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The Use of Limited Access Privilege Programs in Mixed-Use Fisheries (2021)

Chapter: 2 Individual Quota Systems and LAPPs

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Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
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2

Individual Quota Systems and LAPPs

What are LAPPs? As noted in Chapter 1, the term Limited Access Privilege Program (LAPP) describes a set of programs that includes individual fishing quotas (IFQs), as defined by Congress in Section 1853 of the Magnuson-Stevens Fishery Conservation and Management Act (the MSA) Reauthorization of 2006.

This chapter builds on the earlier study of IFQs commissioned by Congress (NRC, 1999b). The first part explains what IFQs are, and why the economists who developed the theory of IFQs believed they would improve fisheries management. In short, the economists’ prediction was that by giving fishers individual quota shares, they would have greater incentive to invest more efficiently in fishing equipment and labor, to fish in a deliberate manner likely to improve quality and safety, and to support conservation measures that produced benefits over the long term.

The next part of the chapter provides different perspectives on IFQs. Some fisheries anthropologists, geographers, and sociologists have questioned whether the predicted benefits of IFQs, if they materialized, would outweigh potential harm to fishing enterprises and fishing communities. For example, economists might see a reduction of labor costs as a positive result because it makes fishing more efficient; cultural anthropologists, on the other hand, might find evidence that the reduction of labor costs was also the loss of valued livelihoods and businesses within a community. The differences are mainly disciplinary, with economists being more likely to focus on costs and benefits to businesses and individual fishers, with sociologists and anthropologists being more likely to also focus on other social units, including families and communities.

Finally, the chapter explains how Congress, in drafting the LAPP provisions, answered key questions in designing its own IFQ program guidelines. The answer to each of these key questions is an exercise in maximizing the hoped-for positive outcomes while minimizing negative outcomes, such as those identified by social scientists. Key questions Congress answered include the following:

  • Should the quota shares take the form of property or of a license to fish?
  • How should the government allocate quota shares at the outset of the program?
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
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  • Should all fishers in the relevant fishery be required to hold shares before fishing, or should some kinds of fishers, for example, those who fish for recreation or subsistence, be exempt?
  • Should shareholders be permitted to buy and sell shares?
  • If shares can be bought and sold, should there be limits on how many shares an individual fisher can acquire?
  • Should the government facilitate the purchase of shares by fishers who are unable to otherwise afford them?
  • And, should shareholders be required to contribute financially to the management of the fishery?

In drafting LAPP provisions, Congress not only had to take into account the pros and cons of various forms of IFQ programs, but also it had to ensure that whatever form it ultimately chose was consistent with the broader MSA. For example, National Standard One is that “conservation and management measures shall prevent overfishing while achieving, on a continuing basis, the optimum yield from each fishery for the United States fishing industry.” National Standard Five underscores the importance of efficiency, but also provides that it cannot be the sole objective of any management measure. National Standard Eight requires that the choice of management measures should, where possible, provide the sustained participation of fishing communities and minimize any adverse economic impacts (16 U.S. Code § 1851).

INDIVIDUAL QUOTAS: THE ECONOMISTS’ RATIONALE

“In the sea fisheries the natural resource is not private property; hence the rent it may yield is not capable of being appropriated by anyone” (Gordon, 1954).

The historical path of fishery regulation that led to LAPPs began with the application of economic theories to the study and management of fishery systems. Fish stocks are classic examples of common-pool resource (CPR) systems, resources for which it is difficult to exclude users, and where the use of the CPR by one user can decrease the resource benefits for all users. CPRs may be managed via a variety of property relations (e.g., no property, government or state property, common property, and private property). A CPR with little to no effective restrictions on the right to participate is known as “open access.” In an open access fishery, the immediate benefits of catching a fish go to the individual and, in deciding whether or not to catch that fish, the individual will take into account their own costs. The problem is that individual fishers often have very little incentive to consider the impacts of their decision on the entire stock of fish and on other resource reliant individuals. To understand the practical impacts of this theoretical problem, assume an open access fishery that has, at present, 100 fishers. If catching a fish is worth net $1.00 to fishers, but also reduces the long-term value of the fishery by $90.00 by impairing stock productivity, fishers will rationally choose to catch the fish because they will make a ten-cent profit on it. ($1.00 – $(90.00/100.00) = $0.10). In other words, participants in an open access fishery will rationally make individual decisions contrary to the collective long-term health of the fishery, jeopardizing conservation efforts as mandated and primary in the national standards for the MSA.

