Ecological Economics 45 (2003) 119 /132 www.elsevier.com/locate/ecolecon
ANALYSIS
Demand-side policies for environmental protection and sustainable usage of renewable resources Jill L. Caviglia-Harris a,*, James R. Kahn b, Trellis Green c a b
Department of Economics and Finance, Salisbury University, Salisbury, MD 21801-6860, USA Environmental Studies Program, Washington and Lee University, Lexington, VA 24450, USA c Department of Economics, Southern Mississippi University, Hattiesburg, MS 39406, USA
Received 28 November 2001; received in revised form 24 June 2002; accepted 6 January 2003
Abstract Since many renewable resource systems such as tropical and temperate forests, coral reefs, and wild fisheries are often exploited at unsustainable rates, studies aimed at reducing these trends have focused on the market failures associated with over-exploitation. Within this framework, the literature devised what we term supply-side policies to correct these market failures. Here we introduce demand-side policies into the mix of renewable resource and environmental management policies. These policies are designed to increase the demand for goods produced in a sustainable fashion by: (1) promoting the long-term conservation of natural capital assets, (2) promoting the attainment of economic efficiency, and (3) providing greater political acceptability relative to supply-side policies. # 2003 Elsevier Science B.V. All rights reserved. Keywords: Demand-side policies; Renewable resources; Exploited; Environmental policy; Tropical forests; Fisheries
1. Introduction Renewable resource systems such as tropical and temperate forests, coral reefs, and wild fisheries are often exploited at unsustainable rates
* Corresponding author. E-mail addresses:
[email protected] (J.L. Caviglia-Harris),
[email protected] (J.R. Kahn),
[email protected] (T. Green).
(Brown and Pearce, 1994). Many would argue that some of these ecosystems are in a state of de facto collapse, despite the use of traditional management policies (Thorpe et al., 2000; Food and Agricultural Organization, 1995; Safina, 1995). One reason why many of these renewable resources are being exploited at higher than sustainable rates is because of the increase in global demand for the harvested products of these ecosystems (Edwards, 1992; Amelung and Diehl,
0921-8009/03/$ - see front matter # 2003 Elsevier Science B.V. All rights reserved. doi:10.1016/S0921-8009(03)00009-0
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1991). The environmental and natural resource economics literature has examined market failures associated with over-exploitation of forests (Barbier et al., 1994; Repetto and Gillis, 1998; Kahn and McDonald, 1995; Caviglia and Kahn, 2001) and fisheries (Gordon, 1955; Anderson, 1976; Bjorndal and Munro, 1998; Danielsson, 2000). Within this framework, efficient policies to correct market failures include defining and securing property rights, eliminating inefficient government subsidies, and correcting imperfect information to reduce deforestation (Caviglia, 1999; Wood and Walker, 1999; Alston et al., 1996) and limiting open-access in fisheries through individual transferable quotas (ITQs) and other property rights provisions (Copes and Cook, 1982; Muse and Schelle, 1989; Edwards, 1994; Derren and Gartside, 2001). Traditional environmental resource management policies are designed to equate the private marginal cost of production with the social marginal cost of production. These policies can be viewed, in a microeconomic context, as supplyside policies because they attempt to internalize the externality through the definition of property rights, imposition of taxes, marketable quotas, subsidies, performance bonds or similar policies. While supply-side policies often can achieve efficiency by shifting the marginal cost function, they generally are not sufficient to achieve long-term sustainability when demand pressure is systematically growing because the policies have been developed for an economic environment in which demand is assumed to be exogenous or constant. This paper focuses on the issues of both sustainability and efficiency by integrating demand-side policies into the mix of renewable resource and environmental management policies. These policies are designed to increase the demand for goods produced in a sustainable fashion. Demand-side policies can make three major contributions to resource and environmental management. The first contribution is to promote the long-term conservation of natural capital assets and the consumption opportunities and ecological services they offer to future generations. If the accelerating global demand for products made from renewable resources is not checked by policy,
harvest rates will increase. This could increase the probability of over-exploitation, and in some cases result in eventual depletion of the resource. Unsustainable use of a renewable resource occurs when the quantity of extraction exceeds the net addition to the stock in the relevant time period. A reduction in demand could, therefore, reduce the extraction rate. The second major contribution of the demandside policies is to (in concert with more traditional supply-side policies) promote the attainment of economic efficiency. For example, if enforcement and monitoring problems or institutional and political factors prevent supply-side policies from fully internalizing external costs, demand-side policies can also help achieve economic efficiency as a ‘second-best’ type of policy instrument. Factors that prevent the full internalization of external costs are likely to exist in many of our important renewable resource systems, including forests and fisheries. The third major contribution is that these policies may be more politically acceptable because they employ positive incentives rather than the disincentives that are utilized with supply-side policies. Since political acceptability can be a major influence for policy, demand-side policies can provide viable alternatives for policy makers. This paper is organized into eight sections. Section 2 investigates the impact of unsustainable activities on renewable resource systems. In Section 3 we provide an overview of demand-side policies and definitions of the two applications presented in this paper. In Section 4 we examine the choice between sustainable and unsustainable activities and discuss how this choice is affected by traditional supply-side policies used to correct market failures in comparison to demand-side policies. Section 5 continues with a discussion of demand-side policies that can be used to increase the demand for alternatives in production. In Section 6 we turn to demand-side policies that promote substitutes in consumption. Section 7 discusses the importance of developing concurrent policies to reduce market failures such as insecure property rights and lack of access to capital markets. And, in Section 8 we summarize the arguments and discuss the future potential of
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generating sustainability through demand-side policies.
