Is there a free-market solution to overfishing?

Overfishing is often presented as a classic example of market failure. When individual fishing enterprises are competing, the benefits of winning the ‘race to fish’ accrue to the successful ones, while the costs of depletion are shared among all the fishermen in the fishery. There are therefore poor incentives for conservation – the so-called ‘tragedy of the commons’.

This is a simplistic interpretation, however. Market feedback mechanisms offer some protection to stocks. Declining yields will tend to force less efficient fishermen out of business, for example. Providing there is free trade in fish and substitutes are available in food markets, the combination of increasing costs and declining catches may not be offset by higher fish prices. The outcome will partly depend on the species in question. Its scarcity value, reproductive behaviour and migration patterns may affect the probability that overfishing leads to a collapse in stocks.

The history of the fishing industry shows overfishing has been hugely exacerbated by government intervention, in particular subsidies for uneconomic fishing businesses. These handouts have undermined the market mechanisms that would have helped to conserve stocks. The resulting overcapacity – too many vessels chasing too few fish – has strengthened the rationale for costly and bureaucratic regulation of the sector, as exemplified by the EU’s Common Fisheries Policy. As public choice theory would predict, such regulation has inevitably been subject to politicisation and lobbying by special interests, which has meant problems with overfishing have persisted. The creation of artificial property rights by governments, such as the Individual Transferable Quotas used in Iceland, has tended to deliver superior allocative efficiency compared with other forms of regulation, but has not been immune to special-interest influence or indeed discarding.

These problems raise the question of whether an unhampered market could solve the problem of overfishing. Clearly the removal of direct and indirect government subsidies would go a long way towards resolving the issue. However, it would not remove the tendency entirely and both yields and efficiency could still be suboptimal. While collapses would be less likely, they would not be impossible – and there are indeed examples that pre-date direct state subsidies to the industry.

There would therefore appear to be a trade-off between competition and efficiency. This is the case in many sectors, for example due to the ‘transaction costs’ resulting from competition, or because competition means economies of scale are lost (the rail industry is a classic example). Indeed it is a common misperception that unhampered markets inevitably produce a high level of competition. It depends on the characteristics of the sector concerned. One way markets can reduce transaction costs and capture economies of scale is through mergers and acquisitions.

In the fishing industry there are potentially major efficiency losses from competition in the form of the ‘race for fish’, both in terms of wasteful duplication of equipment, fishing effort and the depletion of stocks to suboptimal levels. There may therefore be strong incentives for fishing enterprises to merge or evolve into one large business (which could perhaps be some kind of cooperative) that held a near monopoly over fishing in a particular region. This dominant enterprise would then determine catch levels to maximise returns.

If fisheries remained ‘open access’, how could this structure be sustained? The market solution may be vertical integration. The dominant firm would merge with the harbours and/or the distribution operations in the region and perhaps even the fish processing industry, enabling it to exclude local competitors and to capture economies of scale that would act as a further market-based barrier to entry. Competitors from further afield would face much higher costs to reach the fishery. Nevertheless, initially the dominant firm might choose to deter them by deploying some of its vessels in a ‘race to fish’ in order to drive them elsewhere. Clearly there would be strong incentives to develop agreements between neighbouring firms not to stray into each other’s area of operation, to avoid the costs of such behaviour, and possibly also rules regarding migrating fish.

Subsidies from foreign governments to their own industries could upset this market outcome by artificially sustaining the ‘race for fish’, which raises issues regarding state protection of territorial boundaries within the current system of Exclusive Economic Areas. However, in principle there is no reason why these dominant firms or associations should not straddle existing national boundaries, with their geographical extent evolving according to market conditions.

This analysis also suggests that the state ownership/subsidy of fishing ports and associated distribution infrastructure (resulting again in substantial overcapacity) is likely to be a key factor in hindering a market solution to the problem of overfishing. In some countries there could also be problems with competition rules.

Finally it is important to consider the impact on consumers. The ‘market power’ of the vertically integrated firms would be severely limited. Under free trade they would be competing with fish suppliers from around the world, including produce from fish farms. Moreover, fish can be substituted for other foodstuffs and make up only a small percentage of the overall food supply. And the benefits would be substantial. A market solution to overfishing would deliver major benefits for consumers, with higher yields leading to lower prices and improved quality. At the same time, the inefficiencies, subsidies and special-interest influence associated with state-imposed fisheries policies would be avoided.

Energy Bill will impose immense costs on households and businesses

Today’s agreement on energy policy, ahead of the forthcoming introduction of the Energy Bill, shows the government remains committed to meeting ambitious targets on greenhouse gas emissions and renewable energy. The economic cost will be immense. The Department of Energy and Climate Change quotes a figure of £110 billion of investment in the electricity sector alone (by 2020), a high proportion of which will be used to expand offshore wind capacity and connect it to the national grid. This investment will be funded by higher bills.