Open access fisheries can also lead to inefficient use of labor and capital. Although the term “open access” suggests a free-for-all, many fisheries are actually “regulated commons,” in which government managers set an overall annual limit on catch, then open fishing to all willing participants (see Box 2.1). In this form of open access, fishers have a strong incentive to catch fish as quickly as possible because the government will close the fishery once the overall annual limit has been reached. This form of management is also known as the source of “derby fishing” or the “race

Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×

Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×

to fish.” It leads competitive firms to invest in labor and capital to catch fish as quickly as possible. Investments made in fishing speed represent a waste of resources if the same amount of fish could be caught at a slower pace. Invariably, the quality of the fish caught (and thus their value) in derby fisheries deteriorates because of gluts to the processing and distribution parts of the supply chain. Rushing to catch fish can also create safety problems, because fishers are motivated to fish quickly, discounting risks associated with bad weather or the condition of their vessels.

The proposal to use IFQs as part of fisheries management was a way to solve the excludability problem while maximizing the aggregate producer surplus generated from the resource. Christy (1973) suggested that the limited licenses be issued in terms of units of harvest (which could be effectively controlled by a TAC) rather than in terms of vessels. Because the secure “privilege” to harvest a specified amount of catch each year would eliminate the race to fish, the owner of the license could focus on arranging fishing activity in time, place, and method to maximize the value of the harvest. As noted above, slower, deliberate fishing can eliminate unnecessary costs and promote safety as well. It can also improve the quality of fish landed, because fishers can take their time both catching fish and unloading catches at the dock.

In the economic view, IFQ programs, depending on how they are structured, could have other benefits as well. If the privilege to harvest a specific amount is indefinite in duration and the amount allowed under each share is based on a percentage of the total allowable catch (TAC), fishers would have more reasons to care about the long-term sustainability of the fishery.

Individual transferable quota (ITQ) programs theoretically represent another twist on IFQs, even though the terms IFQ and ITQ are often used interchangeably in the United States (see Figure 1.1). Transferability means that the program allows holders of quota shares and/or the corresponding annual allocations to sell or lease them to other fishers. By creating a market for the long-run privilege (i.e., shares) or the corresponding short-run annual harvest (i.e., allocation), transferability can generate additional efficiency gains. In the share market, buyers are those who assign a higher net value to the fish than sellers. Net value is the difference between marginal cost of catching a fish and the price for which the fish (or the opportunity to catch the fish) can be sold. If the committee assumes that price is constant across the fishery (such as if the market were to reach equilibrium), then shares and/or allocations should end up in the hands of those participants who have lower marginal costs of catching fish. The total variable costs of fishing, integrated under marginal cost curves and summed across the fishery, are minimized.

The extent to which transferability can enhance efficiency gains, such as through markets reaching equilibrium, will ultimately depend on the extent to which the markets have the characteristics to support a perfectly competitive equilibrium (i.e., homogeneous good, many buyers and sellers, full information, and no barriers to entry and exit). For at least some fisheries, these conditions will not be met. Transferability also creates opportunities to address catch and management uncertainty in multispecies fisheries in which vessels cannot perfectly target species under individual quota management and can use trading to quota balance (i.e., fill their individual allocations of species without exceeding regulated limits).

In brief, fisheries economists predict that moving from a regulated commons (derby with a TAC), or a regulated, open-access fishery, to an IFQ will eliminate the race to fish, thus reducing fishing costs, improving safety, and giving fishers a greater incentive to care about the long-term health of the fishery. If transferability is allowed, the resulting ITQ program can produce the benefits of IFQs while adding additional efficiency gains. All of the cases in this study are ITQs, but the committee follows the standard practice in the United States of using the term IFQ for them in the rest of this report.

Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×

OTHER CONSEQUENCES OF LAPPs

The Statement of Task asks the committee to examine the positive and negative effects of the LAPPs that have been implemented pursuant to the MSA. The committee focuses on the ways features of LAPPs generate positive and negative impacts within mixed-use fisheries.

For example, IFQ programs allow fishing enterprises to reduce costs because they can have more control over when and how they fish. If they reduce capital and labor costs and increase profits, this can benefit the shareholders, vessel owners, and fishing crews and may generate more wealth for the community, depending on how the income is used. But there can be other consequences that are negative for some. For example, some former hired captains and crew members will no longer be employed, and some equipment dealers or vessel maintenance companies might lose revenue. Both of these changes can affect not only the individuals and companies that are directly affected, but the communities around them.