2. Renewable resource use and environmental externalities There are two types of inefficiencies associated with the over-exploitation of renewable resource systems. The first inefficiency concerns the traditional management issues of open-access and associated property rights-based market failures that encourage over-harvesting in the current period. This over-harvesting subsequently generates a stock reduction that further lessens future productivity and the regenerative capability of the resource itself. The second major source of inefficiency occurs when harvesting the resource generates environmental externalities, reducing the suite of ecological services flowing from the renewable resource system. The importance of these inefficiencies can be illustrated with the renewable resource examples used through the paper: forests and fisheries. In developing policy for commercial fishing, the focus in the economics literature has been the development of limited-access policies (e.g. ITQs) designed to mitigate the open-access externality by assigning property rights and reducing overcapitalization. However, this literature has not focused on other externalities such as the by-catch of nontargeted species (fish, marine mammals and turtles), indirect ecological impacts through predator /prey and competitor relationships, and the destruction of the bottom environment through contact with fishing gear. These environmental effects have proven very difficult to mitigate with traditional policy instruments such as direct controls and economic incentives sometimes due to vehement opposition and litigation from those regulated in the fishing industry (Thorburn, 2001; Thorpe et al., 2000; Margavio et al., 1993). Environmental impacts from the over-exploitation of forests have received far more attention in the literature, compared with fisheries, emanating from the worldwide concern about tropical deforestation. In addition to the global environmental externalities, such as loss of biodiversity and
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reduced carbon sequestration (more global warming), there are important local and regional environmental externalities. These include the loss of ecological services such as nutrient cycling, soil fertility, watershed protection, and maintenance of regional climate. In addition, there has been increased interest in the impact of deforestation on the uses of the forest for production of non-timber products, such as nuts, fruits, fibers, and pharmaceutical plants. These issues, like those mentioned in relation to fisheries, have been difficult to mitigate with direct control and economic incentives for various reasons. Some of these reasons include lack of government support, poverty issues, and civil war (Caviglia and Kahn, 2001; Caviglia, 1999; Cairnes and Garrity, 1994; Craswell et al., 1998; Pretty and Hine, 2000; Dakora and Keya, 1997; Kebede et al., 1990).
3. Demand-side policies: definition Demand-side policies are income-based incentives designed to influence demand in favor of sustainably produced products. Two types of demand-side policies are examined in this paper: (1) demand-side policies that develop substitutes in production, and (2) demand-side policies that develop substitutes in consumption. The first type of demand-side policy focuses on increasing the demand for products that are sustainability produced in the ecosystem in question and are substitutes in production for the unsustainable harvest of the relevant renewable resource. For example, instead of using a tropical rainforest for the unsustainable production of mahogany, soybeans, or corn, the forest could be used to sustainably harvest a variety of tree species and/ or utilized to produce native fruits, nuts and other products. The second type of demand-side policy focuses on the development of a demand for goods produced outside the ecosystem in question that are substitutes in consumption for the renewable resource. Again, the ultimate goal of policy is to reduce demand for the renewable resource at risk. For example, aquacultured fish can be produced in tanks or artificial ponds on farms and can be
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promoted to reduce the pressure on wild fish stocks. And, barren lands can be reforested into farms to provide substitutes for wood taken from ancient growth forests or to forests to provide high levels of ecological services. This paper discusses the use of both types of demand-side policies to promote sustainable uses of resources. Our focus in this paper is on the sustainable development of renewable resources1. Renewable resource use can be sustainable over any period of time as long as the exploitation of the renewable resource does not exceed the natural regenerative capacity of the system.
4. The impact of alternative policies on costs and incomes Policies designed to correct market failure generally increase marginal private cost to equate it with marginal social cost. Within this framework, standard welfare analysis is applied to assess the policy effects on efficiency from cost adjustments.
