By trying to restrict investments in oil and gas ventures, is the ESG movement going to have the effect of reducing supply of oil as global demand increases? With this scenario the price of energy will increase and developing countries will find it even more difficult to provide its citizens with electricity, water etc which requires energy in the form of oil, gas and to some extent coal. Developing countries will need significant financial help from the developed world if they are going to grow in a sustainable and environmentally favourable way. The concern is the reliance on oil and gas and the ever increasing demand – see graph:
Environmental, social, and governance (ESG) investing is used to screen investments based on corporate policies and to encourage companies to act responsibly. There has been a lot of anti ESP feeling as a focus on environmental and social issues conflicts with the corporate duty of maximising the return for shareholders. Banks in particular have indicated that they may withdraw from corporate alliances that have promised to cut carbon emissions across entire industries – see video from the FT below. But as Gillian Tett points out:
The challenges around sustainability and business are not going to disappear. On the contrary, they’re becoming more urgent than ever.
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The impact of the recent Cyclone (Gabrielle) on the North Island of New Zealand have highlighted the problems of soil erosion and the damage from wood debris left behind after harvest (known as ‘slash’). Tonnes of woody debris, mixed in with silt and sediment, blanketed across landscapes, has destroyed critical infrastructure, farms, homes and polluted rivers and the marine coastal environment. Clear-fell harvesting of pine forests on steep erosion-prone land has been identified as a key source of this phenomenon.
Basically the forestry companies are internalising the benefit of forestry clearing but socialising the cost. This means that after they have taken what they want from the forestry plantation they leave unwanted wood – ’slash’. This ‘slash’ then causes huge damage when they is excessive rain in the area. In economic terms this is referred to negative externalities of production as the forestry company has failed to internalise the cost of the wood debris i.e. they have externalised the cost of the damage caused by slash. The New Zealand Government are to investigate the poor forestry harvesting and management and regulate practices in clearing of forestry land. This issue can be represented by a negative externalities of production graph which is part of the A2 and NCEA Level 3 syllabuses.
When there is a negative production externality, marginal social cost (MSC) exceeds marginal private cost (MPC), as in Figure 1.
Firms take decisions on the basis of MPC, so the market settles at Q1, rather than at Q*.
The shaded area represents the welfare loss for society in this position – i.e. the damage caused by ‘slash’.
This is where there is ‘slash’ caused by the forestry companies which imposes costs on households, farms, infrastructure etc that are not reflected in the costs faced by the forestry company.
Externalities – Key definitions
Private cost or benefit: a cost that is incurred (or a benefit that is enjoyed) by an individual (firm or household) as part of its economic activities
External cost: a cost that is associated with an individual firm or household’s production or other economic activities that is borne by a third party, and is not reflected in market prices
Social cost: private cost plus external costs
Marginal social cost: the cost to society of producing an extra unit of a good
External benefit: a benefit that is associated with an individual firm or household’s production or other economic activities that is received by a third party, and is not reflected in market prices
Social benefit: private benefit plus external benefits
Marginal social benefit: the benefit received by society from consuming an extra unit of a good
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Poor nations, which have contributed the least to climate change are among the most vulnerable to climate change today. They need some financial commitments from the developed world who have grown their economies by polluting the atmosphere. For instance Pakistan emits under 1% of global emissions but it is the eighth most vulnerable country – see graphic. It is estimated that Pakistan has had $22 billion in material damages with up to 12,000 people losing their lives with 60 million affected – 2022 saw extreme monsoon rains and the worst flooding in a decade.
It is the developed world that is most responsible for climate change – since 1850 the US has emitted more than 500 billion tonnes of CO2 which is approximately twice that of the next largest emitter China. It is vital that the richer countries assist the developing world combat extreme weather. They have the finance to do it but don’t seem to rich their target of $100bn per year year since 2020. There is a pay back here in that those got countries got rich on the problem that we now have.
1992 UN Framework Convention of Climate Change was approved and at the Conference of Parties (known as COP) and in 2009 15 developed nations committee to $100 billion each year – see graphic – to support developing countries with reducing emissions and adapting climate change. The $100 billion goal was “carefully crafted” to be deliberately vague. As a result, there’s no requirement that specific countries contribute a certain proportion of the funds. Multiple analysis have calculated that the United States, which contributed less than $3 billion of the $83.3 billion in 2020, is under delivering by tens of billions of dollars when considering its relative emissions, population size and wealth.