The use of transferable IFQs can create additional problems. In an IFQ fishery with no or limited transferability, the government distributes the shares to fishers without charge; when fishers retire, for example, they return their shares to the government, which then redistributes them. In an ITQ fishery, where the quota shares are transferable, the retiring fishers can sell their shares on the market. The market for shares created by ITQ programs raises important questions. For example, should one fisher be allowed to purchase all of the shares in a fishery, thus potentially consolidating benefits to one community? And, what if there are fishers who want to fish—because they have been trained to fish or because it is culturally important to them—but who cannot afford to buy shares in the quota market? With respect to the former question, LAPPs implemented in the United States are directed to consider restrictions to prevent excessive consolidation. With respect to the latter question, there are several potential solutions such as improving access to market information and sellers, establishing a grant or loan program, and providing job retraining.

REAL-WORLD EXPERIENCE INFORMING THE 2006 AMENDMENTS

The first major IFQ program was instituted in New Zealand in 1986 and served as an important source of ideas for IFQs in the United States (Anderson, 1989). The first program in the United States was the surf clam and ocean quahog fishery in 1990. The wreckfish fishery in this study was close behind, in 1991. These early experiments with IFQs came shortly after experiments with cap-and-trade programs in the 1970s as a means to address other market failures in environmental management (Fowlie and Perloff, 2013; Tietenberg, 2002). The North Pacific halibut and sablefish IFQ system began in 1995. But in 1996 the U.S. Congress imposed a moratorium on new IFQ-like programs that lasted until 2002. In 2006 Congress reauthorized the MSA, Section 303A, with provisions for LAPPs (see Box 2.2). The concepts of “catch shares” and LAPPs became widely used. In 2007, the Gulf of Mexico red snapper IFQ LAPP was implemented, having been stalled by the moratorium. In 2009, the golden tilefish IFQ LAPP came into effect, soon followed by an IFQ LAPP for New England Atlantic sea scallops and for Gulf of Mexico grouper and tilefish in 2010. All of these programs involved transferable individual quotas and are thus technically ITQs. New England’s multispecies groundfish sectors, similar to LAPPs but managed on a cooperative basis, began in 2010 as well. Between 1999 and 2011, the West Coast and North Pacific saw a variety of programs with different structures, including cooperatives, permit stacking, and “rationalization,” as well as the unique Western Alaska Community Development Quota Program (1992).1 Finally,

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1In the North Pacific region, some LAPPs are assigned to cooperatives; certain limited access fisheries allow permit holders to use more than one permit on a vessel, which is called permit stacking; and the word “rationalization” has been used to refer to particular cases of assigning individual quotas.

Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×

the individual bluefin quota (IBQ) program was created for managing bycatch of Atlantic bluefin tuna in 2015.2

As described above, IFQs were initially conceived of as policy tools used to address the open access problem and promote the economic goal of efficiency by reducing overcapitalization. They have been called “one of the great institutional changes of our time: the enclosure and privatization of the common resources of the ocean” (Neher et al., 1989), and they continue to be praised as a practical solution to the excludability problem for a common-pool resource and as a means to promote economic efficiency. However, the major IFQ programs in New Zealand, Iceland, and the United States gained many critics. In Iceland, one of the first countries to utilize IFQs on a broad scale, the programs have been described as “one of the most contentious and tumultuous issues in Icelandic political history” (Helgason and Pálsson, 1998).

Social scientists studying the human dimensions of fisheries and fishing communities have critiqued conceptualizations of IFQ systems that center on the goal of efficiency as leaving out or minimizing considerations such as livelihood and community sustainability, social justice, and distributional equity, among other goals that fisheries management policy could explicitly address. Numerous studies suggested that IFQs, particularly those with transferability (i.e., the ITQs), fundamentally transform fishery systems (e.g., Carothers and Chambers, 2012; McCay, 2004; McCormack, 2017; NRC, 1999b; Olson, 2011; Pinkerton, 2015; Pinkerton and Davis, 2015; Young et al., 2018).