1 The economics literature has debated the specifics of modeling sustainability (see Pearce and Giles, 1998; Pezzey, 1989; Pearce et al., 1989; Stern, 1997 for a synopsis of this debate). There is agreement that sustainability implies that some form of inter-temporal equity is maintained, as welfare is held constant or non-declining over time. The controversy lies in the preconditions for attaining this inter-temporal equity, wherein the dominant view (the capital theory approach) asserts that a capital stock is what should be maintained over time. This paper is primarily concerned with a different sustainability issue. This paper looks at the sustainable use of renewable resources and asserts that renewable resource use can be sustainable over time as long as the exploitation does not lead to extinction or total exhaustion of the resource. Adopting practices in the current period that protect against this overexploitation enhance sustainable use of the resource, protecting the stock of environmental capital. While our paper does not fully address the issue of overall capital accumulation and the question of the sustainability of the global economic/social system, we focus on the issue of the sustainable management of individual renewable resource systems. Obviously, this has implications for both the maintenance of the total stock of capital and for the sustainability of the overall global system, but a discussion of these implications is beyond the scope of this paper.
However, policies that correct market failure do not only affect cost, they also affect income. Economists have not addressed income effects much because they focus on equity over efficiency. However, these effects are important because they influence the political acceptability of a project. More importantly, income effects can profoundly impact the choice between a non-sustainable production activity and a sustainable alternative. The following theoretical model of sustainable and unsustainable income paths is developed to illustrate the different impacts of supply- and demandside policies for environmental protection. In general, unsustainable activities that are dependent upon a renewable resource base produce a higher level of income in the short run and a lower level of income in the long run if the resource is depleted and not permitted to regenerate naturally or is not replenished through human intervention. For example, Fig. 1 contains a stylized representation of the income time paths of unsustainable and sustainable practices, where UI(t) represents the unsustainable income path over time and SI(t) represents the sustainable income path over time. Income generated from a renewable resource is hypothesized to be relatively high in the initial period, but steadily declines as the environment is disrupted. Fig. 1 includes an illustrative income path for a renewable resource such as a tropical forest farm lot or a fishery that is limited in size. This decline in income will occur at any discount rate, as it is based on the degradation of the environment or the loss of soil fertility. Note that since each of the functions in the graph represent income in a specific time period, the shapes of the functions are independent of the discount rate. The higher the discount rate, the more likely the producer will choose the unsustainable path. However, because the loss in income results from an absolute decline in the inputs to production, this can occur at any discount rate. In the initial years, as more and more land is cleared, or the effort expended in the fishery increases, output and income expand. Although the productivity of the of the resource decays, the initial income more than compensates for the future loss in productivity. Eventually, a plateau is achieved, and then
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Fig. 1. Income paths of sustainable and non-sustainable methods of resource use.
income declines as there is no new land to clear or additional effort only reduces the fish stock and does not increase catch (see Weinhold, 1999). It is possible that in the long run the steady state income associated with sustainable activity is greater than the maximum income associated with the unsustainable activity. Even so, people with relatively high discount rates tend to adopt the unsustainable alternatives because short run income is often higher. Sustainable practices usually require an initial investment in terms of human capital and inputs (such as seedlings and equipment) that make their adoption relatively expensive in the short run. For example many farmers in tropical regions do not use sustainable agricultural practices. These methods of agriculture generally require perennial crops that take several years to mature to the point where they generate a usable output. Moreover, peasant farmers who have migrated from other regions of Brazil to the Amazon often do not have access to the training or equipment necessary to adopt the more sustainable practice. Therefore, unsustainable practices, such as slash-and-burn agriculture, are often their only option (Caviglia and Kahn, 2001). Adding to the problem is that there are often well-developed markets for unsustainable products in many regions of the world. These markets help to increase the current income