The IMF has also provided long-term affordable financing. The money so far has funded mitigation projects, which help developing countries transition away from fossil fuels, like building a zero-emissions transit system in Pakistan. Money has also gone toward adaptation projects, which help countries build resilience against climate risks, like restoring vegetation and reducing the risk of flooding.
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I have blogged a few times on the resource curse that affects some developing countries but it seems that in Africa a lot of resources go unused when they are actually demanded in an economy. There seems to be a lack of planning for supply and demand and build an infrastructure linking the two. The Economist came up with some good examples of this:
Ghana – generation vs distribution. The country produces too much electricity as Ghanaian usage per year equates to what someone in the US uses a fortnight. More than 25% of households in Ghana are not connected to the grid and 25% of electricity is lost due to derelict distribution infrastructure and theft. With regard to oil, Ghana spent over $4.7 billion on importing petroleum last year, despite having domestic petroleum refineries which are lying idle – they could produce 30% of its petroleum needs.
Uganda – like Ghana supply is greater than demand as capacity if nearly double peak demand. Trucks wait on the side of roads even though traders can’t find vehicles to transport their goods.
Ethiopia – largest livestock in Africa and tanneries to turn hides into leather but shoe and glove makers import leather from China. Local tanneries are concerned with how the leather is treated.
Nigeria – tomato-processing plant to make tinned paste but closed down due to crop failure caused by a voracious moth
Another issue is the completion of infrastructure projects – according to McKinsey approximately 80% of African infrastructure projects fail in the cost benefit analysis stage whilst fewer that 10% get the stage of acquiring funding. For Africa to further development there has to be some acknowledgement of market failure and a willingness to separate commercial power and political power amongst its government officials.
Source: How market failures are holding Africa back. The Economist 5th May 2022
For more on Market Failure and Development Economics view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.
You maybe aware that the rugby game tonight between Ireland and the New Zealand All Blacks in Dunedin created history. It was the first time that Ireland have beaten the All Blacks in New Zealand. Remember they did beat the ABs in Dublin and Chicago.
Irish supporters, including myself, will take great pleasure in talking about such a result – I was at Eden Park last Saturday and disappointed at the number of mistakes Ireland made. What all this alludes to is the fact that as part of this entertainment comes without the public paying for it, the public benefits from an externality.
Those Irish supporters who traveled to Dunedin for the game will have no doubt spent a significant amount of NZ dollars tonight in the bars and restaurants around town. Nevertheless the satisfaction (utility) derived in NZ dollars from the game would have been much greater than the price Irish supporters would have paid for the ticket. This suggest that there is a lot of consumer surplus present – the difference between the price that a consumer WOULD BE WILLING TO PAY, and the price that he or she actually HAS TO PAY. The success of the Irish team will boost merchandise sales and interest for the World Cup next year in France but more importantly it has been good for rugby in general with throwing the World Cup wide open. When the All Blacks play overseas there are significant externalities whether it be the revenue generated in hosting the match or the social benefits to society.
Furthermore the lead up to the game brings about a sense of delayed gratification (Behavioural Economics). Looking ahead the fact that people have paid for tickets to the World Cup means that they can reap the pleasures of anticipation of being there. Research (Smarter Spending – see previous post) shows that owning material things from expensive homes to luxurious cars turn out to provide less pleasure than holidays, concerts or even witnessing Ireland beating the All Blacks – where were you when Ireland beat the All Blacks in Dunedin? With Ireland’s win national pride increases, along with patriotism and people feeling better about themselves. This is turn brings people together and boosts well-being of the nation. As for the All Blacks they will learn from this defeat and it makes for a great game next week in Wellington. Go Ireland!
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Below is a very good documentary on the construction of the largest dam in the world – the Three Gorges Dam in China. However in its construction there are both costs and benefits including private and external. This is a topic in Unit 1 of the CIE A2 Economics syllabus and is found under – Externalities. Remember that we have both positive and negative externalities of production and consumption.
THE DIFFERENCE BETWEEN PRIVATE AND SOCIAL COSTS
Externalities create a divergence between the private and social costs of production.
SOCIAL COST = PRIVATE COST + EXTERNAL COST (externality)
Private costs are the costs to a ‘firm of producing a good or service and to an individual of consuming a product.
External costs are the spill over effects on third parties.
Social costs are obtained by adding the private and external costs together. They reflect the total cost to society of an economic decision.