For those and other reasons, including struggles between harvesters and processors over control of quota (see Matulich and Clark, 2003), there was considerable resistance to IFQs in U.S. fisheries. Congress placed a moratorium on them in U.S. fisheries in its 1996 reauthorization of the MSA and called for a study, which was published as Sharing the Fish (NRC, 1999b). Issues highlighted in Sharing the Fish and other studies (e.g., GAO, 2004), as well as concerns of fishers, fishing communities, crews, processors, and councils, fed into Congress’s next reauthorization, which went into effect in 2007 and included specification of LAPPs (Iudicello and Lueders, 2016). Support for IFQs also expanded as environmental nongovernmental organizations (NGOs) shifted position to become more in favor of them (e.g., Griffin, 2009; Pew Environment Group, 2009). A review of the NGO literature showed that the term “catch share” was increasingly used along with the thesis that private ownership promotes stewardship and conservation (Carothers and Chambers, 2012).3

After the 1996-2002 moratorium on IFQs, National Oceanic and Atmospheric Administration (NOAA) policy shifted to promoting catch shares not only for efficiency but also “to help rebuild and sustain fisheries and support fishers, communities and vibrant working waterfronts” (NOAA Fisheries, 2010). Furthermore, concerns about livelihood, social justice, and other social matters, highlighted in the National Research Council (1999b) study, were reflected in the design of LAPPs (Stoll and Holliday, 2014). The 2006 reauthorization of the MSA highlights the need for equity and fairness in allocation of individual privileges, the importance of the social and cultural framework in their design and implementation, and the need to address questions about transferability and new entrants.

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2See https://www.fisheries.noaa.gov/national/sustainable-fisheries/catch-share-programs-council-region (accessed December 28, 2020).

3The committee was not tasked to examine the complex issue of the property status of IFQs and other LAPPs in relation to conservation and has chosen not to do so given the priority of other questions. Macinko and Bromley (2004) have criticized property claims for ITQs, but most scholars accept that they constitute quasi-property. Court cases and legal scholarship show that they are best viewed as property for some purposes but not others (Iudicello and Lueders, 2016). They may be viewed as property in bankruptcy or divorce proceedings, and the privileges are considered property for purposes of the Due Process Clause of the Fifth Amendment. Status as “property” in these regards may help fishing groups intervene in court cases based on having property at stake. However, the MSA is clear that they are revocable privileges assigned by government, and not private property with regard to the Takings Clause of the Fifth Amendment. As a result, they are not subject to a takings claim against the government if the government revokes the privileges.

Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×

Just as the initial evolution of IFQs was due to a process of adapting to limited entry programs, the more recent evolution has involved learning and adapting to circumstances that influenced today’s programs (McCay, 2004). For instance, early Canadian experiments in the Bay of Fundy underscored the critical role of monitoring and enforcement, which delimits the use of IFQs (Burke and Macgillivray, 1990). The New Zealand experience revealed risks of treating the allocations as complete property rather than privileges and not fully understanding the full range of claimants to rights or privileges (De Alessi, 2012; Guth, 2001; Stewart and Callagher, 2011). The initial New Zealand program for orange roughy showed the wisdom of allocating percentages of an annual quota rather than specific amounts of fish, a practice now widely followed (Boyd and Dewees, 1992). The first U.S. IFQ program, for surf clams and ocean quahogs, dramatized how rapidly extreme consolidation of holdings might occur and the critical importance of the initial distribution (Adelaja et al., 1998; McCay and Brandt, 2001), information about which fueled fisher resistance to IFQs along the Atlantic seaboard. A British Columbia program raised questions about fairness to crew members and potential new entrants in the manner in which the cost of leasing or buying shares is allocated (Pinkerton and Edwards, 2009).

The IFQ program for crab in the Bering Sea and Aleutian Islands included a number of features to address distributional concerns and support fishing communities: including allocating some quota share to captains, vesting processing quota share in processors to preserve historic landings patterns (which required special legislation), and an arbitration mechanism for ex-vessel harvesters designed to preserve the historic division of rents between processors and harvesters. Still other programs have design features intended to protect small-scale and owner-operator fishing enterprises and, by implication, fishing communities. For example, the North Pacific halibut and sablefish IFQ program adopted in 1995 has provisions designed to maintain the owner-operator structure of parts of the industry such as quota caps, transfer limitations, and rules on quota leasing (Szymkowiak and Himes-Cornell, 2015). However, there have been dramatic shifts in access to the halibut fishery as a result of the IFQ program, particularly the loss of access rights in rural and Indigenous communities (Carothers, 2010; Carothers et al., 2010; NPFMC, 2016). For example, in the Gulf of Alaska region communities are excluded from the Community Development Quota program in western Alaska (see Haapala, 2019; NRC, 1999a; Pinkerton and Langdon, 2019). In 2004, a new community quota purchase program began for the Gulf of Alaska to address these inequities, but has been largely unsuccessful in returning fishing rights to longstanding halibut-dependent communities in the Gulf region (Carothers, 2011; Langdon, 2008; Langdon and Springer, 2007; NPFMC, 2010; Richmond, 2013; Sea Grant Alaska, 2009; Soliman, 2015).