potential of the unsustainable practices. In addition, studies have also found that cultural and social factors, among others, have led to the use of less sustainable or profitable agricultural practices in tropical regions (Adesina and Zinnah, 1993; Holden, 1993; Kebede et al., 1990; Feder et al., 1985). Sustainable income paths generally involve a greater initial capital investment and initial opportunity cost of foregone income while the renewable resource matures (SI(t) in Fig. 1) (Nelson et al., 1995; Nair, 1990). Therefore, sustainable paths generate lower income levels in the initial time period, but can produce a larger and steadier stream of income past some threshold time period (here at T1) (Grimes et al., 1994). As the investment in capital grows, and the environment that supports the sustainable activity does not deteriorate or lose productivity, the sustainable activity becomes more profitable relative to the unsustainable alternative. Although the choice of the discount rate can impact the value of T1, the point here is that there is a waiting period before the sustainable income stream is more profitable at high and low rates. Changes in the prices or costs of unsustainable activities can shift the functions up or down, compress them to the left (by increasing the intensity of the activity) or extend them to the
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right (by decreasing the intensity of the activity). Changes in prices for the sustainable goods can shift the functions as well. However, the basic intuition of the model remains unchanged whether prices are variable or constant. In addition, changes in discount rates are unlikely to affect the shapes of the sustainable function as its shape is determined by the maturation of the renewable resource. However, an increase in the discount rate could compress the unsustainable function (moving the peak to the left) by encouraging more intensive activity in the short run, speeding the degradation process. Supply-side policies decrease the income path of unsustainable income sources by internalizing external costs. This increases the cost of production or harvest, making the adoption of sustainable income practices relatively more attractive. This is represented, in Fig. 1, as the downward shift of the unsustainable path from UI(t)1 to UI(t)2. An example of a supply-side policy that would result in this outcome would be the use of harvesting permits for valuable woods (e.g. mahogany and teak), designed to internalize the external environmental costs associated with unsustainable harvesting activities. Alternatively, the forest could be protected against high-grading by direct controls. Either permits (based on a per unit harvest) or direct controls (including fees and/or fines) would increase the costs of harvesting the wood, thereby decreasing the unsustainable income path and making the sustainable path relatively more attractive in comparison. Demand-side polices aim to alter the sustainable path of income, rather than the unsustainable path. An upward shift in the sustainable path will serve to shorten the period of time it takes for the income from sustainable activities to exceed those from unsustainable activities. For example, in many tropical forests introduced products (such as beans or corn) are cultivated and harvested through slash-and-burn agriculture, while many native products (such as palm fruits and cashew nuts) are destroyed in the process. Policies that increase the demand for sustainable products could increase the income derived from sustainable uses of the forest. For example, rainforest fruits such as ac¸ai, graviola, acerola and cupuac¸u can be
made into ice creams and juices that are so delicious that they cannot be adequately described. In addition, they have very healthy properties such as high concentrations of vitamins and minerals. For many years, these ice creams and juices were difficult to find in large urban centers such as Sa˜o Paulo and Rio de Janeiro2, and they are still virtually impossible to find in North America and Europe. A policy that publicized these ice creams and juices and increased the demand for tropical fruits (that could be collected in the wild or cultivated using sustainable agricultural methods) would shift the sustainable path of income upward, making the sustainable path of income more profitable. Fig. 1 suggests that both supply-side and demand-side policies could have the same potential outcome in terms of reducing the breakeven time from T1 to T2. This occurs because both policies essentially decrease the time period whereby the unsustainable path is made more profitable. The important difference in the two types of policies is the income effect. For example, in the tropical forests where slash-and-burn agriculture is practiced, supply-side policies would punish the peasant farmers who use slash-andburn, while demand-side policies would reward the farmers who adopt sustainable agricultural practices. Since the poverty of the region is of great concern, it is both more practical and more ethical to protect the environment with demand side policies that increase income.
5. Increasing the demand for the sustainable products of an ecosystem Tropical rainforests provide good examples of the potential for demand-side policies that utilize substitutes in production. Much of the current economic activity in the rainforests is unsustainable, yet sustainable alternatives exist that have a 2
Rainforest juices have become available in Rio de Janeiro, Sao Paulo and other large urban centers in recent years at specialty juice bars and at fitness centers. They still have not penetrated ‘mainstream’ restaurants and supermarkets.