The same concept applies for Private and Social Benefits:
SOCIAL BENEFIT = PRIVATE BENEFIT + EXTERNAL BENEFIT (externality)
Benefits and Costs of building the Three Gorges Dam
The biggest benefit that is seen from the dam’s construction is that it produces renewable energy from hydro electricity. The Three Gorges Dam alone can provide China with 10% of its annual energy consumption. Increasing the proportion of hydroelectricity alternative to coal burning plants, will cut their emissions greatly which will help reduce the overall emissions all over the world – carbon emissions will be reduced 100 million tonnes compared to alternative coal generation.
Martin Sandbu of the Financial Times in his Free Lunch on Film produced a very good video (see below) on how, with the help of technology, the global economy can be decarbonised without impacting on what is seen as normal growth rates. He travels to his native Norway where Oslo has around 30% of all its passenger cars being EV’s. The key to its success has been to make EV’s as affordable and attractive as conventional cars. Policies of tax exemptions on EV’s, lower tolls, cheaper parking and taxes on polluting vehicles have directed consumers to the cleaner option. He goes on to talk about the Kaya Identity. This is the relationship between four factors:
Global carbon dioxide emissions, in carbon dioxide (CO2);
Global primary energy consumption, in Ton of Oil Equivalent (TOE);
GDP, in dollars ($);
Global population, in billions.
In other words global CO2 emissions from a human source = global population x quality of life x energy intensity x intensity of carbon in the energy mix.
GDP/Per Capita: represents the total value of output in an economy divided by the population
Energy/GDP: represents the energy intensity, i.e. the amount of energy used (in kWh) necessary to create a monetary unit, meaning to manufacture a product or provide a service. This intends to encourage us to rationalise our use of energy.
CO2/energy: represents the intensity of carbon in the global energy mix. This relationship demands a reduction in CO2 emissions in the production of energy, in particular through the promotion of energies low in carbon, such as renewable energy.
So from Kaya we can decarbonise in 3 ways:
shrink the world’s population.
limit and reduce incomes.
lower the amount of CO2 emitted for each dollar of GDP.
In some areas, like ground transport, it’s technologically feasible, even easy, to take the carbon out. In other areas, it’s more costly, more difficult, maybe even impossible to do by 2050: flying, cement making, meat production. The video is well worth the time to watch.
Negative externalities of consumption is where the consumption of a good may have spillover costs or negative externalities for others e.g. passive smoking, drink driving, sugary drinks. If left to the free market goods that have negative externalities of consumption will be under priced (Pm) and over consumed (Qm) compared to the socially desirable price (Ps) and quantity (Qs). At Qm the MSC > MSB therefore the quantity needs to reduce until the MSC=MSB. The government could tax the good, increasing its price and lowering the level of consumption back to more socially desirable levels.
Source: Elearneconomics
Coke and how much sugar?
The video clip below, although a bit old, is from the BBC Newsnight Programme in which Jeremy Paxman interviews President of Coca Cola Europe James Quincey. How much sugar is in a cup of Coke? A ‘small’ cinema serving is said to contain 23 teaspoons on sugar, while a large contains 44 – ‘each to be consumed in a single sitting.’ You can see the amount of sugar for yourself when Paxman pours out the sachets in each cup. Like with the tobacco industry quite a few years ago, the pressure is now on drink companies to reduce the amount of sugar in drinks because of the negative externalities of consumption that are associated with it.
Externalities on elearneconomics has written answers that allows students to recall information and apply it to assessment style questions. Immediate feedback allows for true student-centred learning and understanding.
With the end of a long first term (11 weeks) approaching I try to add a bit of humour to the classroom as generally people are tired and add to that the numerous disruptions to COVID. Later this year the football World Cup takes place in Qatar and I hark back to the last World Cup where we saw the same old tricks played by players to try and influence the decision of the referee.
France’s Lucas Hernandez admitted to flopping in France’s 2-1 win against Australia in an attempt to get Australian midfielder Mathew Leckie sent off.
Spanish defender Gerard Piqué accused Portugal’s captain Cristiano Ronaldo of exaggerating a fall to secure a penalty kick in their 3-3 nail-biter. Piqué said Ronaldo has a habit of “throwing himself to the ground.”
Neymar rolling around in what seemed to be excruciating pain when there was contact on his ankle and that was on the sideline. What would he have done if it was in the penalty area and Brazil were 0-1 down?
That being said it was hoped that the VAR system would start to see this sort of tactic removed from the ‘beautiful game’. Some of the techniques of faking an injury are below – HT to Kanchan Bandyopadhyay.
