Promoting Sustainable Aquaculture through
Economic and other Incentives1

[1]Denis Bailly and [2]Rolf Willmann

[1] Economist, CEDEM, Université de Bretagne Occidentale,
Centre for Marine Law and Economics, Brest, France
[2] Senior Fishery Planning Officer, FAO,
Rome, Italy


Bailly, D. & Willmann, R. 2001. Promoting sustainable aquaculture through economic and other incentives. In R.P. Subasinghe, M.J. Phillips, P. Bueno, C. Hough, S.E. McGladdery & J.R. Arthur, eds. Aquaculture in the Third Millennium. Technical Proceedings of the Conference on Aquaculture in the Third Millennium, Bangkok, Thailand, 20-25 February 2000. pp.95-101. NACA, Bangkok and FAO, Rome.

ABSTRACT: Economic incentives have been widely applied to encourage growth in aquaculture production, especially in the “infant” phase of development where risks are often high and scale economies cannot yet be realized. In recent years, increasing attention has been given to incentives that encourage the use of environmental and natural resources in a sustainable manner. This growing interest is not least due to the frequently disappointing performance of command and control measures. Different kinds of incentives can be developed in isolation or in combination, including tradable use/access rights, taxes/subsidies, codes of conduct, eco-labelling and others. While practical experiences are still very limited in aquaculture, these measures have proven effective in other sectors to induce producers to adopt better and more environmentally friendly production practices.

KEY WORDS: Incentives, Taxes, Subsidies, Tradable Rights, Codes of Conduct, Eco-labelling

 

 
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Introduction

Many agencies (local, national, regional or international) have provided incentives for aquaculture development. These include subsidies for production inputs or outputs, e.g.:

  • subsidies to fixed capital or to operating capital by direct grants, soft loans or debt-equity swaps;
  • income and profit tax rebates (tax holidays);
  • public investment in collective infrastructure (e.g. water channels and bunds, electricity supply);
  • market promotion of aquaculture products;
  • investment in human capital (skill development through training and extension) and public investment into innovation (research and development); and
  • technology transfer4.

The traditional concern of these agencies was to accelerate the growth of the aquaculture sector in order to realize economic and social objectives, such as generation of income and employment, foreign exchange earnings and rural development for food supply and poverty alleviation. These policy objectives and tools are not specific to aquaculture but, in the past, emerging aquaculture industries, both in industrial and developing countries, have benefited from such public support. The main arguments for this support have been:

  • the risky character of aquaculture production for which knowledge is still rather limited;
  • the relatively high-tech content of some aquaculture practices; and
  • the significant potential of aquaculture to provide socio-economic development opportunities, especially in deprived regions and poor countries.

An additional argument is that “infant” industries face cost disadvantages because scale economies do not yet apply and the gains from learning-by-doing are not yet available. As a consequence, a late starter may not become internationally competitive, or may become so only after a great length of time, without government assistance.

In recent years, increasing attention has been given to the kind of public policy and support needed to ensure that aquaculture development proceeds in a sustainable manner and is not negatively impacted by other economic activities.

  Concerns about the environmental sustainability of certain aquaculture activities relate, inter alia, to the degradation or removal of ecologically valuable habitats, the waste production levels that exceed the assimilation capacity of nearshore waters and freshwater aquifers, the capture of wild postlarvae for stocking and high by-catch mortalities, and the transmission of pathogens and genes between cultured and wild stocks. Economic, social and cultural sustainability concerns include dramatic production losses caused by epidemic outbreaks of diseases; obstruction of traditional access by local communities to common resources; and nutritional, socio-economic and cultural impacts of conversion from agricultural multi-crops to pond culture5.

Growing interest in economic incentives to achieve sustainability objectives is not least due to the frequently disappointing performance of command and control measures (the setting of regulatory norms and standards that forbid or allow certain actions or outcomes), especially under conditions where growth incentives exist concurrently. Command and control measures generally focus on blocking the incentive created by various types of market failure for private operators to over-utilize or pollute natural resources. Conversely, economic incentives attempt to align the incentive structure with sustainability objectives.

The underlying economic rationales for the provision of sustainability incentives are various types of market failures. Markets are frequently absent or ill defined for important aquaculture production inputs such as land, water and specific valuable environmental resources and functions. As a consequence, these inputs are under-priced vis-à-vis their social value or not priced at all. In turn, this has the effect that the price of the cultivated products carries a “subsidy” element whose ultimate beneficiaries are the consumers of these products.