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higher income potential (Grimes et al., 1994; Smith et al. 1996; Current et al., 1998; Caviglia, 1999). This section of the paper explains how demandside policies can shift the income path for sustainable activities upward, thereby increasing the relative attractiveness of the sustainable option. We present two examples to illustrate the importance of demand-side policies that utilize substitutes in production. The first example examines the peasant farmer who faces the choice between unsustainable and sustainable agricultural methods. Our second example examines the timbering firm that faces the choice between clear cutting and more sustainable methods of harvesting wood. In both cases, demand-side policies can induce the individual farmer or firm to choose the sustainable alternative. 5.1. Demand-side policies and agriculture in tropical forests Small farmers are one of the major sources of deforestation in periphery Amazonian states (e.g. Acre, Rondoˆnia, Mato Grosso, Para´, and Maranha˜o). Due to household labor and other constraints most farmers engage in slash-and-burn methods to clear the land, and then plant annual crops such as corn, beans and rice. The soil quickly loses its fertility and only supports crops for several years. The cropland is then converted to pasture, but because of lack of fertility, the pastures only support livestock for several years. Since productivity declines so quickly, more land must be cleared and the cycle repeats itself over time. This leads to the dramatic decline in the unsustainable income path in Fig. 1. An alternative method of agriculture includes the clearing of narrow strips of the forest to plant production substitutes such as perennial crops (e.g. fruit trees and coffee) and inter-mixed annual crops. The advantage of this inter-cropping, or agroforestry, method is that it removes only a small fraction of the trees. As a result of the smaller disturbance, leaf litter continues to fall into the cultivated areas and the soil is protected from the sun. The roots of the surrounding trees (that actually underlie the crop area) absorb the nutrients not captured by the crops, instead of
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allowing the nutrients to run-off with the heavy rains of the region. Thus, the nutrient cycle is not altered and the soil maintains its productivity. Perennial crops such as fruit trees and coffee also become part of the natural nutrient cycle3. In a study of peasant farmers in Ouro Preto do Oeste, Rondoˆnia, Brazil, Caviglia (1999) finds two problems with insufficient demand for production substitutes. First, many of the farmers themselves have no experience in consuming these native fruits and nuts because of habit and lack of local knowledge. These farmers have typically migrated from southern Brazil, where annual crops are the standard in agriculture. They are simply unfamiliar with the hundreds of edible rainforest fruits and nuts. For example, the cashew fruit is primarily used for juice while the nuts are often left to rot because many of the colonist farmers do not know that they can be eaten after the caustic toxic substances found in the shell oil are removed, a process generally accomplished through roasting. Other fruits such as cupuac¸u and pupunha are often left to rot simply because many of the farmers are not familiar with these products or their harvesting methods. Public information, education and agricultural extension programs could be developed to increase the local demand for these sustainable products. This would increase the benefits to the farmers of choosing sustainable agricultural methods. Second, there is insufficient demand for the production substitutes in formal markets in urban areas. Increasing the demand for native production substitutes in formal markets, such as the large urban areas and export markets will do even more to increase the income associated with sustainable agricultural methods. Two related types of demand-side policies can be established to promote these native production substitutes in formal markets. One type of policy simply makes consumers aware of the potential products, such as the juices from rainforest fruits. 3 Coffee is an interesting crop in that coffee plantations tend to be an unsustainable use of the rainforest, since monocultures are often unsuccessful in this type of environment. However, coffee planted as one of many crops in a strip inter-cropping system can be part of a sustainable agroforestry operation.
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This type of policy would promote the taste, health benefits (many rainforest fruits have Vitamin C concentrations orders of magnitude higher than orange juice) and other characteristics that consumers typically look for in their food products. The other type of demand policy would be a ‘green certification’ type of program, which would promote these products for their role in preserving the rainforest, allowing consumers to ‘vote with their dollars’ for rainforest preservation. In addition to these policies aimed at changing consumer preferences, structural barriers must be eliminated to allow the policies to be successful. For example, even if the farmers can produce the fruits, and urban consumers want to drink the juices and eat the fruits, nothing will happen unless there is an infrastructure that supports the transport of the fruits and juices from the rainforest to the distant urban centers. Smith et al. (1996) suggest that as markets grow in the Amazon, policies can be applied to support the production of fruit pulps, the packing and storing of fruit products, and the processing and canning of other products. Currently, much produce is lost because it cannot be processed. Micro industries have been established in some locations in the Brazilian Amazon to process the fruits. However, Smith et al. (1996) point out that unreliable or non-existent supplies of electricity and lack of credit are major deterrents to expanding these industries. Improved access to and supply of capital could, therefore, provide an alternative way of increasing the sustainable uses of the forest. Similarly, market failures affecting farmers’ choices’ must be corrected with supply and/or demand-side policies when is socially optimal. Three major problems in this regard are insecure land tenure, imperfect information, and lack of access to capital. Lack of secure land tenure is an important problem, as sustainable agricultural methods require investment in perennial crops. The incentive for making these investments declines as the probability of being displaced from the land decreases. Imperfect information is also a critical problem, as many of the farmers are migrants from non-rainforest areas, and know little about agroforestry techniques that can be both profitable and sustainable in the rainforest.