CONGRESS CREATES ITS OWN BRAND OF IFQs: LAPPs

The LAPP provisions in Section 1853a of the MSA represent Congress’s attempt to balance the potential benefits and costs of catch share programs, particularly IFQs, including ITQs.

Issues in Designing an Individual Fishery Quota Program

Transferability

A major choice that law and policy makers need to make when implementing an IFQ program is whether to make the privileges transferable, that is, to allow permit holders to buy and sell or lease privileges as an ITQ. A program allowing managers to grant fishers nontransferable rights can produce many benefits; however, adding transferability to the picture creates other kinds of potential benefits, including the possibility of making fishing more efficient and profitable for fishers through trading. Transferability also creates opportunities to address catch and management uncertainty in

Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×

multispecies fisheries in which vessels cannot perfectly target a menu of individual species allocations under individual quota management and can thus use trading to quota balance. These potential benefits, though, could come at a cost, including reduced access and lost employment if excess downsizing occurs, and with it excess consolidation of ownership and control. A decision to allow transferability in part reflects law and policy makers’ judgment of the relative importance of efficiency, access, and employment opportunities in the fisheries within their respective jurisdictions.

The question of whether shareholders can buy, sell, or lease individual shares is of enormous significance. If the shares are transferable, there may be efficiency gains but they also may be accumulated and consolidated into fewer entities. In addition, the use of shares can be effectively consolidated by collaboration within families (and extended families), companies, communities, and fish houses although consolidation is to be addressed by accumulation caps. The standard characterization in the fishery management plans implies that shareholders are distinct individuals with a single investment making independent decisions. However, “shareholders” can often be individuals, firms, or partnerships, and the link between shareholding entities and actual fishing enterprises is not clear and can be complicated by intractable relationships (e.g., families).

Although it can generate efficiency gains, creating a market for IFQs and making them the prerequisite for participation in a fishery can result in social costs in the form of loss of access for certain groups of fishers and communities, reduced employment, the creation of political power due to enhanced profitability for those holding the privileges and loss of power for those without, and high barriers to new entrants to the fishery.

Scope of Program: To Whom Should the Rights Be Allocated?

From a long-run economic efficiency point of view, if the rights are transferable, it should not matter how the rights are initially allocated. With a perfectly competitive market there will be incentives for the more efficient producers to purchase or lease rights from the less efficient producers. The incentives for these trades will continue until the allowable harvest is landed by the entities that can do so at the highest net present value of the quota shares.

Although in theory LAPP systems could allocate quota to a wide array of interest groups, in practice, there are no individual quota programs that include this wide a range of users to date. In fact, almost all quota programs are limited to the commercial fishing sector, exceptions being a few for the for-hire sector (e.g., for Alaska halibut) and some collaborative arrangements with environmental organizations. For example, The Nature Conservancy worked with fishers to establish a risk pool for bycatch of low-quota species in the West Coast groundfish LAPP (Kauer et al., 2018).4 There would seem to be several reasons that quota programs are mostly limited to the commercial sector. First, it will often be the case that net value per fish varies more between sectors than within sectors. For example, while the commercial sector, under the assumption of constant price, tries to minimize costs of catching fish to maximize profits, recreational fishers are seeking to maximize their net utility from the fishing experience. Because users value quota for different purposes, a transferable quota system that included both recreational and commercial fishers could lead to large shifts in holdings between traditional commercial versus recreational sectors, especially if less commonly measured and considered values (particularly in the long run) were discounted. Ideally the transferrable market system would fully incorporate the social values generated by the existence of each sector, including the provision of food to sustain a local community and community stability, through employment and ancillary businesses in many aspects of the commercial fishery. However, existing transaction markets only capture private benefits and costs (although social factors could

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4See https://www.nature.org/en-us/about-us/where-we-work/united-states/california/stories-in-california/californiagroundfish-project (accessed July 16, 2021).

Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×

be explicitly incorporated through resource rents). Second, the market for shares can only function where potential buyers believe that shares represent the only lawful (or practically lawful) way to catch fish. Enforcement is easiest in commercial fisheries because of the relatively small numbers of participants and the ease of tracking commercial catches. Other sources of fish mortality, such as recreational fishing or pollution, are much harder to monitor and regulate effectively. Recreational fishing involves large numbers of participants who are very heterogeneous, highly dispersed, do not have to use marinas, and are somewhat unpredictable in behavior, adding to enforcement challenges.