A number of questionable claims are made to justify the policy. Firstly, it is claimed that new investment is required to ‘keep the lights on’ since a significant proportion of coal-fired power stations will close within the next few years.  In fact, environmental policies – in particular the EU Large Combustion Plant Directive (LCPD), which is supported by the UK government – are forcing the closure of coal-fired power stations which are not fitted with desulphurisation plants. In other words, the potential reduction in generating capacity is itself largely the result of environmental regulation.

Then there is the claim that meeting the targets on emissions and renewable will add only a small amount to bills. In reality, these policies are already inflating electricity prices by a very large degree. This is because government regulation effectively forces power companies to generate electricity from high cost sources and limits the extent to which they can deploy low-cost sources such as coal. The Renewables Obligation and feed-in-tariffs are two ways in the electricity market is rigged to achieve this result. And as long ago as the 1990s the ‘dash for gas’ was partly spurred by the imposition of EU regulations on coal-fired generation. It is telling that in US states that have refused to adopt European-style green policies, electricity prices are now over 50 per cent lower than in the UK. Indeed, DECC itself has estimated that by 2015, climate change policies will be adding 26 per cent to domestic electricity prices and 10 per cent to domestic gas prices. The impact on commercial users will be similar. This estimate implies an extra burden on energy consumers of approximately £12 billion per annum. Other environmental policies such as the LCPD will push up prices even further.  Moreover, there will be additional negative effects on the wider economy. For example, rising energy costs are likely to add to the political pressure to raise welfare benefits for those on low incomes, who spend a disproportionate share of their income on utility bills.

Despite the huge costs being imposed within the UK, these policies are unlikely to make a discernible difference to climate change. Firstly, Britain accounts for only a tiny fraction of global greenhouse gas emissions. Moreover, developing countries are rapidly increasing their carbon output. Secondly, higher energy costs in the UK are likely to displace economic activity, particularly energy intensive industries, to countries with lower costs such as China, a process known as ‘carbon leakage’. If production is less energy efficient in developing countries, as is often the case, this may actually lead to a rise in emissions. Given their questionable overall effectiveness, there is surely a strong case for the British government to moderate its green energy policies to take greater account of their impact on households and businesses. At the very least, the government should ensure that targets are met at the lowest possible cost by reforming fiscal and regulatory frameworks so that they treat different sources of emissions similarly.

23 November 2012, IEA Blog

Should the UK introduce a carbon tax?

Earlier this month, President Sarkozy announced plans to introduce a carbon tax in France. The UK could follow suit. A widely applied new tax, justified on environmental grounds, could prove popular with politicians seeking to address unprecedented levels of government borrowing.

Yet there are strong economic objections. In particular, given the economic and scientific uncertainty on the effects of climate change, together with the essentially individual and subjective character of environmental costs, the setting of a carbon tax rate would be almost entirely arbitrary.

Nevertheless, in the context of the government’s broad objectives on climate change (however misguided), a carbon tax could be a rather less harmful way of reducing emissions than the sector-specific tinkering that has characterised recent British policy. Examples of the latter include the renewables obligation in the energy sector, bus and train subsidies in transport, higher motoring taxes, forced recycling and tight regulation of the waste sector, as well as draconian planning controls. The current approach has imposed enormous costs on the affected sectors, subjecting them to a high degree of bureaucracy and central planning.

In theory, a carbon tax could avoid this kind of damaging micro-intervention and help ensure that cuts in emissions took place in a relatively cost-effective manner. But such benefits would require the tax to be applied evenly across all sectors responsible for greenhouse gas emissions and for the existing mish-mash of climate change policies to be phased out.

In practice, however, implementation is likely to be driven by interest-group politics and the tax-raising imperatives of the Treasury. Accordingly, a new tax would almost certainly be overlaid on existing taxes and subsidies.

Motorists would therefore continue paying high rates of fuel duty on top of any new carbon tax, as well as additional costs resulting from the forthcoming inclusion of road fuel in the EU Emissions Trading Scheme. In contrast, bus and train operators would probably require additional government support to help them pay the new tax burden – a case of taxpayers subsidising emissions.

The position of domestic energy consumers is a particular problem for policymakers. In another example of inconsistent policy, they currently enjoy a reduced rate of VAT on fuel. Indeed, If there is the political will to introduce a carbon tax, then it would be better to charge full VAT on domestic fuel consumption (and public transport) instead. However, in the context of concerns over “fuel poverty”, abolishing the concession could be politically difficult and imposing an additional tax almost impossible.