Finally, since the choice of sustainable agriculture requires an initial investment that can temporarily reduce income relative to the unsustainable methods, farmers need access to credit to support household consumption needs while the investment realizes its potential. If credit or capital is unavailable to support the farmer through the initial lower income period, the farmer likely will be constrained to choose the unsustainable method. The supply of household labor is often one of the major production constraints for farmers in tropical regions (Godoy et al., 1997; Kaimowitz and Angelsen, 1998; Angelsen, 1999), making the adoption of income related activities difficult without such assistance. Therefore, a combination of demand-side and supply-side policies, focused on market failure, may be an effective way of reducing tropical deforestation. 5.2. Demand-side policies and logging in tropical forests Traditional commercial forestry in the neotropics tends to be unsustainable because of the impact of clear-cutting on soil productivity and forest recoverability. In addition, harvesting activity compacts soil, generates collateral damage to untargeted trees, and destroys many juvenile trees in the process. Traditional forestry may also be unsustainable because it degrades water quality and impairs the natural functioning of ecosystems. There exist two primary types of sustainable forestry: (1) the selective harvesting method, and (2) the strip method (Kahn et al., 2000). The selective harvesting method carefully removes less than 10% of the volume of trees in small plots with large untouched areas between the plots. It also requires that within each exploited plot, sufficient trees of each species remain unharvested to provide a source of seed to maintain the existing diversity and distribution of tree species. The strip method, (also called strip-shelter belt method) cuts all the trees in a narrow strip, approximating the type of disturbance that naturally occurs when a large tree is toppled by the wind, bringing down all the trees in its path. In order for either method of sustainable forestry to be economically viable, the firm must
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cut and sell up to forty different species of trees, since the forest itself is composed of hundreds of different species. With both types of sustainable forestry, the ecological constraints that govern recoverability require that a diversity of species be harvested, rather than focusing on the most valuable species such as mahogany, teak or rosewood. The problem, however, is that furniture makers and final consumers in Europe, Japan and North America are unfamiliar with all but these high profile species, hence there is no export market for the less well-known species, even though their wood is both equally beautiful and durable to the higher profile species. In fact many of the species are unnamed except for locally utilized names. An obvious type of demand-side policy would be an advertising campaign oriented towards increasing the demand for the other native species of wood substitutes. However, many people will associate the use of any rainforest wood with the destruction of the rainforest. Therefore, the advertising campaign must be supplemented with an information and/or ecological certification program to identify the wood as sustainably produced, the purchase of which actually aids in rainforest preservation rather than generating degradation. This not only corrects a market failure of imperfect information, but also allows consumers to exercise their (hypothesized) preferences for purchasing goods that are more consistent with environmental preservation.
6. Reducing Ecosystem Demand Fisheries provide good examples of the potential for demand-side policies that utilize substitutes in consumption. Many oceanic, near-shore and inland fisheries have collapsed or come close to collapse due to the increased demand for fish and the unchecked access to the fisheries. The United Nations Food and Agricultural Organization (FAO) (Food and Agricultural Organization, 1992) reported that 13 of the 17 major ocean fisheries are at, or beyond, maximum sustainable yield. Moreover, the FAO continues to monitor a drastic decline in fish availability per capita. This
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Fig. 2. Maximum sustainable yield and the equilibrium catch function.
section of the paper illustrates how utilizing substitutes in consumption can contribute to environmental resource management, using fisheries as an example. Economists cite overcapitalization (excess effort) as the source of fishery collapse, even though supply-side management policies have been adopted in many of these fisheries. It is possible that the implementation of certain policies is flawed and has not achieved the desired goal4. Increases in demand associated with global population and income growth may also be a serious source of the problem of fisheries decline. Supplyside policies that limit entry can achieve goals of efficiency, however, supply-side policies cannot unilaterally reverse the precipitous declines in fish populations, because they do not address the problem of ever-increasing demand (Green and Kahn, 1996). If efficiency were the only policy goal, then policy makers should take demand as given, and simply chose a time path of harvesting that maximized the present value of income. Supplyside policy can do this by limiting entry. However, if inter-temporal equity concerns are important, then one must consider the sustainability of the fish population, the sustainability of the harvest 4 Milon (1993) articulates two major categories of problems. First, in many cases, regulatory and management policies have not focused on limiting entry. Second, limited entry policies have been compromised and/or delayed by the political and bureaucratic process.
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and the maintenance of the associated ecological services, even in the face of increasing demand that increases rewards from the current harvest. In order to address inter-temporal equity, the goal of policy should be to maintain sustainability of the stock and associated services in perpetuity. Services include the harvest of the stock, ecological services provided by the ecosystem containing the species, recreational opportunities and existence values. If these services contribute to social welfare, then it is unlikely that the collapse of the fishery will be socially optimal even if it maximizes the present value of the time path of income from harvesting the stock. To explore these issues, a more formal analysis is required. Fig. 2 presents a logistic growth function that can also be interpreted as a sustainable catch function (Gordon, 1955; Anderson, 1976). The growth function can be interpreted as a sustainable catch function because equating catch and growth will leave population unchanged. Thus, movement along K 0 in Fig. 2 represents a change in the sustainable fish population, and therefore, a change in sustainable growth and catch rates. There is only one sustainable catch associated with each population level. Starting from the unexploited productive capacity at point K , if C1 units are caught, the population will decline to X1. Thus, C1 is the sustainable catch at population X15. Fig. 3 incorporates the biological model into the marketplace, based on Kahn and Kemp (1985). The locus of biological equilibria is obtained by ‘mapping’ the equilibrium growth function (K0 in Fig. 2) onto the family of supply functions. Each supply function corresponds to a different level of fish stock, because supply is inversely related to fish population as effort is increased. Thus, the supply curve shifts upward when decreased fish stocks increase extraction costs per unit of effort. For example, S0 is a low cost supply curve
Fig. 3. Demand reductions and the open access fishery.
