Review of Management Options for the Landing Obligation

Section 3: The Allocation and Management of extra Quota arising from not discarding

The Quota Uplift

3.1 'Quota uplift' has been coined as a shorthand expression for the difference between the TAC awarded under a landing obligation and the TAC that would have been awarded in the same period under the business-as-usual baseline. While this represents 'additional quota' (than would otherwise have been available), it is not referring to changes in TAC from one year to the next which may be positive or negative.

3.2 Under Article 16 (2) of the CFP reform, overall fishing opportunities will undergo a transition from representing a fixed landings quota to a catch quota. Based upon the assumption that under the landing obligation all TAC species caught will be landed (discounting the specific exemptions), a TAC change will accommodate the landing obligation, for species where discarding has occurred, and consistent with MSY commitments. This effectively results in the transfer of a proportion of the fish previously in the discard column of ICES advice into the catch column. Provided that the stock is at MSY and any flexibilities and exemptions are accounted for, this uplift will be allocated to Member States in order to provide quota for the catches previously discarded. While the effectiveness of the uplift will be marred by its allocation between Member States on the basis of Relative Stability, difficult policy decisions will need to be taken regarding how the uplift is allocated at a national level. In reality, the allocated TAC will not distinguish between 'business-as-usual TAC' and 'uplift TAC' but will be expressed as a single tonnage figure. In practice, the uplift can be estimated by fisheries managers, for example using evidence-based rules of thumb derived from known pre-ban discard rates eg X% or Y tonnes of total TAC of stock W will be identified as 'uplift'.

The Catch Quota Principle

Figure 1. The Catch Quota Principle. Source: European Commission 2011:24

3.3 This section examines the different management and allocation options that exist for how the uplift can be used. An essential point to make is that the further away in time the catch quota system moves from implementation, the more difficult the visibility of the uplift in aggregate allocations will become. If quota is to be managed in a specific way, it would therefore be crucial to disaggregate the amount or percentage of quota awarded in the uplift from the total quota allowance. This percentage or tonnage can then be ring-fenced for future use. For instance, if the total allowable catches / landings of Scottish cod increase by 10 per cent relative to the business-as-usual baseline, 10 per cent of the catch total could be ring fenced on an annual basis. This data can be accessed from ICES advice. Quotas for some stocks with an 'uplift' may actually be lower on a year-to-year basis. Of course, fisheries managers may decide to ring fence any amount of quota they choose, not necessarily the 'uplift' proportion. But the step change in allocations which may occur when the Landing Obligation comes into force provides a rationale and opportunity to allocate some proportion of quotas according to some other basis than Fixed Quota Allocations held on vessel licences ie the concept of an uplift provides cover for fisheries managers to allocate quota differently from the norm.

Allocation Options for the Quota Uplift

Vessel Discard Rates

3.4. Within the history of UK fisheries policy, fishing opportunities have generally been allocated on a historical basis. One option is therefore to allocate the uplift according to the historical discarding patterns of the fleet. The objective of this would be to 'reward' the sectors of the Scottish fleet that have high discarding ratios with a high proportion of the uplift. This may produce a better alignment between quota holdings and catch compositions and may also work to support the broad social objective of supporting the vessels likely to incur high financial costs as a result of the landing obligation. It would however mean that those who have worked to reduce their discard rates would lose out.

3.5 A practical limitation to the use of this allocation is the lack of rigorous data on discarding patterns and bycatch compositions, in particular at an individual vessel level. Apart from a few selective studies of specific fisheries and sectors, there is a distinct lack of data as to how much and of which stocks vessels have historically discarded. In the interviews, one PO noted that basing this allocation on an area basis, while not great, would work to overcome the lack of data on discarding rates at an individual vessel level. This uncertainty regarding current levels of discarding opens the door for this allocation to be based upon arbitrary decisions which could accentuate issues of equity and efficiency within the allocation and create political costs.

3.6 Crucially, while this allocation may work to protect the high discarding vessels- with many likely to be exposed to the risk of bankruptcy- it undermines crucial economic incentives for improved selectivity. An opinion put forward in the interviews was that on the basis of social justice, this option could be politically attractive as it would help the industry through a transition stage in which the government was unable to adopt an adequate policy. The general consensus within the interviews was that this policy would be likely to undermine the overall impetus of the discard ban and have an adverse effect upon positive behaviour change. Condie et al., (2013) stress that the impact of a shift to catch quotas on the entire fleet is unknown. They conclude however that the more constraining the quota, the greater the incentives to avoid bycatch.