The Economist has looked at this area and I thought that I would delve a little deeper. There is no doubt that if you study the costs and benefits of faking an injury there are certain sports where it is perceived as quite worthwhile – i.e. the benefits outweigh the costs. Cost benefit analysis is part of Unit 3 of the AS Level course. What is cost-benefit analysis (CBA)?
Cost Benefit Analysis (CBA) refers to estimating the private and external benefits of an investment project – airport, rail link, road etc against the private and external costs. Once these costs/benefits are established a decision is made as to whether the project should go ahead.
CBA can be applied to any decision you make and below is a table outlining the cost and benefit of faking a peanalty or injury in particular sports. I see the benefit in soccer of diving in the box and being awarded a penalty outweigh the costs by a significant amount. Firstly, if the appeal for a penalty is turned down it is very unlikely that the referee will administer any punishment to the player faking a foul. In too many cases they are happy to let the game play on as they feel under so much pressure anyway for not awarding it. Whilst in ice-hockey a suspension of either 2 or 4 minutes has acted as a deterrent to those caught “embellishing”. I have put some values in the end column which will no doubt encourage a lot of discussion – remember Warren Gatland, the Welsh coach in the Rugby World Cup 2011, considered informing a player to fake an injury so there would be no pushing in the scrums. This was after their captain, Sam Warburton, was sent off early in semi-final against France.
However, with the perceived benefits of diving in soccer it does encourage players to even practice this activity. This reminded me of a great advertisement run by the Guardian Newspaper for the Euro 2004 Soccer Cup – see below
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Informative video from the FT that looks at the externalities of food covering – environmental cost, health costs and social costs. It focuses on the ‘True Cost Accounting’ and uses the example of coffee where a 1 kilo bag from Brazil costs $2 but the real cost is around $5.17 when you include that farmers are underpaid, there is unsustainable water use, air pollution, climate changing energy supplies and land degradation.
To encourage greater sustainability Rabobank introduced ‘The Rabo Impact Loan’ which is a low-interest business loan created especially for farmers that have a high sustainability performance. Good introduction to market failure.
Sustainable development is part of the CIE A2 Economic Syllabus and greenhouse emissions are significant barrier in trying to achieve specific goals. Sustainable Development Goals (SDG) requires a collective agreement and to advance towards a society which is more respectful of the environment, whilst at the same time working towards economic growth and sustainable development. Kaya identity tries to explain the relationship between four factors:
Global carbon dioxide emissions, in carbon dioxide (CO2);
Global primary energy consumption, in Ton of Oil Equivalent (TOE);
GDP, in dollars ($);
Global population, in billions.
In other words global CO2 emissions from a human source = global population x quality of life x energy intensity x intensity of carbon in the energy mix. See the formula below:
GDP/Per Capita: represents the total value of output in an economy divided by the population Energy/GDP: represents the energy intensity, i.e. the amount of energy used (in kWh) necessary to create a monetary unit, meaning to manufacture a product or provide a service. This intends to encourage us to rationalise our use of energy. CO2/energy: represents the intensity of carbon in the global energy mix. This relationship demands a reduction in CO2 emissions in the production of energy, in particular through the promotion of energies low in carbon, such as renewable energy.
The focus from government and the private sector in reducing climate change has been on two of the four factors: Global carbon dioxide emissions, in carbon dioxide (CO2) and Global primary energy consumption, in Ton of Oil Equivalent (TOE). However should there be more emphasis on the other two: GDP and Global population? GDP can be influenced by government policy but there are political dangers if going down this avenue. Firstly by reducing growth you may limit the creation of jobs and the advancement of economies. Secondly developing economies depend on the demand from developed world to drive them out of poverty. Limiting population growth is not a policy that government’s can respectably push towards. Ultimately the global economy needs more than a power source without emissions but investment and innovation which can reverse the damage that emissions have already done. Below is an informative video on carbon markets from The Economist.
Another good video from CNBC looking at the recent COP26 meeting. COP26 – Conference of the Parties – is the specific name of the annual United Nations Climate Change Conference in its 26th year. The first meeting was in Berlin in 1995. Main points from the video are:
2015 Paris Climate Agreement – committed countries to limit global warming to no more than 2°C above pre-industrial levels with an aim for 1.5°C
Global warming is 1.1°C – on track for 2.4°C increase by end of the century
Rather than phasing out coal they would phase down – opposition from China and India
USA, EU and others stated that they would cut global methane levels by 30% by 2030
India to cut its emissions to net zero by 2070
Richer nations need to help finance emerging economies to cope with climate change
Present policies will see the temperature rise by 2.7°C.
