical policies has taken place. The Environment for Development centers in Costa Rica and South Africa have taken a lead in this development.

Many developing states, however, are seeing an increasing trend of phasing our tax-based grants to national parks, placing even more pressure on the to set prices that will cover their costs. The pricing of national parks is also very important for at least two other reasons: first, it can be used to manage congestion, and second, it can be used to smooth seasonality in park visitation. Finally price discrimination policies should take into account the different income levels of national and international visitors - and maybe also other categories, such as students or pensioners. Alpízar (2006) develops a model which allows for differential pricing of visitors to national parks based on Ramsey pricing. More recently Alpízar and colleagues have collaborated with the park authorities in Costa Rica to test how revenues can be maximized by making contributions voluntary (partially) and providing information, gifts, or other incentives to elicit higher payments (Alpízar et al 2008a; 2008b).

References

Alpízar, F. 2006. The pricing of protected areas in nature-based tourism: a local perspective. Ecological Economics 56: 294-307

Alpízar, F., F. Carlsson, and O. Johansson-Stenman. 2008a. Does context matter more for hypothetical than for actual contributions? Evidence from a natural field experiment. Experimental Economics 11(3): 299-314

Alpízar, F., F. Carlsson, and O. Johansson-Stenman. 2008b. Anonymity, reciprocity and conformity: evidence from voluntary contributions from a national park in Costa Rica. Journal of Public Economics 92:1047-1060

For more information, visit www.efdinitiative.org/themes/conservation

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Environmental policy lecture videos

Thomas Sterner

Professor in Environmental Economics

University of Gothenburg, Gothenburg, Sweden

Introduction to Environmental Policy, PART 1

This lecture is an introduction to Environmental Policy, a course given at the University of Gothenburg in the spring of 2014. The purpose of the course is to highlight the need of implementing effective environmental policies and thus the course evaluates and discusses already existing instruments and their impact and political feasibility in different settings.

In this first lecture, divided into three parts, Professor Thomas Sterner from the University of Gothenburg gives an introduction to the topic.

The first ten minutes of this introductory lecture Professor Thomas Sterner introduces himself, the Environmental Economics Department at the University of Gothenburg and the course literature. As the lecturing starts in part 1, Sterner gives an overview of how policy instruments work and explains why it is important to understand and evaluate the effectiveness of the different methods. He discusses the role of incentives exemplifying by how a small policy change in Sweden increased the amount of marriages by three times for a couple of years. Sterner goes on and presents the concept of externalities.

Introduction to Environmental Policy, PART 2

Based on Chapter 4, 5, 6 and 7 in Policy Instruments for Environmental and Natural Resource Management

Sterner presents a table where he has categorized different economic policy instruments dividing them into four subgroups based on either affecting the price such as taxes, subsidies and charge and refund schemes, or rights like property rights, tradable permits, or regulation as for example banning or setting a minimum technological standard, or finally the category of info/legal which is based on public participation, voluntary agreements.

Sterner evaluates and exemplifies the instruments in different settings and shows why it is not always the case that one method works better in all countries, as for example gasoline taxes which work in Sweden but are hard to even mention in the US.

He also presents examples from around the world. How did they for example phase out a hazardous chemical widely used as Trichloroethylene or CFCs? Or make car companies start implementing catalytic converters in their cars? And how do you monitor that the policies are being respected?

Introduction to Environmental Policy, PART 3

Based on Chapter 9, 10, 11, 13 and 15 in Policy Instruments for Environmental and Natural Resource Management

Sterner discusses criteria important to consider when evaluating policy instruments, such as effectiveness, fairness, political feasibility and costs. Who suffers from emissions? Who will suffer the abatement costs? What uncertainty/risks are there? What does the market look like, is there a monopoly/oligopoly?

Sterner also presents some real world examples where different methods have been implemented and evaluates the outcome of the different policy instruments used.

Sulfur, nitrogen and appropriate policy instruments

Based on Chapter 20 and 21 in Policy Instruments for Environmental and Natural Resource Management

Presents the story of how sulfur and NOx emissions have been cut. Sterner starts his lecture by giving the example of acidification and how Swedish lakes died out mainly from German and British sulfur emissions, while down on the European continent and in the UK the problem was slim; a situation originating from differences in bedrock and wind patterns. Through sulfur taxes Sweden basically eliminated their sulfur emissions and later managed to influence the other countries to cut their emissions as well.