In conclusion, the politics of energy and transport mean that a carbon tax would probably not be applied consistently and that existing bureaucratic control would remain in place. Thus the new tax could end up aggravating existing distortions and would perhaps do little to ensure that emissions reductions were achieved at low cost.

24 September 2009, IEA Blog

The dark side of climate change policy

The government recently announced a series of measures designed to make Britain a low-carbon economy, including a large expansion of renewable energy (primarily wind), grants for better home insulation and a so-called green transport strategy. Under the Climate Change Act, the UK is “legally bound” to reduce CO2 emissions by at least 26% by 2020 and 80% by 2050 (relative to 1990 levels).

Meeting such ambitious targets will require substantial investment and while ministers have emphasised alleged advantages, such as the creation of 400,000 “green jobs”, there has been little acknowledgement of the wider economic impact.

Higher energy bills and transport costs are likely to be devastating for many businesses. Some enterprises will be forced to close. Others will relocate to locations where energy and transport are cheaper and environmental regulations less burdensome. In some instances, potential entrepreneurs won’t even bother starting new ventures in the UK. Overall, jobs are likely to be lost rather than created.

Then there is the impact on the less well off. People on benefits, for example £64 per week Jobseeker’s Allowance, may already be using around one third of their (non-housing) incomes to pay utility bills inflated by existing environmental policies.

If this share increases further, there will be strong pressure to raise welfare benefits and winter fuel payments to compensate. Taxes will have to rise accordingly and the already weak incentives to enter low-paid work will be further undermined.

However, the most devastating impact of climate change policy is likely to be on the developing world. While some middle income countries may benefit initially from the flight of businesses from rich nations, it is unrealistic to think that a large upward shift in the level of political control and central planning can take place in the West without negatively affecting the Third World.

The resulting misallocation of resources will hamper entrepreneurship and innovation leading to reduced wealth creation. And restricted and constrained markets will inevitably limit the opportunities for trade, thereby hindering economic development.

The impact of climate change policy therefore goes far beyond landscapes ruined by wind turbines and higher electricity bills. Big cuts in CO2 emissions are likely to prolong the misery of hundreds of millions of the world’s poorest.

29 July 2009, IEA Blog

Green “New Deal” will sink the UK further into the red

Will a green ‘New Deal’ help get Britain out of recession? The Liberal Democrats, for example, have proposed the reopening of disused railway lines as a means of boosting the economy.

Yet such policies will increase the level of public debt, making future tax rises more probable and putting upward pressure on interest rates, therefore deterring private sector investment in the UK. Indeed, any jobs ‘created’ are likely to be more than offset by those ‘destroyed’ through the wider economic effects arising from funding the developments.

Worse still, many green projects, such as reopened railway lines, will require continued long-term taxpayer subsidies, both to pay capital costs and absorb operating losses. The green ‘New Deal’ therefore threatens to increase the long-term role of the state in the economy with negative implications for economic growth.

At the same time, as with previous generations of big-government projects, it risks creating a new generation of white elephants which will gradually be abandoned as spending cuts become necessary to balance the books.

Green projects should be justified on their merits (if, indeed, they have any).

5 January 2009, IEA Blog

The hidden cost of environmental scares

Environmental scares have a long history. At the end of the 18th century, Thomas Malthus predicted that rapid population growth would lead to war, pestilence and famine. Almost 200 years later, the 1972 Club of Rome report, The Limits to Growth, pointed to similar consequences due to rising populations, pollution and the exploitation of finite natural resources.

But the disasters failed to materialise. In flexible market economies the price mechanism incentivised consumers to use scarce resources more efficiently. Entrepreneurs found lower-cost substitutes and developed new technologies to improve productivity, for example through the new crop varieties that facilitated the green revolution. Nevertheless, the ideological climate created by The Limits to Growth contributed to the implementation of some unpleasant sterilisation programmes in developing countries in an attempt to reduce birth rates.

These consequences were relatively minor compared with the effects of Rachel Carson’s 1962 book Silent Spring. The resulting assault on pesticides lead to the banning of DDT in the USA and the steering of foreign aid to prevent its use in tropical countries. As revealed in Malaria and the DDT Story, this green crusade contributed to the death of up to 100 million people, as efforts to eradicate the disease were hampered by controls on spraying.

The world is now gripped by another environmental issue: climate change. The latest IEA monograph, Climate Change Policy: Challenging the Activists, describes how the policy agenda has been captured by quasi-religious ‘global salvationists’. Even more than in previous green campaigns, dissent has been ruthlessly suppressed. Organisations like the Intergovernmental Panel on Climate Change (IPCC) are dominated by ‘true believers’ and the political process is noticeably biased towards socialist-style initiatives based around central planning and detailed regulation.