3.7 As mentioned, avoiding unwanted catches is the first step in managing the discard ban. A preferential allocation to high discarding vessels and weaker businesses would therefore be unwise as it would undermine the economic incentives to change behaviour (fish more selectively). The trade-off is that while the incentives would be realised, high discarding vessels would be exposed to the high financial costs of the landing obligation, with the likelihood that some firms would go bankrupt if unable to find and purchase quota. An issue with the two criteria discussed is that information on discarding patterns is lacking, therefore the process would likely be influenced by the industry's knowledge of discarding patterns and levels. Using this to inform an administrative allocation poses the risk that the use of such asymmetric information could lead to an unrepresentative allocation as it would be rational for fishers to inflate their 'needs' in order to gain higher quota allocations, thereby reducing the financial impacts.

Equal allocation across vessels

3.8 When introducing quota for previously discarded bycatch in the Canadian groundfish fishery, fisheries managers divided the new quota evenly across the number of vessels. While this may work towards a type of equitable allocation, this criteria would do little to improve the matching of quota holdings with actual catch compositions. In practice, this allocation would produce an inequitable allocation as by taking no account of vessel's individual operations or investments, it would work to severely constrain the financial operations of some vessels while benefiting others.

Initial Allocation Mechanisms and Criteria

Table 3. Initial Allocation Mechanisms and Criteria

Mechanism/ Criteria	Objective	Examples	Benefits	Risks
Administrative: Equal Catch Quota Amounts	Equitable allocation, Simple Administration	Atlantic Canadian Fisheries, Canadian Groundfish Fishery	Administratively straight forward	Unrepresentative of individual vessels size, power, catch compositions and existing quota holdings; would not aid the alignment of quota holdings and catch compositions; would cause bankruptcies amongst high discarding vessels and weaker business, while benefiting low discarding vessels
Administrative: Historical Performance	Equity Efficiency Protects high discarding vessels	Icelandic ITQs, Dutch demersal North Sea Fishery, UK FQA system	Alignment of quota holdings to catch compositions, relatively uncontentious. Popular as it would protect the high-discarding vessels	Lack of data renders this an arbitrary and contentious in practice; by protecting high discarding vessels, economic incentives to avoid bycatch removed.
Administra-tive: Allocation on proportion of current quota holdings	Equity Administratively simple	TAC increases	Administratively simple, likely to be perceived as fair	May increase pressure on weaker business; takes no account of actual catch composition or individual discard patterns
Market: Auction	Efficiency Administratively simple Protects high discarding vessels	Chilean Patagonian Toothfish fishery, New Zealand for new quota	Protects against the use of the asymmetric information from industry; deters vessels with low discarding receiving disproportionately high quota uplift; protects economic incentives to avoid bycatch.	Likely opposition from industry; inefficient or unprofitable businesses may go out of business if they cannot compete, quota likely to end up in hands of those with money.

Allocated on the basis of FQA holdings

3.9 Another option is to allocate the uplift to reflect individual vessels current proportions of quota holdings either awarded or purchased under the FQA system. In the interviews, several participants commented that this would represent a 'fair' allocation as it reflects individual operations and quota investments. However, against this general consensus, one interviewee came out in strong opposition to an allocation on the basis of FQAs. One of the reasons for this was the notion that allocation via FQAs would channel the uplift (intended to cover discards) to the wrong places i.e. this allocation would not necessarily go to vessels with high discard ratios of bycatch, which might be targeted by other vessels. While it is likely that the initial allocation would produce some inefficiency, internal trading and leasing arrangements within Scotland could help to move the quota awarded in the uplift to the high discarding firms. This would, however, be likely to increase the financial pressure upon weaker/high discarding firms, with others benefiting from the additional quota allocated to them. The second reason put forward in opposition to this allocation was that allocation via FQAs would turn the quota uplift into a tradable asset. Instead, it was argued the value of the uplift should be at the point of use: it should hold no financial value until it is used to cover catch as it comes out of the water. Allied to this was the notion that the industry should not have to 'buy the right to avoid discarding' i.e. pay to use the uplift.