If National Determined Contributions (NDC) targets are implemented then by 2030 temperature rise will be approximately 2.4°C.
If all targets are fulfilled the best case scenario is 1.8°C
GFANZ – Glasgow Financial Alliance for Net Zero – hope to raise $130 trillion from private capital to fight climate change.
With COP26 conference underway the FT has produced a very good interactive graphic where you can select 193 countries’ historical emissions and future climate targets, as well as information on the energy mix that indicates their progress on renewable energy – below are screenshots of China and New Zealand. NZ having 0.14% of world’s annual CO2e and China coming in at 23.9% with fossil fuels being 70% of electricity production in China.
Although New Zealand’s emissions are small it has been a poor performer – between 1990 and 2018 emissions rose by 57% which is the second highest increase of industrialised countries. 2018-2019 increased by 2%. New Zealand’s nationally determined contribution (NDC) is to reduce net emissions by 50% below gross 2005 levels by 2030 which is a 41% reduction using an ‘emissions budget’ approach.
What is an emission budget? An emissions budget is a total quantity of emissions that is allowed to be released during an emissions budget period. Each emissions budget covers a period of five years (except the first emissions budget which will cover the period 2022 – 2025). Emissions budgets will act as stepping-stones, or interim targets, to reaching our 2050 emissions reduction targets. New Zealand’s legislated targets are for net zero greenhouse gas emissions (except biogenic methane), and a 24 – 47% reduction in biogenic methane, by 2050. Source: NZ Ministry for the Environment.
In 2019 I stayed up all night to watch the Back Caps lose the World Cup One-Day final in England in what was such a bizarre finish and one felt for Kane Williamson and the side. However two years later and all has been forgotten as the Back Caps become the first ever World Test Champions. Captain Williamson like Richie McCaw, a humble character, has led from the front and just goes about his work in a quiet manner.
Black Cap supporters will take great pleasure in talking about such a result but what all this alludes to is the fact that as part of this entertainment comes without the public paying for it, the public benefits from an externality.
Those who were able to travel to Southampton for the game and will have no doubt spent a significant amount of British pounds tonight in the bars and restaurants around town. Nevertheless the satisfaction (utility) derived in pounds from the game would have been much greater than the price they paid for the ticket. This suggest that there is a lot of consumer surplus present – the difference between the price that a consumer WOULD BE WILLING TO PAY, and the price that he or she actually HAS TO PAY. Furthermore the lead up to the game brings about a sense of delayed gratification (Behavioural Economics) especially after the disappointment in 2019 World Cup. Research (Smarter Spending – see previous post) shows that owning material things from expensive homes to luxurious cars turn out to provide less pleasure than holidays, concerts or even witnessing the Back Caps winning the first ever Test World Cup – where were you when the Black Caps beat India in Southampton? With New Zealand’s win national pride increases, along with patriotism and people feeling better about themselves. This in turn brings people together and boosts well-being of the nation.
Most economics courses will include the topic of limitations of Gross Domestic Product as an indicator of standard of living. US senator Robert F Kennedy pointed out 50 years ago that GDP traditionally measures everything except those things that make life worthwhile. Increasing GDP has been the indicator of a healthy economy but is it time for degrowth? This CNBC video looks at whether degrowth is the way forward and should we priorities social and ecological well-being? Scotland, Iceland and New Zealand have focused on well-being rather than economic growth. New Zealand’s recent ‘well-being’ budget indicated this. Good video for the future direction of macro policies and where we are going as a society.
The Economics of Biodiversity by Sir Partha Dasgupta was published in February this year and was a wake up call for all of us. Sir Partha says nature must be recognised as an asset and that our traditional measure of economic prosperity – Gross Domestic Product – is no longer fit for purpose. Basically all 7.8 billion of us is on a collision course with the planet.
“The problem with GDP is that it doesn’t include the depreciation of capital and one of the natural capital, or nature, which is somewhat different from buildings and roads in that you can really depreciate it very fast.”
Between 1992 and 2014 there was a 40% fall in the stock of natural capital per person – water, food, air etc. See graph below.
Global Wealth Per Capita, 1992 to 2014
Source: The Economics of Biodiversity by Sir Partha Dasgupta
Since 1950 the global economy has grown 14 fold and with the increase in prosperity has come the cost to our natural environment. With our current consumption we need an earth that is 1.6 times larger. Although there has been moves to slow the rate of climate change the progress needs to be accelerated. Larry Elliott in The Guardian looked at three ways:
Firstly you could simply stop the burning of fossil fuels or international travel now or in the near future.