Sterner goes on discussing NOx, nitric oxide and nitrogen dioxide emissions. While for sulfur it is possible to count how much sulfur there originally is in the fuel and also how much is being captured, NOx is far more difficult. It is created from a side reaction due to heat in the ovens and these reactions are nonlinear - increasing drastically with heat. There are well known methods to cut NOx emissions but it is complicated to calculate how much is actually being cut. Thus, emissions have to be measured, and measurement appliances are by themselves so expensive it is not worth installing them on small plants.

The discussion illustrates how taxes work fine to cut sulfur emissions while they are not suitable to reduce NOx. What is an appropriate policy instrument to reduce the NOx? Sterner shows what has been done.

Also covered is how different markets (monopolies or oligopolies) are affected by various policies.

Discounting, PART 1

Based on Chapter 14 in Policy Instruments for Environmental and Natural Resource Management

Professor Sterner speaks about discounting, an exciting topic as he calls the discount rate "the value of the future". In spite of all uncertainties there are about impacts of Climate Change, one of the biggest uncertainties considering its future costs seems to come from the discount rate.

In part 1, Sterner discusses the concepts; he compares and explains the differences between discount rate and growth, and explains why it is impossible to have a steady high growth rate. He gives an example of the first contact he had with discount rates in the 70s in a discussion about the costs of dealing with nuclear waste. The opponents had argued that by estimating a high discount rate the future cost would be so low that it would not be a problem for future generation. This is the same logic, as Sterner shows, that Prof William Nordhaus uses in his calculations for the future costs of Climate Change, and also the main point which differs Nordhaus calculations from Prof Nicholas Stern.

When estimating future values, one has to be careful when assuming discount rate, Sterner calculates and shows how extremely different the outcomes are with just small differences in discount rate.

Discounting, PART 2

Based on Chapter 14 in Policy Instruments for Environmental and Natural Resource Management

In part 2, Sterner explains that the main argument for discounting could be derived from the assumption that rich people suffer less from paying than poor people. Assuming also that future generations will be richer, it becomes reasonable that they will not suffer from paying extra. Such assumptions indicate that one would care a lot about the poor, however, at the same time we know climate change is likely to strike hardest on the poor, in areas such as Bangladesh.

Sterner shows how he and Christian Azar have used Nordhaus model, modifying three things; one being dividing the world into rich and poor people; the main thing however, since Nordhaus basically assumes forever continuous growth, was adding an assumption that after the world has gotten 10 times bigger it would stop growing. By doing so the results became completely different.

Property rights and the ”Tragedy of the Commons”, PART 1

Based on Chapter 3 and 8 in in Policy Instruments for Environmental and Natural Resource Management

In a not so technical lecture Professor Sterner discusses the topic of property rights and the “Tragedy of the Commons”, an expression founded in 1968 by Garrett Hardin. Hardin claimed, when there is free access to some resource, people will try to reap as much as possible from it for their personal gain, until the resource collapses.

Elinor Ostrom who dedicated much of her research to “prove Hardin wrong”, showed there are numerous examples where commons have been properly managed among locals.

Sterner discusses the definition of property rights. He gives an example of England, how land and property rights were shaped already in the 11th century. He continues with more examples from Sweden, the U.S. and Ethiopia.

Water rights are discussed; the rights people have to rivers, and existing systems as the riparian doctrine and prior appropriation.

Property rights and the “Tragedy of the Commons”, PART 2

Based on Chapter 8 in in Policy Instruments for Environmental and Natural Resource Management

In part 2, Sterner continues to talk about water rights, giving a Spanish example. He then discusses the rights of squatters, which is an expression for people who occupy buildings. In England and more countries squatters actually have the right to stay in the occupied houses as long as they have not broken in. The class discusses the moral issue of such a rule and such actions.

Sterner discusses the aspect of nuisances - negative externalities that neighbors might have on your property. One example being a huge pig farm emitting bad smell next to a summer house, another a noisy industry.

Returning to Common Property Resource (CPR) management, Sterner shows how villages in southern Spain have managed common water resources without involving the government since early 15th century. Finally he goes through the prisoner´s dilemma and its relevance when considering the problem of open access resources.

Distribution of Costs, PART 1

Based on Chapter 12 in Policy Instruments for Environmental and Natural Resource Management

Professor Sterner discusses “The Distributions of Costs” and shows two curves, one of the environmental benefits and one of abatement cost, for example a tax on emissions. He explains why companies benefit on voluntary agreements and gives an intriguing example from Japan.