The economic perspective is dominant in the design of LAPPs. However, equity and environmental justice considerations could support giving rights to those who are highly dependent, were historically and remain deeply engaged in the fishery, have cultural ties to fishing, and so forth. For example, the LAPP provision in the MSA requires an effort to “promote the sustained participation of small owner-operated fishing vessels and fishing communities that depend on the fisheries.” Sustained participation is also at the heart of grandfathering people into such systems; historical participants have invested in their operations, in their vessels, in training crews, and (in some cases) in developing their markets. A more open definition of who is eligible to participate can disadvantage smaller operators and those supporting fishing communities as larger operations and outside investors compete to be shareholders.

Initial Allocation

In order for an individual quota system to work, the government must at the outset create shares and then distribute those to vessel owners or other stakeholders. The manner of initial allocation has tremendous implications for the distribution of benefits from IFQs, and hence the political acceptability of the program itself given entrenched power structures. It may also, under certain conditions, influence the final outcome of who holds rights and harvests the quota—thereby influencing efficiency as well. In principle, with well-functioning markets for quota and free transferability, the initial allocation formula may be irrelevant to the final ownership because quota can easily find its way to those who can harvest it most efficiently. This “independence property” has some empirical support from cap-and-trade pollution markets (Fowlie and Perloff, 2013), but has not been extensively studied in fisheries. In practice, relatively small numbers of fishers, potential market power, and information failures may all serve as transaction costs in IFQ markets, causing the initial allocation to matter for the realized efficiency.

The economists’ preferred method for the initial distribution of shares would likely be some form of auction, again helping to ensure that shares move to their highest and best use, and reduce the problem of windfall profits, whereby the initial recipients of shares have an advantage in subsequent trading. Auctions also have the beneficial effect of taking government officials out of allocation decision making (at least at the firm level), thereby limiting the potential for both actual bias and complaints about bias. Because they generate revenue, auctions ensure that the public receives some compensation for the fish it is handing over for private profit, making fishery management more in line with other publicly managed extractive resources, such as mineral and oil leases.

Despite these benefits, there are legitimate concerns about the impact of auctions on the demographics of a fishery. To start, the potential effects of an auction on the fishery resemble the effects of transferability: the winning bidders will be, all other things being equal, those with the highest net present value and the greatest access to capital. Risk preferences are also an issue as there is no guarantee that the programs will continue in the future. Auctions would also favor fishers who have been in the fishery longest and whose cost structure (e.g., absence of boat payments) supports higher bids through their access to capital. While this could be efficient, it would also lock in the status quo, as defined by some measure of historical participation and, perhaps, investment concerns

Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×

about the impacts of consolidation on fishing communities. However, the use of auctions implies that the historical participants, which perhaps advantaged some in many ways, would be paying for their shares and those funds could be used to provide subsidies or loans to those seeking entry in subsequent years in order to address socioeconomic priorities of the fishery.

The most commonly used approach to the initial allocation of shares is to base the distribution formula on each individual’s historical catches. While this approach is simple and fair in concept because it is grounded in a form of reliance interest, it is controversial because it requires managers to define “history.” Specifically, managers must determine which (and whose) history counts. It is typical, for example, to exclude several years of recent fishing history in calculating share allocations. The purpose of excluding this history is to remove fishers’ incentive to increase catches while the individual quota plan is being developed. While this makes sense, it may also unfairly punish fishers who simply happened to do well during that time period or are new to the fishery. It is also the case that extending the time period for eligibility to allow fishers to each pick their best years over a long time horizon means that, on average, the associated/implied annual TAC would need to be higher and, as a result, the shares each receive could be less than optimal.

A politically determined approach to allocation, as opposed to a market-driven approach such as auctions, opens the door to favoritism or, at least, the perception of favoritism on the part of government decision makers. At the same time, a political approach does not guarantee but allows for the possibility that decision makers can structure the initial demographics of the fishery in a way that fairly takes into account the social benefits of certain distribution patterns. Because assessments of efficiency and fairness inevitably include subjective judgments, there is no objectively optimal approach to allocation.

Management Costs

Fisheries management costs money. Proper management requires good science about all of the dimensions of fishery systems. Moreover, no management scheme can be effective without some level of enforcement. In most U.S. fisheries management, the government bears the costs of science and enforcement. IFQ programs, specifically those in which shares are marketable, create private wealth by permitting costs to be rationalized. Given enhanced profitability (and the public nature of the underlying resource), it is reasonable to suggest that the fishing industry should pay some or all management costs.