Ideally, incentives should create “win-win” conditions, achieving both social and economic development objectives, as well as environment protection. In reality, however, growth-oriented incentives are known to have caused or contributed towards unsustainable production systems. Similarly, sustainability incentives can, at least in the short and medium term, retard achievement of growth objectives. Moreover, proper social costing of production inputs can place domestic producers at a competitive disadvantage with foreign producers who are not required to internalize environmental costs.

 

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Command and control versus economic incentive schemes

Command and control (C&C) standards are usually tailor-made to regulate how a specific activity or class of activities need to be carried out. Compliance monitoring and eventual sanctioning of trespasses are usually indispensable features of effective C&C. The primary disadvantages of the C&C approach are that it is overly constraining, leaves little room for flexibility, is not adaptable on a case-by-case basis and tends to retard technological change. Moreover, regulations underlying the C&C approach offer no incentive for producers to attain standards higher than those imposed by the law. While C&C is often criticized for these reasons, it is widely used by government agencies and even sometimes requested by the industry. Producing regulations is done within the logic of public administration, often regardless of their enforceability. In terms of political relations, “something has been done”, and since the same norm or standard applies to everybody, it provides a sense of fairness. The frequent weakness of results monitoring and accountability, in the political arena, however, often leaves implementation in the shadow.

Incentives are a different approach. The idea of incentives is not to strictly forbid/allow, but rather to provide signals on public objectives while leaving some room for individual and collective decision-making to respond to them. Incentives play indirectly through the determinants of individual/collective choices, such as the profit motive or normative values. Market or social forces can be very efficient vectors to force the global outcome of individual actions towards collectively set objectives. Different kinds of incentives can be developed in isolation or in combination:

  • improving the institutional framework (definition of rights and participatory processes);
  • developing collective values (education, information, training);
  • creating nonmarket economic incentives (taxes and subsidies); and
  • establishing market incentives (tradable property/access rights; eco-labelling).

Any of these instruments rely, to some degree, on command and control. Creating the conditions for an efficient market over property rights requires that these rights are legally set and practically enforced. Similarly, creating a market-based incentive for environmentally friendly production methods through product

  eco-labelling requires that certification standards are established and complied with. So rather than two different approaches, incentives plus command and control should be seen as a continuum of policy means, having relative advantages or disadvantages depending on what they are supposed to achieve. Presently, the diversity of available incentive instruments is probably under-used, with a continuing bias towards command and control.


Crafting institutions to improve the structure of rights and stakeholders participation

The first arena to provide incentives is to define and enforce rights. The enforcement of human rights is as important for social sustainability as the definition and enforcement of rights of nature for environmental sustainability. Within the last several decades, the times of abundant natural resources have globally given way to conditions of scarcity, as many resources become degraded, depleted or even irrevocably lost. Free and unregulated access, or simply the lack of enforcing access rights, have been important reasons for unsustainable use patterns of many natural resources. The conservation of landscapes and valuable ecosystems, preservation of water quality and quantity, accessibility to the shore and avoidance of land erosion are all major sources of dispute raised by opponents of certain aquaculture practices. Defining basic rules to impartially arbitrate among potentially conflicting interests may prevent many of these conflicts arising in the first place. Legislation on integrated coastal area management, defining access rights and limitations to various types of activities, recognizing basic individual rights (such as the accessibility to the shore or to water with specific properties) would help private and public promoters of aquaculture development to plan their activity in more secure and informed circumstances. Well-defined individual or collective rights act as an incentive where those who have these rights, either on the side of the aquaculture promoter or on the part of another interested party, can use them for persuasion or can claim them in front of a jurisdiction capable of enforcement. When defining and allocating use rights to natural resources, an important and often controversial issue is how to deal with the old and the modern, how to balance recognition of the historical rights of the first comer or user, the rights of the best economic offer and the rights of future generations.