associated with the maximum productive capacity K , while S8 is a high cost supply curve near stock depletion at point 0. Demand functions are determined outside the fishery by societal tastes, income, population, and substitutes. The specific locations of D1, D1?, D2, D2?, and Dz are chosen for purposes of illustration. Since there is a unique equilibrium catch level associated with each level of fish population, there is only one point on each supply curve that can be characterized as a biological equilibrium. The open-access economic equilibrium occurs where the locus of biological equilibria (K0) intersects the demand and supply functions, since open-access operates where average revenue equals average cost. This happens, for example, at point a with catch equal to Q7 and price equal to P76. If population, income, and/or tastes increase demand over time, the open-access equilibrium will move along the biological locus K0 in a counter-clockwise direction (as the growth rate declines). If demand is pushed to a level such as DZ , which lies completely above K0, the fishery will crash under either open-access or limited
5
Note that C1 is also the sustainable catch for the population level X1?. For example, a limited-access fishery might maximize revenues by harvesting C1 at population level X1. An overcapitalized, open-access fishery might harvest the same C1 with more effort at lower population X1?, and economic rents would be dissipated.
6
The losses associated with open-access can be shown by a comparison of point a with point e . Both are associated with sustainable catches of Q7, but point e is associated with a larger fish stock and a much lower average cost of production.
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access. The crash of the population not only has ramifications for future harvest, but also for future ecological services, as the ecological impacts of the loss of the species ripple through the ecosystem. Even if limited-access were successful in maximizing the net present value of harvests, it would not internalize the environmental externalities associated with the depletion of the fish stock, incidental catch of other species and marine mammals, or damage to habitat from fishing gear. Therefore, demand-side policies can increase economic efficiency (by reducing these externalities) even if a well functioning ITQ system is present. In the absence of limited access systems, demand-side policies can also serve to reduce traditional stock externalities. This is an important point because the majority of the world’s fisheries are open-access7, either completely unregulated or associated with, regulatory restrictions governing gear, season length, allowable catch and size of catch. One way to implement the demand-side strategy is to develop and promote production growth targets for consumption substitutes, such as aquacultured fish. Consumption substitutes reduce the demand for wild fish, ceteris paribus. A decrease in the demand for wild fish moves the bioeconomic equilibrium clockwise along K0 in Fig. 3. This will unambiguously lower price and increase the population of wild fish. However, the impact on catch is ambiguous and would depend on whether the fish population was above or below the level associated with maximum sustainable yield. If the initial demand curve was D2, intersecting K0 at point c in Fig. 3, a reduction in demand to D2? would reduce catch. Price falls and catch decreases. In contrast, D1 represents a demand function in a fishery near collapse. If the original demand curve intersects K0 to the northwest of maximum sustainable yield, such as point a on D1 (Fig. 3), then a decrease in demand to D1? will
7 Notable exceptions include Australia and New Zealand, which are vigorously pursuing limited access systems such as ITQ.