While there are obvious benefits to the public from shifting costs to private parties, the arrangement can be viewed as leading to shareholder “ownership” of science and enforcement. Nonshareholders, such as recreational fishers in many cases, could be concerned that science and enforcement efforts would be focused on ensuring shareholder success instead of the success of the fishery more generally.

Accessibility (for future entry into program)

By imposing a new cost on potential entrants into the fishery—the cost of purchasing shares from an existing shareholder—IFQ programs may increase barriers to entry, even when there are existing entry costs such as limited entry permits. A barrier to entry, whether it be a formal right or an informal sanction, is necessary to solve the exclusion problem. Higher barriers will have the greatest effect on younger and less experienced fishers, who in a more traditionally managed fishery would have the opportunity to learn and earn their way to success. In many communities, fisheries have long offered economic opportunities to people without much formal education and training, to those without resources, as well as to immigrants and other disadvantaged groups. In some areas, there are few other occupations available. However, in places where absence of exclu-

Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
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sion led to overfishing, these opportunities with low costs of entry may become less economically viable over time.

How Congress Addressed the Issues in Section 1853a

Transferability and Limits on Transfer

Although Section 1853a(b)(4) establishes that LAPP permits do not constitute property, Section 1853a(c)(7) expressly allows councils to make LAPP permits transferable. Consistent with the general theory of ITQs, transferability will reduce capacity by facilitating trades between more and less efficient fishers, making it possible for the more efficient to buy out the less efficient.

Due to other policy goals, including food security and job protection, the MSA limits potential efficiency gains by limiting transferability. In Section 1853a(c)(1)(D), Congress artificially limited the size of markets for LAPP permits by prohibiting them from being transferred to “any person other than a United States citizen, a corporation, partnership, or other entity established under the laws of the United States or any State, or a permanent resident alien.” Section 1853a(c)(5)(D) requires the Councils or the Secretary, depending on which is developing the LAPP, to “ensure that limited access privilege holders do not acquire an excessive share of the total limited access privileges in the program.” Pursuant to that section, all LAPPs must “establish a maximum share, expressed as a percentage of the total limited access privileges, that a limited access privilege holder is permitted to hold, acquire, or use” and can “establish any other limitations or measures necessary to prevent an inequitable concentration of limited access privileges.”

Scope of Program: To Whom Should Rights Be Allocated?

The MSA does not require the inclusion of all fishery users in any LAPP. The MSA does provide for two types of LAPPs—for “fishing communities” and “regional fishery associations”—that allow for the inclusion of a wide range of direct and indirect users, including “residents who conduct commercial or recreational fishing, processing, or fishery-dependent support businesses within the Council’s management area.”5

The scope of any LAPP is likely to be closely correlated to the specific fishing sectors that drove its creation in the first place. The MSA, in Section 1853a(c)(6) (“Program Initiation”), lays out the process by which LAPPs are generally to be created. The process of establishing a LAPP can be initiated either by one of the Councils or by a petition submitted by fishers. The MSA does not define the term “fishermen” or “fishers.” Section 1853a(c)(6)(B) does, however, state that petitions can be submitted only by “group[s] of fishers constituting more than 50 percent of the permit holders, or holding more than 50 percent of the allocation, in the fishery.”

The MSA creates special process requirements, in the form of referenda, for certain fisheries in the Gulf of Mexico and New England.6 The Gulf of Mexico provision requires a majority vote of those who “substantially fished” the species in question. The New England provisions require a two-thirds vote among a stakeholder group that includes not just fishers who hold allocation or permits but also “crew members who derive a significant percentage of their total income from the fishery.”

Initial Allocation

As noted, the initial allocation of shares in an individual quota fishery will often be hotly contested because the distribution of shares is the distribution of wealth (rent). Congress chose

___________________

516 U.S.C. § 1853a(c)(3)(A)(III).

616 U.S.C. § 1853a(c)(6)(D).

Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×

to make initial allocation decisions political rather than market driven. In Section 1853a(c), the MSA mandates that the Councils “establish procedures to ensure fair and equitable initial allocations, including consideration of current and historical harvests; employment in the harvesting and processing sectors; investments in, and dependence upon, the fishery; and, the current and historical participation of fishing communities.” While meeting these criteria would require the input of quantitative information (such as data on historical catches), the final decision is a policy one. In choosing which years to include as relevant history, for example, the Councils must make subjective judgments. It should be noted that while the MSA allows the Councils to use auctions for initial (or subsequent) allocation, those auctions must be structured to meet the above-listed requirements relating to “fair and equitable allocation.”7

