Individual Transfer Quotas (ITQs). How do ITQs work?

We've discussed how common resources tend to be overused and if we take the ocean as an example we think about how fishermen have an incentive to continue to add boats even beyond the socially optimal point. The reason is that when a fisherman decides to say "I'm going to add an extra boat, I want to increase the number of fish I catch," they're also reducing the number of fish caught by other boats but they don't take this caused into consideration. They're only considering their own private costs and benefits. So we have a negative externality that results in overfishing. So we're catching more fish than is socially efficient and that can reduce the fish stocks and create severe problems for this renewable resource of fish.


How does ITQs Help Reduce Overfishing?

So individual transfer quotas (ITQ) try to solve this problem and what they do, at least the best individual transfer quotas they have three main properties and so what the quote is going to do is it's going to entitle each person each fisherman to a specific number of a specific fish. So let's say that it says "This particular quota allows you to catch 100 Cod." that's what you get for that particular quota and you might have 500 quotas you might have 1000 or whatever but each quota gives you a specific number of a specific fish but when you add up all the quotas that are given to all the fishermen, you're going to have the socially efficient quantity of fish. So again let's use Cod, let's say that basically, your government says "We think that 1,000,000 Cod could be caught in any year and that wouldn't create a problem." So if we were to add up the quotas it should not exceed 1 million because that's the socially efficient level.


However, also the quotas can be bought and sold on open markets. So basically what you're doing with ITQ is you're creating a market. So one fisherman let's say one fisherman is given the right to catch 5,000 Cods and let's say that a fisherman invests in his boats and he gets to where he really has low cost in terms of catching fish, he's really good at it. He could do it cheaply and some of the other boats haven't really made those investments so this fisherman could say "I really like to be able to catch 7,000 cod so I'm going to buy 2000 ITQ that will allow me to catch an additional 2000 cod." and so the other people if they haven't really invested in technology and it to be really good at inefficient at catching Cod then they can sell credits of 2000 cod to the boat that is really efficient. So it's kind of it gives an incentive to invest in technology and so that's a real key of this the quotas that they're transferable they can be bought and sold on the open market.


How to Allocate Quotas?

Now the question is how you initially allocate these individual transfer quotas? How do you decide how many quotas that this fisherman gets and that fisherman gets and so forth? So one way you could do it is you could auction them off. So you hold an auction and the highest bidder gets the ITQs. So you have a number of people calm and their bidding for the ITQs that raises revenue for the government. You could use that revenue on any number of things, you could use on early childhood care, you could use it to prepare the boat dock and do maintenance, and so forth.


You can also say "Well look we're going to base it on the historical catch." So the people that caught the most cod in the past that the people who are doing the most fishing, they're going to get the most ITQs to start with, and then people who didn't catch as much cod maybe they don't get as much in terms of their quota their ITQs. Then what happens is let's say five years from now there's somebody who's a new person and they want to start getting into the cod fishing business, then they would have to purchase from somebody who already had ITQs. So they basically like the new entrance to the market have to purchase from people who already owned ITQ. So that's another way of doing it.

Challenges with ITQs

Now there are some challenges with ITQ, so ITQs have been used in several countries and there's been a lot of success in several of those countries with basically keeping the fish stocks where they're at a sustainable level. So that you don't have overfishing and depleting the fish stocks for future generations. So there's been a lot of success but there are some issues and one issue is with a thing called bycatch.

What is Bycatch?

Bycatch is basically if you think about a boat out there and they throw a net into the water and then they catch any number of fish, let's go back to the example of cod, let's say they're trying to catch Cod they might catch a Shark. They might have some shark in there and they say "We didn't mean to catch this thing, this thing looks nasty." but maybe they'd say "We don't have any quota for sharks so if we bring this shark back to the dock we're going to get a fine because we have enough quota to bring these cod back but we don't have any ITQ's for sharks so we're going to get a fine. Let's just take that shark and let's throw it back in the ocean." But the thing is that the shark might die after it's been pulled into the boat and the net and then you throw it back, there's a good chance it'll die and that's actually they have a phrase for that it's called "Release Mortality" So if you have really high release mortality then you're basically creating waste. You're creating waste because they caught this fish but they didn't have they weren't intending to catch a shark but they could have used it, maybe shark fin soup or something but they didn't have an ITQ and so they say "We've got it, we've gotta throw it back into the ocean and it dies anyway." So it's really created waste and so bycatches is a real issue.


What is High Grading?

Also, another challenge with ITQ is something called high grading. So high grading is basically with the nature of the quota system, where you can only get an incentive to keep the larger fish and to throw back the smaller fish. So let's say, and again we've got the net and then we catch different fish and some of them are small and some are quite large some are kind of fat. So we keep those fat ones and then we throw back the tiny ones or the juveniles the skinny fish. However, you want to think about that, if we throw those ones back then that becomes waste because might die. So now we've got this issue of basically they're putting a premium on the larger ones but then the smaller ones they've already been caught and then we have that release mortality issue and basically just dumping them in the ocean.


How to Solve the Challenges of ITQ

So people would say "One way to deal with these challenges is to just ban discarding a fish." We can just say "You can't discard fish and so if you catch a shark and you don't have an ITQ guess you're paying a fine, so you could do that but another thing you could do is you could allow firms to have a temporary overage," So we brought those fish back we happen to have a shark, we didn't have any ITQs for that but we're going to purchase a temporary overage. We're going to purchase an ITQ or pay some kind of money or some other than a fine we're going to basically have a system set up where we can say "We didn't intend to catch this or we could buy a little bit extra credit so that we don't get a penalty." and then that basically reduces the amount of waste but by the same token, it's not forcing the fisherman to be penalized.