 

 
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For many kinds of environmental resources, there are limitations to establishing private property regimes. These limitations are caused by, on one hand, the interconnectedness of functionalities of many natural resources and, on the other hand, by high enforcement costs. Thus nature is often hard to appropriate under a private property regime. Innovation in terms of common property rights definition is needed for water management (integrating fresh, brackish and marine waters), for landscape and land protection, or the conservation of biodiversity and valuable ecosystems. Beyond the legal definition of rights, crafting of institutions and decision-making processes, structuring of interest representation and development of enforcement and monitoring schemes all have to be taken into consideration. The main difficulty in designing and establishing rights regimes is the capacity to enforce them. But this difficulty should not prevent active efforts to design, publicly discuss and legislate these rights and obligations. Creating private property rights that can be allocated by the market is, theoretically, appealing, but they require certain conditions to be fulfilled to function effectively.


Fees, charges, taxes and subsidies6

Economic instruments including fees, charges, taxes and subsidies seek to “get prices right” for production inputs and/or outputs. Absent or inadequate markets, i.e. market failures, as well as government price controls/price support schemes, may all distort real social and environmental costs (or benefits) of goods and services. Economic instruments explicitly affect private costs and benefits. They seek to induce individuals and firms to change their behaviour to more socially and environmentally desirable alternatives.

The difficulty in applying economic instruments is to design the levy or tax in such a way that it gives a clear economic signal to producers and consumers about the objective it seeks to attain. The basic rationale of a pollution charge or tax is for the one who causes the damage to compensate the victim of it. This reasoning underlies the “polluters pay principle” which has been adopted by Organisation for Economic Cooperation and Development (OECD) countries in 1972 and is reflected in the 1992 Rio Declaration on Environment and Development. It traces its origin to arguments first advanced by Pigou, who proposed its implementation through a tax. Appropriately named, the “Pigouvian tax” should be set equal to the pecuniary value of the marginal damage caused by pollution at the point of “optimal” pollution.

 

Optimal pollution is not usually a point of zero pollution, but a level where the cost of reducing pollution any further outweighs the environmental, social and economic benefit received. Implementing such a tax has its difficulties:

  • it is often next to impossible to determine the optimal pollution level because of measurement and valuation problems of the damage caused and cost of mitigation and clean-up; and
  • it is also difficult to calculate and apply the tax in proportion to the value of the damage caused.

In practice, environmental levies and taxes may not be directly applied to the polluting substance released or natural resource used, but a closely correlated input or output7.

Economic instruments, as with all instruments, need some monitoring and enforcement capacity. To be efficient, the authority should be able not only to collect the tax or fee but also to monitor the phenomena on which tax calculation is based. Such control is difficult at the very decentralized level of the individual farm, so taxes may be imposed directly at the pollution source (antibiotics, pesticides, feed) or at the level of production outputs, where taxes can be more conveniently collected. The consequence, however, is that the tax becomes a much less fine-tuned policy instrument, as all kinds of economic activities using such inputs will be taxed in a similar fashion irrespective of actual damage caused. At the worst, a tax may have unintended effects that could potentially worsen rather than lessen environmental damage. Consider the imposition of a tax on pellet feed to incite farmers to adopt more efficient feeding strategies that result in low feed conversion ratios and low organic effluent loading per unit of production. While some farmers may indeed be incited to economize on pellet feed, other farmers may shift to alternative non-taxed low-quality feeding materials with high feed conversion ratios.

In addition to the above implementation problems, arguments raised against environmental taxes in aquaculture, as in any other business, are their effect on competitiveness and the fact that by raising the production cost they are a disincentive to innovation. These arguments are not necessarily tenable for the following reasons. A well-designed and implemented environmental tax that, for example, reduces water pollution, can result in a more stable and higher production level for all farms.

 

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Moreover, farmers will seek to reduce the use of the taxed production input through technological innovations. On theoretical grounds, there is little that speaks against the use of economic instruments. The difficulties lie in designing cost-effective schemes that can practically be implemented and achieve their intended objectives8.

Subsidies and grants have been widely used to compensate for the high level of risks in the start up of aquaculture farms9. When evaluated on the basis of whether or not they have accelerated production growth, they have been fairly successful in many countries. If evaluated on the basis of whether or not they have led to sustainable development, however, their track record is less laudable for some types of aquaculture. There appears to be a need to reorient subsidy schemes, if maintained at all, towards reaching more efficient and rational use of environmental and other resources. One obvious area is targeted research to develop more environmentally friendly production techniques. Another obvious area is to explicitly target alleviating poverty not just for social and humanitarian reasons, but also because poverty is a major cause of environmental degradation in developing countries.