Market Mechanisms

3.10 Alternatively, a market mechanism could be used to allocate the uplift through a sale of the additional quota units. In the current Scottish FQA system, quota trading frequently takes place but fishers do not possess a legal entitlement that denotes ownership of a 'right'. FQAs instead provide a basis for allocation from a public resource. Therefore, at the point of 'sale' specific terms would have to convey that the nature of the bought asset was not a right or an ownership entitlement but, in keeping with the FQA system, would represent an entitlement to catch x amount of fish on an annual basis.

3.11 Theoretically, an auction mechanism could work to deter vessels with low discarding levels from accessing extra quota and thus disproportionately benefiting. Moreover, it would facilitate the alignment of quota with vessels with high discarding patterns- thereby offering some protection against bankruptcies- while working to retain elements of the economic incentives to avoid bycatch and change behavioural patterns as a competitive financial element governs access to the bycatch quota. The issue is that as quota is scarce commodity that is desired by all, it is likely that in practice quota would be bought up by richer vessels. Also, this mechanism does not currently fit with the nature of Scottish fishing rights which are not privately owned. This scheme is also likely to be opposed by the industry, firstly as it could be perceived as channelling revenue from the industry to the government, and the traditional fear of auctioning surrounding the buying of quota by foreign vessels. To counteract this, the revenue generated could be channelled back into compliance and enforcement of discard ban, research or aiding changes in gear, and possible checks and balances could be put in place to make sure that the quota uplift or bycatch quota is aligned to current quota holdings in Scotland.

3.12 Ultimately, the issue with using the market mechanism is that while theoretically the uplift may go to the higher discarding vessels as their willingness to pay would be higher, it is likely that quota would be bought up by those that have money. Therefore, the uplift would not necessarily be used to accommodate vessels under the landing obligation but would instead allow the operations of some vessels to increase while others went out of business.

Overview

3.13 The consensus within the interviews was that the most appropriate way to allocate the uplift to the fleet was on the basis of current FQA holdings. Overall, this was seen as the fairest method of allocation as it took into account the investments made by specific quota holders. As one contributor noted it was best to avoid as much as possible the sense that the uplift was an added 'bonus'. Therefore, the ability to filter it to the fleet as an unspecified tonnage increase would be most appropriate. From an industry view point, it was noted that any other administrative allocation that had a specific economic or social agenda was likely to cause political problems, primarily due to the fact that distributional allocations create winners and losers. As everyone cannot be pleased, any allocation that had a distributive goal could potentially create perceptions of inequity. More generally, there was agreement that as the first step in mitigating the problems associated with the discard ban is the reduction of unwanted catches, any allocation that would undermine the economic incentives to alter behaviour towards more selective fishing was unwarranted. Allocating so as to protect weaker businesses would be counter-beneficial to the whole landing obligation and cause greater problems in the long run.

Managing the Uplift

3.14 Despite the general consensus that allocation of the uplift should be done on the basis on current FQA holdings, numerous short-run and long-run concerns were raised regarding the allocation of the full uplift to the fleet. The common denominator that underwrote the tensions identified concerned the objective for the uplift: the uplift should not be used in a way that creates the economic incentive for fishermen to target the additional quota. Instead, the uplift should be managed so as to cover continuing accidental catches that now have to be landed and accounted for with quota. A key theme within the interviews was to design mechanisms that fix the value of the quota in the uplift at the point of use, therefore prohibiting the uplift from acquiring an asset value that would be targeted.

A Government Controlled Buffer Zone

3.15 A management mechanism put forward in the first interview, which was subsequently supported across the board, was the option of holding back a proportion or even all of the uplift and managing this centrally in some sort of pool format that would act as a buffer zone. All but one expert interviewed believed that the management of this buffer zone was a role for government; however the option of integrating this at PO level is discussed later. The objective would be to use this pool to act as a 'buffer' against any over-quota fishing. Theoretically, the government would hold these buffer pools centrally and when a vessel caught fish for which it did not have quota, it could draw down from this pool. The intent would be to allow the government to smooth out the rough edges and account for unintended consequences occurring as a result of the implementation of the Landing Obligation.