In the worst case scenario, global warming will provide a rationale for state officials to increase dramatically their control over households and businesses, in terms of their freedom of movement, housing choices and energy consumption. Entrepreneurship and innovation will suffer and economic growth rates will fall. Intrusive bureaucracy will thrive. This will cause discomfort in the West, but it will be disastrous for developing countries. Even a small cut in their growth rates will condemn millions more to poverty and disease.

As the authors of the book explain, climate change can be addressed by relatively low cost policies that reduce emissions without significantly reducing the dynamism and flexibility of market economies. The ability of individuals, businesses, communities to innovate and adapt can be retained. Accordingly, calls for central planning and heavy regulation should be strongly resisted.

30 September 2008, IEA Blog

Planning policies that brought flood misery

Tighter planning and building regulations are at the forefront of the Government’s efforts to tackle global warming.
New homes must adhere to strict insulation standards and they must be packed closely together, both to economise on land and to encourage public transport use.

On some schemes, councils restrict the number of parking spaces to discourage car ownership. Moreover, a high proportion of new houses are built on brownfield sites, often reclaimed from industrial uses.
Such measures enjoy widespread support across the major political parties. Yet the negative environmental effects of these policies are substantial, and there are far more efficient ways of limiting carbon emissions. As the Government proposes to build three million homes by 2020, it is critical it looks again at its policies on how and where new houses are built.

Severe problems are caused by the locations that developers are being forced to build on. Many brownfield sites are particularly vulnerable to flooding – as disastrously demonstrated in recent weeks.

Traditional industries clustered in flood plains to take advantage of flat land and easy access to canals and railways. Given the high costs, it seems unlikely that such locations would have been redeveloped without generous government grants and restrictions on building on more suitable greenfield sites.

Planning policies must therefore take part of the blame for the scale of the flood damage.

And there are other risks facing property owners. One new development near Leeds is squeezed in between a busy dual-carriageway and a railway line. It also sits underneath a run of electricity pylons. Unfortunately, such substandard sites are all too common thanks to current planning policies.

High density housing also has negative consequences. Small gaps between homes mean that nuisance from neighbours is more likely. Everyday annoyances such as screaming children, loud music and unpleasant cooking smells are far more intense when households live cheek by jowl.

While housing in other developed countries has been gradually improving over the last few decades, this has hardly been the case in the UK. Regulations mean that Britain’s new homes are now the smallest in Western Europe. They are probably smaller now than they were in the 1930s when the country was only a quarter as rich.

It is also notable that the planners have severely limited the size of gardens in new developments. This doesn’t seem sensible in the light of government exhortations that children should play more sport. In many new developments there simply isn’t room for the games of football and cricket that helped ensure physical fitness in previous generations.

In locations where new private developments border older council estates, such as Sunnyside in Rotherham, the contrast is particularly marked. The council houses, many of them occupied free of charge through the housing benefit system, often have larger gardens than the new private homes.

Many council tenants are also benefiting from the Government’s lavish Decent Homes initiative. They are getting brand new kitchens, bathrooms, central heating systems and double glazing.

Meanwhile, their owner-occupier neighbours are working hard to pay expensive mortgages to obtain the same facilities, as well as subsidising the council tenants through their taxes.

This policy undermines the Government’s stated aim of providing incentives for people to move away from welfare dependency and into work.

There is therefore a strong economic and environmental case for liberalising planning and building regulations. Allowing developers to build larger new houses on more spacious plots would help ensure that today’s younger generation can enjoy the same standard of housing as their parents.

While liberalisation would involve using more greenfield sites, this is preferable to cramming more houses into urban areas and making our cities more congested, with less and less open space.

The environment of homeowners would also be dramatically improved. Lower densities would reduce the impact of neighbourhood nuisances and facilitate the large gardens that are ideal for family life.

The development of poor quality brownfield sites next to rivers at risk of flooding as well as roads, railways or crime-ridden social housing estates would no longer be necessary. Britons could enjoy the high quality of housing that is taken for granted in other industrialised nations.

If the Government wants to reduce carbon emissions, it should tackle them directly rather than imposing complex and expensive regulations on housing and other sectors.

There are effective ways to reduce carbon emissions while actually benefiting the economy. These include reducing power consumption within the public sector, raising VAT on domestic fuel to the standard rate (with compensatory tax cuts elsewhere) and reducing foreign aid when it causes deforestation. Such measures would be far more effective than cramming homeowners into small houses on tiny plots.

Economists have known for years that regulation is an inefficient and often counterproductive way of achieving a given objective. Unfortunately, the bureaucrats, planners and politicians make their living from regulation – at the expense of the rest of us.

16 July 2007, Yorkshire Post