Information dissemination, development of normative values and other tools of persuasion

Cultural values and norms regulating behaviour, and shared among a group, are a good source of incentives that guide individual and collective decision-making. The problem is that traditional value systems, based on common knowledge and alive through moral obligations and social sanctions, can break down when social groups face rapid changes and are subject to strong outside influences. In these frequent instances, short-term economic and political interests tend to erode traditional norms and values that are seen as barriers to modernization. A careful balance appears to be needed between maintaining, or even rejuvenating, traditional sources of behavioural norms that can positively contribute to fostering sustainability, while not curtailing the dynamic changes needed for economic and social progress. Building collective concerns about sustainability and fostering human resources development certainly need the formation and promotion of common values.

  Education and, more broadly speaking, persuasion, are important factors. Public information about potential risks, training of aquaculturists on the environmental and social dimensions of their business and, likewise, sensitization of politicians and other policy-makers, should be promoted.

In recent years, associations of producers and industry play increasingly important roles in information dissemination, awareness creation, education and training, as well as in the development of codes of best practices, production and product standards, and codes of conduct10. These efforts, while in some cases building upon traditional institutions and organizations, are generally a modern-day response to the well-known environmental, socio-economic and marketing issues facing certain types of aquaculture systems. Voluntary industry codes can significantly reduce the need for costly government regulatory interventions. Moreover, the reassurance of consumers and intermediaries, such as wholesalers and retailers, about the absence of adverse environmental impacts and respect of human rights and labour standards when producing a product is known to have the potential of increasing demand for such products in international and national markets.

A central function of a code is to coordinate the behaviour of decision-making units such as individual farmers or cooperatives. By agreeing to behave in a specified manner, common problems can be resolved, such as maintaining water quality within common water bodies used by several farmers. Codes offer the advantage of being more flexible and readily “amendable” than command and control. However, rules originally conceived as voluntary guidelines or recommendations can have an impressive “juridical career” in that they may develop within a short time into binding rules. This may happen because the recommendations or guidelines are shared by the overwhelming majority of those concerned by them.


Eco-labelling

Eco-labelling schemes have been introduced in various sectors and for different objectives by nongovernmental organizations (NGOs), private industry and governments. Their common feature is that the consumers’ purchasing behaviour is directed to take into account attributes of the products other than their price and mandatory quality and health standards.

 

 
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These attributes can relate to economic and social objectives (fair trade, support to small farmers, discouragement of child labour), health-related product quality objectives (organic production), in addition to environmental and ecological ones.

The potential usefulness of eco-labelling schemes to create market-based incentives for environmentally friendly products and production processes was internationally recognized at the 1992 United Nations Conference on Environment and Development (UNCED) in Rio de Janeiro, Brazil, where governments agreed to “encourage expansion of environmental labelling and other environmentally related product information programmes designed to assist consumers to make informed choices”. Consumers are provided with the opportunity to express their environmental-ecological concerns through their choice of products. The consumers’ preferences are expected to result in price and/or market share differentials between eco-labelled products and those that either do not qualify to be eco-labelled or those whose producers do not seek to obtain such labelling. The label is obtained through a certification process based on a set of criteria (i.e. the desired standard). Potential price and/or market share differentials provide the economic incentive for firms to seek certification of their product(s).

According to their design and administration, eco-labelling schemes are often classified into:

  • first party labelling schemes, emanating from individual companies based on their own product standards;
  • second party labelling schemes, established by industry associations for their members’ products. Certification criteria are elaborated by the members, sometimes by drawing upon external expertise from academia and environmental organizations, and verification of compliance is achieved through internal certification procedures within the industry or employment of external certifying companies; and
  • third party labelling schemes, usually independent from the producers, distributors and sellers of the labelled products; while the criteria may be established through a negotiation process among the various interested parties, they are often motivated by the environmental objectives of the private initiators of such schemes.
  Environmental organizations generally advocate eco-labelling schemes based on third party certification because of the heightened confidence that private commercial interests will not compromise the criteria applied to the schemes and strict compliance with them will be based on verifiable and impartial certification procedures.