3.16 The withholding of quota to act as a buffer against overfishing of national TACs and quota is used in a number of countries. Similar schemes are used in Denmark where quota is held centrally by the government in order to facilitate a new entrants scheme. In the US, buffer zones are used to ensure no overfishing by placing a buffer between catch limits and targets. The intent is to account for uncertainty, variability and risk (Semmens, 2008). As well as acting as a safeguard against accidental catches that individuals cannot cover with quota, evidence from the interviews identified other ways in which the use of a buffer zone could potentially alleviate a number of problems that may arise in line with the landing obligation.

Limit the incentive to catch

3.17 If the uplift is allocated out to the fleet, the vessels are given an incentive to use the quota to target fish. The issue with this appears to be derived from a perception held by several in industry, academia and policy that the uplift should be used to cover discards, rather than to allow vessels to expand operations through a quota increase.

3.18 If the quota is held back and accessed under controlled conditions to cover unexpected landings, this incentive can be mitigated. An important shift required in order to facilitate the landing obligation concerns the way in which quota is used- it will be required to prove an ex ante right to catch and go to sea and also an ex post resource to cover unexpected and unavoidable catches. The latter part of this depends upon quota being available for this purpose, with this purposefully constrained by the TAC/quota system. A narrative from the interviews was that quota needs to be set aside for this purpose.

Protecting quota entitlements and the 'right to fish'

3.19 A concern expressed in the interviews was that on account of the landing obligations, the security of FQA entitlements might be affected. Currently, an FQA awards the holder with the right to land a certain amount of fish. Under the landing obligation the right to land will be replaced with the right to catch. A problem will arise when a vessel 'accidently' catches fish for which no quota is held. Even with improved selectivity and behaviour, a complete reduction in bycatch and matching of quota holdings to catch compositions is unrealistic. One group interviewed exhibited extreme nervousness regarding how this almost inevitable situation would impact upon others' rights, as it seems likely that with no buffer or pool system in place, quota from other fishers who had not yet used their quota would be rescinded. While theoretically if there is unused quota that could be requisitioned in this way, it could presumably be available to purchase for the right price. However, a general theme from the industry interviews was that some fishermen often prefer to use their quota rather than lease it for a higher price. If quota could not be sourced and Scotland overshoots its EC allocation, it would face a penalty. While Member States are allowed to borrow up to 10% of quota from the following year, this is a short-term solution which will only serve to reduce future opportunities. This has the potential to undermine the security of the current FQA entitlements if there is the possibility that quota will be removed from some fishers to cover others. Having a buffer pool to cover the 'accidental' catches that are almost inevitable could go some way in alleviating the practical impact of this insecurity.

Government access to quota to facilitate swaps

3.20 At a national level across Europe, difficult decisions are going to have to be made regarding the transfer of national quota holdings into other species via international swapping mechanisms. Many of the decisions will be hard to make, as species of lower value on paper may have to be accessed in exchange for more valuable current holdings. For instance, as Scotland holds a high proportion of the North Sea haddock quota, this could be used to trade for quota of other species quota that acts as a choke on the industry. It was commented by one individual interviewed that these decisions would be hard for the industry to make as it goes against their general business interests. However, it is likely that POs and the industry will continue to be a better judge of what is in their interests than the government; it will just be that their interests will have changed. The thinking within the interviews was that these decisions will have to be made by government, therefore government will need maximum control over a good percentage of the quota in order to facilitate this without recalling tonnage allocated to the fleet.

Managing a Buffer Pool: Mitigating the Open Access Dilemma

3.21 Buffer quotas are used around the world for a variety of reasons. A first step in designing the management framework for a buffer quota in the context of a landing obligation would be to clearly define the objective of the buffer quota: in this case this would likely concern the intent to cover accidental over-quota catches, and remove the economic incentive to target the uplift. In effect, what it would try and achieve is to place the value of the quota in the buffer at the point of use. It would be important to make it clear that the intention of the buffer-quota was to minimise total fishing mortality and aid compliance, as this quota would be accessed in order to cover unexpected catches which the vessel could not cover by personally obtaining additional quota.

3.22 The key issue for this management option is that the choke species that will affect the Scottish fleet are commercial target species. If they are pooled, it is almost inevitable that perverse economic incentives will be created that expose the pool to open access problems as individuals will attempt to draw down from the pool as much as possible. Therefore, the creation of the right incentives will depend upon the implementation of internal management mechanisms within the pool to tightly control access to the buffer quota. The key message that needs to be conveyed is that access and use of the quota in this buffer is not a given. Several management options are offered by the literature on common pool problems, which has arisen in the last few decades in response to increasing globally pervasive concerns regarding environmental degradation and resource depletion (Ostrom et al. 2002) and from fisheries management policies used internationally.