Sterner gives theoretical examples from when it is reasonable that society takes the cost and help firms clean up emissions. He also puts it into a historical context of property rights, comparing countries. He discusses the Polluter Pays Principle (PPP) and different scenarios on how payments can be divided.

Another topic is the importance of understanding when you should regulate emissions and when to use price type mechanisms. He refers to Weitzman’s article from 1974, comparing P and Q types of instruments. Adding the fundamental question of whether you believe it is the people or the polluter who owns the environment - a dimension often excluded in the debate. This is an issue also misinterpreted as something which defines the instrument when they are really two separate aspects.

Distribution of Costs, PART 2

Based on Chapter 12 in Policy Instruments for Environmental and Natural Resource Management

Professor Sterner starts part 2 by emphasizing how media and politicians often confuse price and quantity policies. For instance; taxes are good because they give revenue or permits are better for industry and so on. However, what they are missing is that both tax and permit schemes can be adapted to compensate or suit all parts. One can very well use price type instruments like a tax and compensate firms with subsidies, similar schemes apply for permits. There are also mixes of P and Q types of instruments.

The last six minutes, from minute 25 and on is an introduction of a case study, meant to do in groups of three. The instructions are there for those who want to try calculating on their own.

Distribution of Costs, PART 3

Based on Chapter 12 in Policy Instruments for Environmental and Natural Resource Management

Professor Sterner starts part 3 with congestion pricing. When you decide to drive your car during rush hour, not only are you delayed by heavy traffic, you also waste more gasoline than you would have if there were no congestion and you delay everyone else driving their cars. So what are the social costs, and what are the effects of congestion taxes?

Transportation, Energy and Climate, PART 1

Based on Chapter 14, 16, 17, 18 and 19 in Policy Instruments for Environmental and Natural Resource Management

Professor Thomas Sterner discusses transportation, energy and climate. He starts by showing diagrams of who gain and lose (in terms of time and money) from a congestion tax.

How environmentally friendly is a new car compared to an old one? A new car emits less emission but there are a lot of emissions when building cars, so how often should one change car? Furthermore, should congestion taxes vary depending on how old and dirty your car is?

The next topic is climate change, and Sterner touches upon some of all its complexity, e.g., the risks of sea level rise and the uncertainty concerning this. He also shows how much temperatures are expected to increase and how these increases differ around the world.

Transportation, Energy and Climate, PART 2

Based on Chapter 14, 16, 17, 18 and 19 in Policy Instruments for Environmental and Natural Resource Management

In part 2, Sterner continues the comparison of fuel prices and fuel use between the US and the UK. He moves on discussing whether fuel taxes are generally progressive or regressive, in other words if they affect the rich or the poor most. He gives an example of South Africa and illustrates how the richer part of the population is proportionately using more of their money on fuel than the poor (not only in absolute numbers) and are hence affected more by higher prices. The same is true in Kenya, even when you include traveling with public transportation.

Returning to climate change, Sterner mentions what he believes is the main reason why the climate negotiations are so tough and why it so hard to reach an agreement. He speaks about his experiences working with the IPCC and the fifth assessment report.

Blogs and Websites

• The Environment for Development (EfD) Initiative is a capacity building program in environmental economics focusing on research, policy interaction, and academic programs. www.efdinitiative.org
• Great source of reports, data and materials on policy instruments and the design of policy instruments by Thomas Sterner and colleagues http://www.efdinitiative.org/our-work/research-programs/policy-instruments
• The environmental organization Environment Defense Fund's blog by people located all around the World https://www.edf.org/blog
• Excellent blog by EDF Lead Economist Gernot Wagners blog about the environment and our economy http://gwagner.com/category/blog/
• From the perspective of an environmental think tank, Resources for the Future has a blog that is worth reading http://www.rff.org/blog
• Green Budget Europe (GBE) is a non-profit expert platform on environmental fiscal reform. Their aim is to promote a transformation of Europe's budgets and tax systems to ensure that Europe in the 21st century is environmentally, economically and socially sustainable. Follow this exciting new project on www.green-budget.eu
• The Green Growth Knowledge Platform (GGKP) is a global network of international organizations and experts that identifies and addresses major knowledge gaps in green growth theory and practice. http://www.greengrowthknowledge.org/