Currently, the most attractive opportunity is offered by rapidly expanding markets for organic food products which offer price premiums in the range of 30 to >100 percent. These relatively high premiums may not be exclusively, or perhaps even primarily, associated with the consumers’ desire to buy products produced with environmentally friendly technologies, but their desire to eat healthy and uncontaminated food. Presently, no international guidelines are available specifically for organic aquaculture production, but a number of specifications laid down for agricultural production are readily applicable to aquaculture. The adaptation of current international standards for organic food to fish and shellfish from aquaculture is likely to require significant changes in production methods and processes, especially for semi-intensive and intensive aquaculture systems.

Concern has been expressed that eco-labelling is a marketing and product-differentiation strategy that ultimately will benefit big businesses at the production, distribution and marketing levels. Small-scale producers, especially those in developing countries, would have more limited access to costly “best available technologies” and not be able to realize economies of scale in both production and product certification, labelling and verification. Experiences made in organic agriculture indicate that small producers can be competitive in national and international markets but may require proper institutional and organizational arrangements (e.g. group certification, cooperative input purchases and product marketing etc.) that allow them to capture scale economies.

 

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References

Boyd, C.E. & Hargreaves, A.J. 2001. Codes of practice for marine shrimp farming. WB/NACA/WWF/FAO Consortium Programme on Shrimp Culture and the Environment. (In Preparation)

Cochrane, K. & Willmann, R. 2001. Eco-labelling in fisheries management. In: Proceedings of the 2000 Conference by the Centre of Ocean Law and Policy, University of Virginia, and FAO on Current Fisheries Issues and the Food and Agriculture Organization of the United Nations. Rome, Italy, 16-17 March 2000. (In Preparation)

Deere, C. 1999. Eco-labelling and sustainable fisheries. IUCN and FAO, Washington D.C. and Rome. p. 32.

FAO. 1999. Papers presented at the Bangkok FAO Technical Consultation on Policies for Sustainable Shrimp Culture. Bangkok, Thailand, 8-11 December 1997. FAO Fish. Rep. No. 572 (Suppl.): 266 pp.

IISD. 1995. Green budget reform: an international casebook on leading practices. London, EarthScan. (http://iisd1.iisd.ca/greenbud/makingb.htm).

OECD. 1999. Handbook of incentive measures for biodiversity. Design and implementation. Paris. Organisation for Economic Cooperation and Development.

Ridler, N. 1998. Aquaculture and the role of government. Aquacult. Eur. 22(4): 6-12.

Ridler, N. & Hishamunda, N. 2001. Economic and legal instruments for the promotion of sustainable commercial aquaculture in Sub-Saharan Africa. Volume 1. Policy framework for the promotion of sustainable commercial aquaculture. FAO Fish Tech Pap. 408/1.

 

4 Many examples from around the world can be found in Ridler and Hishamunda (2001)

5 The sustainability issues in shrimp culture, for example, are discussed in various papers in FAO (1999).

6A good theoretical introduction of economic policy instruments and review of international experiences can be found in IISD (1995);
seealsohttp://iisd1.iisd.cagreenbud/makingb.htm).

7 For a fuller discussion and literature references, see:
http://iisd1.iisd.ca/greenbud/tackling.htm.

8 A comprehensive discussion of economic instruments to address water pollution, including case studies from various European countries, can be found at the web site of the United Kingdom Department of the Environment, Transport and the Regions (http://www.environment.detr.gov.uk/wqd/).

9 In salmon farming, most countries (e.g. Norway, Canada, Chile) provided start-up funding to producers. An ex post evaluation of the cash grant component in Canada found that discounted net benefits of providing start-up funding were positive (Ridler, 1998). In shrimp culture, most countries provided subsidies, at least in the initial phase of development (see for example the papers in FAO 1999).

10 A comprehensive review of codes of conduct or practices for fish and shellfish culture at national and international levels has been prepared by Boyd and Hargreaves (2001) as part of the WB/NACA/WWF/FAO Consortium Programme on Shrimp Culture and the Environment.

11For a review of eco-labelling issues in fisheries, see Deere (1999) and Cochrane and Willmann (Forthcoming).

________

1 The views expressed in this paper are those of the authors. They do not necessarily represent the views of CEDEM or of the Food and Agriculture Organization of the United Nations (FAO).
2 bailly.cedem@wanadoo.fr
3 rolf.willmann@fao.org

 
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