Access conditions

3.23 One organisation interviewed made a strong request that access to quota in the buffer pool be correlated to good practice. For instance, the ability of a vessel to access the buffer quota could depend upon their compliance record in line with the use of specific degrees of gear selectivity, real-time and spatial closures, and VMS information could be used to check that vessels were not fishing in areas that are well-known for high abundances of the species for which inadequate quota was held. This would create a link between access and the incentives to alter behaviour. The amount that could be accessed could depend upon the adoption of CCTV (higher rates for those who had adopted this monitoring mechanism) or could be correlated to current FQA holdings.

Figure 2: Map Output from Fort Bragg Habitat Mapping Tool 2011-2012. Source: Fort Bragg Groundfish Association, Summary Report 2011 and 2012.

3.24 Another option is to tie access to the buffer-pool to participation in schemes that would help identify areas of high risk for choke species. In the waters off the Californian coast, a programme of habitat mapping is used to identify areas of high risk in catching choke species, with this used by fishers to avoid such areas. The implementation and effectiveness of this Risk Pool is reported to rest upon a high degree of data-sharing through the collection of up-to-date, low cost and accurate data on the location, quantity and species of chokes species caught. A web-based application called eCatch ( www.ecatch.org) was created to allow fishers to document where and when they fish and what and how much they catch, using a modern tablet interface (e.g., an iPad). The technology allows fishers to easily capture and log information on web-based maps and share this information with others in near real-time. This has allowed the members of the Risk Pool to know almost immediately where, when and how much of the choke species has been harvested. Areas of high-risk can be identified, which allow the Pool managers to adaptively managed regional fishing plans by updating spatial restrictions and rules. Vessels' VMS data can also be used to ensure that fishers are not purposefully targeting choke species or fishing in areas of high-risk.

3.25 A similar approach can be identified in the Dutch plans for the landing obligation as they recently announced plans for a new EFF funded projected called the 'Fisherman's Dashboard'. The project aims to develop a dashboard that helps fishermen avoid discards. The dashboard collects, combines and visualises catch statistics and information on fishing grounds to predict the chance of discards per area. Also the system aims to help fishermen exchange information with colleagues. This approach would work best for species that are found in aggregations (e.g. saithe), rather than those that are widely distributed.

Social pressures

3.26 In several Canadian and US fisheries where similar pooling arrangements operate, the use of social pressures has proved useful. For instance, many pools post a list of the individuals using the pool and the rate at which they use the quota. This form of incentive is most effective when conducted at a local level, therefore organising the information on a geographical or sectoral basis could be more effective.

Economic Incentives

3.27 Removing the economic incentives to access the buffer zone will be crucial to its success. The fundamental point is that use of the buffer-quota should not be costless: vessels should pay a price for using the quota that mirrors the price of quota on the market, with a preference to set the market price so that there is an incentive to first-off purchase quota to cover the catch. The implementation of economic incentives to only using the pool as a last resort will be crucial.

Withhold the Economic Value of the Catch

3.28 One option is to allow vessels to drawn down from the pool but when the catch is sold through the normal market mechanisms, the vessel receives no profit for the fish caught with pool quota. The vessel would receive revenue from the sales to cover the fixed costs of going to sea and the costs of boxing, icing and the landings commissions associated with the catch. Any value received from the sale above this would be held back. This would work to remove the economic incentive to target catch covered by the pool as they would use up hold capacity and labour for it, but receive no profit.

3.29 A similar instrument is used in Iceland, which is applied to catches in excess of a five per cent carry-back provision. In this circumstance, the vessel must supply their catch to the local auction house, where proceeds are split between the government (80 per cent) and the vessel owner (20 per cent). The 20 per cent that the vessel owner received is to pay for the variable costs of fishing, mainly the crew wages. The revenue received flows to a special development fund run by the Ministry of Fisheries. The amount of fish surrendered to the auction cannot exceed 10 per cent of an owner's total holdings (Sanchirico, 2006 MP). Information required would be: quantity landed, price of fish and operating costs. This would work to remove the economic incentive to target catch covered by the pool as they would use up hold capacity and labour for it, but receive no profit. Further research would be required to establish how this could work in practice (such as the actual costs of boxing, icing and returning to port).