In order to help mitigate impacts on fishery participants who end up on the outside of the LAPP, the allocation provisions in the MSA require that the Councils “consider the basic cultural and social framework of the fishery,” with attention to the needs of smaller owner-operated fishing vessels and fisheries dependent fishing communities. This includes (1) the development of policies to promote the sustained participation of small owner-operated fishing vessels and fishing communities that depend on the fisheries, including regional or port-specific landing or delivery requirements; and (2) procedures to address concerns over excessive geographic or other consolidation in the harvesting or processing sectors of the fishery. In addition, there is a requirement that a LAPP develop an appeals process.

Accessibility (for future entry into program)

The MSA contains various provisions meant to facilitate entry into LAPPs, both from the outset and after the program and the market for permits have begun to operate. Section 1853a(c) (5)(C) (“Allocation”) requires the Councils to “include measures to assist, when necessary and appropriate, entry-level and small vessel owner-operators, captains, crews, and fishing communities through set-asides of harvesting allocations, including providing privileges, which may include set-asides or allocations of harvesting privileges, or economic assistance in the purchase of limited access privileges.”

Section 1853a(g) gives the Councils the option of creating a fund in order to facilitate entry:

  1. IN GENERAL.—A Council may submit, and the Secretary may approve and implement, a program which reserves up to 25 percent of any fees collected from a fishery under section 304(d)(2) to be used, pursuant to section 53706(a)(7) of title 46, United States Code, to issue obligations that aid in financing—
    1. the purchase of limited access privileges in that fishery by fishermen who fish from small vessels; and
    2. the first-time purchase of limited access privileges in that fishery by entry level fishermen.
    1. ELIGIBILITY CRITERIA.—A Council making a submission under paragraph (1) shall recommend criteria, consistent with the provisions of this Act, that a fisherman must meet to qualify for guarantees under subparagraphs (A) and (B) of paragraph (1) and the portion of funds to be allocated for guarantees under each subparagraph.

___________________

716 U.S.C. § 1853a(d)(1).

Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×

Management Costs

The MSA requires LAPP permit holders to pay for costs related to the program:

In establishing a limited access privilege program, a Council shall—

  1. develop a methodology and the means to identify and assess the management, data collection and analysis, and enforcement programs that are directly related to and in support of the program; and
  2. provide, under section 304(d)(2), for a program of fees paid by limited access privilege holders that will cover the costs of management, data collection and analysis, and enforcement activities. Cost recovery fees may not exceed three percent of the annual ex-vessel value of fish harvested by a program subject to a cost recovery fee.8

___________________

8The NMFS has determined that only incremental costs attributable to the LAPP are subject to cost recovery.

Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 35
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 36
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 37
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 38
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 39
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 40
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 41
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 42
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 43
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 44
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 45
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 46
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 47
Suggested Citation:"2 Individual Quota Systems and LAPPs." National Academies of Sciences, Engineering, and Medicine. 2021. The Use of Limited Access Privilege Programs in Mixed-Use Fisheries. Washington, DC: The National Academies Press. doi: 10.17226/26186.
×
Page 48
Next: 3 Progress in Meeting Goals of LAPPs and Magnuson-Stevens Fishery Conservation and Management Act as Determined by Program Reviews »
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A central goal of U.S. fisheries management is to control the exploitation of fish populations so that fisheries remain biologically productive, economically valuable, and socially equitable. Although the Magnuson-Stevens Fishery Conservation and Management Act led to many improvements, a number of fish populations remained overfished and some fisheries were considered economically inefficient. In response, Congress amended the Act in 2006 to allow additional management approaches, including Limited Access Privilege Programs (LAPPs) in which individuals receive a permit to harvest a defined portion of the total allowable catch for a particular fish stock.

This report examines the impacts of LAPPs on mixed-use fisheries, defined as fisheries where recreational, charter, and commercial fishing sectors target the same species or stocks. The report offers recommendations for NOAA's National Marine Fisheries Service (NMFS) and the Regional Fishery Management Councils (the Councils) who oversee and manage federally regulated fisheries. For each of the five mixed-use fisheries included in the report, the committee examined available fisheries data and analyses and collected testimony from fishery participants, relevant Councils, and NMFS regional experts through a series of public meetings.

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