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increase the open-access equilibrium catch. In this case, price falls and catches increases. In this case, the impact on revenue depends on the relative magnitudes of the two changes. The potential results for the demand-side policy in terms of revenue in the wild fishery, are therefore, unknown. In both situations the wild fish population increases, reducing the cost of production. Therefore, the impact on net revenue will be determined by the joint effects of an unambiguous decline in the cost of harvesting, an unambiguous decline in price, and either an increase or decrease in catch. Therefore, net revenue in the wild fishery can either increase or decrease. The important point of the analysis is that the impact of the demand-side policy on sustainability of harvest, the maintenance of ecological services and other stock related benefits is unambiguously positive. Since the demand for fish in general can be broken down between the demand for wild and aquacultured fish, an increase in demand for the substitute will unambiguously decrease demand for wild fish in the current time period. And to continue this trend over time, promotion of aquacultured fish as a healthy alternative to wild fish (as the farmed fish do not contain pollutants found in wild fish such as mercury or petroleum products) could be applied as well. Such a policy could help to increase the demand for aquacultured fish and reduce demand for wild fish over time. Aquaculture can lead to undesirable ecological impacts, including loss of habitat through the creation of artificial ponds in wild fish habitat, nutrient enrichment of neighboring ecosystems, and genetic dilution of wild species. These environmental impacts must be regulated through active policy to prevent associated social losses. However, the potential existence of these externalities does not dilute our argument that a wellstructured increase in the demand for aquacultured fish can reduce the demand for wild fish and increase the sustainability of wild fisheries and the flow of ecological services arising from the fishery. The development of substitutes in consumption, which are produced outside the ecosystem in question, is also a possibility in the management of temperate and tropical forests. Wood produced
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on tree plantations can reduce the demand for wood produced from natural forests8. However, care must be taken in exercising this type of policy. First, since natural (and particularly old growth) forests produce much more ecological services than tree plantations, one does not want to implement the policy by converting natural forests to tree plantations. Rather, previously degraded areas should be reforested into tree plantations. Where possible, decision makers should also develop a diverse set of tree species rather than the monocultures (such as eucalyptus or pine) typically associated with tree plantations. Second, the reduction in demand for wood produced from natural forests may be counterproductive if landowners respond to the fall in price by putting more land in production, or by switching to less sustainable methods that harvest more wood per hectare. One needs to be careful that policies that may encourage plantations do not discourage sustainable forestry activities.
7. Application of demand-side policies and distributional issues One implication of the analysis of demand-side policies in the forestry case versus the fishery case is the distributional difference. The small-scale rainforest farmer, who was actually or potentially engaged in the unsustainable activity, is also the person who would benefit from the increase in demand for the alternative sustainably produced products. In marked contrast, the commercial (or subsistence) open-access fisher will seldom share in the benefits derived from aquaculture, because aquaculture is generally conducted on private property rather than in open-access habitat. It is possible that the fisher will earn more revenue 8
Establishing tree plantations in degraded areas is likely to be successful in many temperate forests, and in some areas where tropical deforestation has occurred. The likely success of tree plantations in tropical areas depends on the soil type and structure, the nature of the disturbance to the soil, and the length of time that has lapsed since deforestation occurred. Many tropical areas have become too degraded to support tree plantations.
from the wild fishery as a result of the promotion of aquaculture, but only if the catch increases as a result of the policy, and if the increases in catch outweigh the reduction in price. The catch will increase if the fish population is less than the level that provides maximum sustainable yield. This is likely to be the case in most important fisheries, since as noted earlier, they tend to be either in collapse or moving toward collapse. However, it is more difficult to make an a priori prediction on whether the positive catch effect will outweigh the negative price effect, as this depends on the relevant price elasticities of demand. This distributional issue is important from a policy perspective. Rainforest farmers are likely to favor the demand-side policies focused on production, as these can increase their incomes. In contrast, the commercial fishing lobby will most likely exert considerable political influence on decision makers, because of the potential for income reduction. Their powerful influence can be used to block and delay policies designed to subsidize or otherwise promote aquaculture. In contrast, wild commercial fishers would be more likely to support other types of demand-side policies, such as the Marine Fisheries Initiative (MARFIN), a program sponsored by the US National Marine Fisheries Service (USNMFS, 2001). MARFIN seeks to protect vulnerable stocks of wild fish though the development of markets for ‘under-utilized’ species of wild stocks. Of course, these under-utilized species may quickly become over-exploited. This has been the case for shark and monkfish in the North Atlantic, and orange roughy in the South Pacific/Tasmanian Sea.
8. Conclusion Although the correction of market failure is an essential element in generating sustainable development, the correction of market failure in itself may be insufficient to catalyze economic incentives for sustainable use of renewable resources. In addition, steps must be taken to increase the income stream associated with sustainable activities in order to induce economic agents to shift to
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sustainable activities. This paper has shown the potential of demand-side policies to promote sustainable use of renewable resources by using examples involving small farmers, commercial timbering, and fisheries. Demand-side policies are introduced as policies that may be combined with traditional supply-side policies to achieve both sustainability and efficiency. It is important that demand-side policies are considered in combination with other policies that help to maintain and/or preserve habitat. If either demand-side or supply-side policies are used alone and habitat falls below a critical level, the policies may not have a positive impact on the resource. This paper differentiates between demand-side polices that promote substitutes in production and those that promote substitutes in consumption. Demand-side polices that promote substitutes in production focus on sustainable production processes. Demand-side policies that promote substitutes in consumption indirectly promote sustainability by creating demand for substitute products. Demand-side polices are promising because in some cases they can lead to sustainable use of renewable resources while increasing income of those dependent on the resource for their livelihoods. In addition, demand-side policies may be an efficient second-best policy when political or enforcement barriers prevent the full or partial correction of market failure since these positive incentives may be more politically acceptable.
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