Implement a Levy System

3.30 Borrowing from the New Zealand approach, a levy could be applied to each unit of catch that is caught and landed in lieu of quota and has to be covered by quota from the central pool. This levy could be set to mirror the price paid for quota, and indeed above the marginal cost of obtaining more quota, in order to create the incentive for vessels to lease in quota and only use the pool as a last resort. Different species could have different rates applied to them in order to offer the greatest incentives to avoid species with low TACs. The key is to set the price at a point that weakens the economic incentive to target the pool, while not setting the price so high (above market price of fish) that an incentive to discard illegally remains.

Figure 3. New Zealand Fisheries Management

3.31 In New Zealand a deemed value system is used to effectively place a tax upon and landings not covered by quota.

What is a deemed value payment?

3.32 The primary purpose of the deemed value system is to provide an economic incentive for firms to cover catch with available quota. If the vessel is unable to lease in additional quota, a deemed value is paid to cover the portion of the catch without quota. A fee is charged for each unit of catch landed above quota. The aim is to set deemed values so that fishermen prefer to obtain quota on the market rather than pay the deemed value. While in economic terms, this system can be interpreted as having a tax element, the New Zealand Ministry of Fisheries (the Ministry) has successfully defended in court that deemed values are a service not a tax (Walker paper 2008).

How is the deemed value set?

3.33 In theory, the intent is to set the levy rate at the point that provides sufficient incentive to land the over-quota catch (and not illegally discard) while creating a simultaneous disincentive not to target the species and use the pool (Sanchirico et al., 2006). To achieve this, New Zealand authorities set the fee (per kg landed) above the lease price of quota for the amount and below the landed price of the fish. The effect is fishermen have an incentive to lease quota (lower cost than the levy) and to land the catch and not discard (landed price received is above the levy). If the levy is paid and a fisher subsequently finds quota to cover the catch, the deemed value (levy) will be refunded (Diamond, 2004). If deemed values are not paid, the fishing permit is suspended and fishing without a permit is a criminal offence.

3.34 In practice, deemed values are set as a proportion of the commercial value of landed fish, with port prices used as the main indicator of market value. The proportion is reported to be 60% of port price or sometimes lower (Sanchirico et al., 2006). Deemed values therefore change when port prices and overharvest levels change (the more overharvest happens to a species in quota management system, the higher the species deemed value should be set)

3.34 In theory, the margin between the deemed value and the price of quota should be sufficient to more than offset the transaction costs of acquiring additional quota, therefore the deemed values should be set above the marginal value of additional quota units. From 2007, the Minister of Fisheries allowed deemed values to be reviewed on an annual basis. This is because if the deemed value is set too low (below the market value of quota) it provides an incentive for fishers to fish on deemed values instead of acquiring quota to balance their catch. This would depress the quota price. From a biological perspective, a low value would not protect the TAC for the stock. Moreover, if the deemed value is set too high (above market price of fish) an incentive to discard the fish instead of acquiring quota is created. This is especially the case if the bycatch constitutes a choke species for a stock that the vessel has uncaught quota for.

3.35 A 'ramping' rate can be used to discourage against large catches in excess of quota. As outlined in the table below, if a vessel brings in a catch that is in excess of its quota by 20 per cent, the per kg levy is $2.76. If the illegal catch is in excess of 40% of quota holdings, the levy increases to $3.22 per kg and so forth. Vessels cannot land no-quota catches in excess of 200% of their quota holdings.

ACE holdings (%)	Differential deemed value rate ($)
20	2.76 per kg
40	3.22 per kg
60	3.68 per kg
80	4.14 per kg
100	4.60 per kg

Source: Walker and Townsend (2008)

3.36 A benefit of the deemed value system is that high value single target species used a different deemed value, with the annual deemed value rates set at twice the landed value. The result is that these fisheries tend to only be targeted by vessels with quota, as the financial penalty of balancing is so high. For these high value species, vessel must hold minimum quota compositions before vessels can legally target them (Walker and Townsend, 2008).

How should the deemed value be set?

3.37 It has been argued that deemed value should also depend upon other sources, and a standard model has been developed by Wang (2009) based upon the conclusion that deemed values are not just related to port prices and quota prices, but should take into account catch composition, operating costs and the number of active firms in the target fishery. Moreover, as many target species have more than one bycatch and sometimes several target species have the same bycatch, therefore some reflection of the target and bycatch relationship would also be instructive. A potential future research project could be to develop a more advanced model to illustrate these problems based on this bioeconomic model of deemed value management.

What would be required for this to operate in Scotland?

3.38 Three key challenges have been identified in implementing this approach in Scotland.

Information

3.39 The key issue with this instrument is the difficulty in achieving the correct rate. This requires regulators to possess substantial amounts of information on the dynamics of the stock and the cost structure of the industry. At a minimum, information on port prices and leasing prices would be needed. Moreover, it would be preferable to operate a more dynamic model that would acquire additional information on catch compositions, operating costs and the number of active firms. Currently, Marine Scotland possesses information on port prices. However, due to the shadowy nature of quota leasing activities in Scotland, no accurate and reliable information in held over quota leasing or sale prices. Even once this information was held; setting the correct price would be a challenging task but could be achieved through a process of trial and error.

Improve Leasing Arrangements

3.40 Many of the international systems (Denmark and New Zealand) that rely on using ex post quota sourcing to cover over-quota catches have developed sophisticated and efficient markets for trading quota. This allows vessels to source and lease in quota relatively easy and with fewer transaction costs. In Scotland, quota trading exists and has done for a long time. However, neither Marine Scotland nor Defra have officially sanctioned quota trading. Until this occurs and a formal open market is encouraged, the efficiency of this process will be hindered by high transaction costs and no information will formally exist as to market prices and levels of activity.

3.41 One option is to remove the condition that FQAs need to be tied to a licence, thereby facilitating the ability of real-time swapping which will be a necessity once the landing obligation comes in. From this, an online trading platform could be established that would facilitate information sharing, transparency and efficiency. Opening up the hitherto shrouded 'market' could also facilitate a downward pressure upon leasing costs (reducing and removing transaction costs) thereby aiding the ability of fishers to afford quota.

3.42 If an open public trading system was created, private companies could be established which would facilitate the matching of individuals paying the different deemed value rate with those that still have quota remaining. Such a firm (FishTech Ltd) was established in New Zealand in 2003, with the gains from the trade split evenly between the parties after Fish Tech takes a percentage. Initially in 2003, this system attracted in 12 participants and reduced total deemed value payments by around $400,000. In 2004, the number of participants had risen to 40, resulting in a total net reduction of deemed values around $600,000 ( MP). In addition, another company (Solutions-Multipliers) was established in New Zealand to service the fishing industry, which operates an annual arbitrage pool at the end of the year to minimise deemed value payments among any group of willing participants.

Political will

3.43 One of the largest obstacles to this will be the political will necessary, firstly to move in this direction within the quota allocation consultation process but also to introduce what is effectively a tax. In New Zealand, fishers are awarded compensation for illegal catch, 50% of the value of the catch, suggesting that a tax alone would incentivise a continuation of discarding. Despite the notable theoretical benefits a taxation instrument yields, they are little used in practice. This is largely due to the associated political costs as it is viewed as a means of transferring profits from the industry to the government.

Additional allocative choices: Allocate to individual vessels but hold the quota centrally

3.44 An option suggested by an industry representative was that while the uplift should be 'owned' and held by government, it should still be allocated out to individual vessels on an in-year basis. The rationale stressed for this is that while quota in the uplift should not be given any financial value that can be traded (i.e. allocation via FQA) it should have a value to individual vessels in that they know they have x units of species x to draw down from. However, while there is quota in the pool they can access, this very clearly belongs to the government Individual vessels would be allocated a ring-fenced specific proportion of the buffer pool, which they could access when they accidently caught fish for which they held no quota and no quota (via leasing etc.) was available. While this mechanism would be useful as it would avoid creating a race for the buffer quota, it would require allocation via some criteria. If FQAs were used for this, the fixed non-transferable nature would mean that the uplift would not necessarily go to cover discarding practices (either through the initial allocation and would be unable to move after), therefore some allocation relative to historical discard rates (vessel discard rates per area) may have to be used. A strong point of departure within the discussion on this mechanism was whether fishers should have to 'pay' to access the quota, with the PO in question arguing strongly against this. While this may be beneficial to the fleet as it would avoid an increase in the cost of fishing, it would likely dampen economic incentives to fish more selectivity.

Identifying the Costs

3.45 One of the obvious drawbacks of this mechanism is the additional administrative costs it would place upon Marine Scotland in terms of time and resources. It is likely that a cost-benefit analysis of this option would need to be carried out to ensure that the costs were proportionate to the expected gains

Identifying Appropriate Stocks

3.46 If the administrative costs are deemed too high for the wide-spread use of government pools or there is political unease at holding back large proportions of the quota, the option exists to apply this mechanism to specific stocks.

3.47 Analysis could be carried out to determine for what species the pools would be most effective.

• For instance, it is accepted that even with the uplift there may not be enough hake quota to cover catches. Therefore, it may be useful to remove the incentives to catch this species by pooling all of the uplift. However, some individuals have invested substancially in high value hake quota.
• Dab quota could also be pooled as it has a high abundance relative to quota and discarding is driven by low market values.
• This mechanism could be very suitable for cod given the very low level of individual quotas.
• Government buffers could also be used for bycatch species such as anglerfish, megrims, Greenland halibut, blue ling, and tusk. Although by-catch species have a relatively low importance in terms of catch in tonnes, they have the potential to become important choke species.

Overview

3.48 The notion of the government retaining some proportion of the uplift was endorsed by all groups interviewed as a pragmatic approach. It was commented by one group that while long term the concept of government controlled quota was not desirable, given the short time frame in which to design a system, the notion of government retaining a part of the uplift seemed like a sensible option. In managing any pooling of quota, a 'tool-kit' approach that used several access mechanisms working in cohesion would likely produce the best result, i.e. the use of economic and social incentives as well as the development of access conditions that have an intentional impact upon behavior.

3.49 In relation to the fundamental economic incentives, the option of withholding the economic value of the catch as used in Iceland (para 3.28-3.29) may be more practical as it requires less information. Data on each fleet segment's operating costs would be required, whereas the New Zealand levy system model would require minimum information on sale and leasing prices. From a practical view point the first option may be preferable. However, the use of a levy/ deemed value system appears a more robust mechanism: while withholding the economic value (profit) of the catch undermines the economic incentive to use the pool, the use of a levy can be designed to: incentivise the purchase or leasing of quota from the market, avoid large use of the pool (ramping rates) and create different price differentials for high value/low TAC species. The key point is to make sure that fishermen have to pay to use quota in the catch and to create strong economic incentives not to draw down from the pool in the first place.

Section Summary

3.48 In line with the shift from landings to catch quota, uplift in quota for some stocks will accommodate the Landing Obligation. The nature of the uplift will be tempered by MSY commitments, which may entail the quota for some stocks actually being lower on a year-to-year basis. The effectiveness of the uplift in covering previously discarded catches will also be dulled by allocation via Relative Stability.

3.49 If the decision is taken to allocate any uplift in quota across the Scottish fleet, several options exist. It could be allocated on the basis of historical vessel discard rates (at an individual-vessel or regional level), equally across all vessels, on the basis of contemporaneous FQA holdings or through market mechanisms. The consensus within the interviews was that any uplift should be allocated on the basis of FQA holdings. The general arguments were; that it would be perceived as fair; it would avoid criticism of political objectives; it took account of the individual quota investments and the ability to filter the uplift through an unspecified tonnage increase would avoid the uplift being viewed as a 'bonus'.

3.50 A management option that received a broad base of support in the interviews was for the government to hold back a proportion of the uplift (or a proportion of national quota holdings). This would create the possibility for some quota to be used as a buffer against over-quota fishing. Vessels would then have controlled access to this to cover over-quota catches. A key rationale put forward in support of this was that the uplift should be used to cover accidental catches under the Landing Obligation and the creation of economic incentives to target the 'additional' quota should be avoided. It is likely that any 'pooling' of quota, either a central government or PO level, would be susceptible to open-access problems. Based upon the use of this pooling mechanism in Denmark and the US and the operation of catch-balancing mechanisms in Iceland and New Zealand, several economic, social and access-related policy options have been identified to mitigate this problem and help vessels responsibility avoid being bound by accidental catches.