Secondly you leave the issue of climate change to the markets: governments could stop subsidising the use of fossil fuels but otherwise leave it to inventiveness of the private sector to come up with solutions.
A third approach is to have a partnership between the government and the private sector. A previous example of this was the announcement by President Kennedy in 1961 that the US would put a man on the moon by the end of the decade. Larry Elliott quotes Mariana Mazzucato’s new book ‘Mission Economy’ in which she states that by focusing on the immense power of governments to shape markets, capitalism itself can be remade. Mazzucato aims to infuse capitalism with public interest rather than private gain.
Below is a recent video from CNBC about climate change which is already taking a financial toll on the planet, with extreme weather events costing the global economy $146 billion in 2019, according to insurer Swiss Re. Also an interview with IMF Managing Director Kristalina Georgieva about how governments and business can fight back.
The mega ship the Ever Given was a familiar name in the news recently with it getting stuck in the Suez canal and thus preventing any marine traffic in both directions. The Ever Given is operated by the Taiwan-based firm Evergreen and is a so called mega ship and was carrying over 18,000 containers.
Mega (container) ships have been built in increasingly larger sizes to take advantage of economies of scale and reduce expense as part of using multiple forms of transport without actually handling of the freight itself. The big container ships can carry up to 23,964 twenty foot equivalent unit (TEU) whilst the smaller capacity ships have a maximum capacity of 1,000 TEU.
Herd Mentality and Prisoner’s Dilemma This being said there is some dispute over the extent that the mega ships achieve economies of scale. A follow the leader mentality in ordering bigger ships have been since the mid 1990’s with firms following Maersk in ordering bigger capacity ships. In most cases it only takes two years for other carriers to catch-up to Maersk and in some cases they can hold more TEU. This has led to operators facing prisoner’s dilemma. Operators are trying to outdo their rivals by building larger ships which help increase its market share through their reduced costs but are fully aware that what actually is needed is capacity rationalisation. This strategy has not only fuelled the never-ending competition for large ships but also led to mistrust among operators, entangling them in the prisoner’s dilemma. The ideal scenario is for operators to refrain from acquiring mega ships and let supply and demand prevail.
Infrastructure costs to cope with mega ships The graph below shows the savings and costs increases from increasing the capacity of mega ships. There is a saving with carrying more TEU’s but terminals will incur significant capital expenditure to handle larger vessels and terminal yards areas will need to increase by 33% to avoid congestion, even with no growth in volume. There are negative externalities to consider that arise from upsizing as dredging deeper channels and expanding yard area will have environmental effects.
Source: Diminishing economies of scale from megaships? Marine Money Japan Ship Finance Forum, Tokyo 12th May, 2016
Good explanation from CNBC of carbon trading with both positives and negatives of the ‘cap and trade’ system. Excellent for CIE A2 Unit 3 – Externalities. Also mention of the problems facing developing economies and pollution.
Our border collie making a point about the coal industry and its impact on climate change. Actually I think she wanted more dinner by looking after some copies of The Economist.
The Tragedy of the Commons was a title of an article by Garrett Hardin in 1968 although the phrase is more commonly used to name the effect which it describes. It explains what can happen when a number of individuals share a common resource and each individual is presumed to act rationally and in his own interest.
For instance if there 10 different farmers grazing a piece of land then there is an incentive to add one more cow to your herd as you gain all of the benefit of this extra cow and you only have to suffer 1/10 of the cost resulting from the increased degradation of the land. Thus although it is in each individual’s self interest to increase the size of your herd, in the long run the land use will be depleted. This concept can also be transferred to CO2 emissions where countries emit emissions in order to grow their economy but don’t consider the long-term impact of global warming on drought and disease.
Recently a lot of attention has focussed on the fishing industry which is worth $16 billion annually. International law states that 64% of the surface of the oceans are defined as ‘the common heritage of mankind’ although with the advent of technology and bigger and faster fishing trawlers the last 50 years has seen a significant depletion of stock. Approximately 90% of fishing areas are fished to sustainable limits or beyond.
Stopping overfishing
The Economist – 22nd October 2020
Property rights has been the traditional policy to try and overcome the tragedy of the commons. This gives exclusive rights to coastal states to police and maintain territorial waters but the looting still continues – since 2010 the proportion of tuna and tuna-like species being overexploited has increased from 28% to 36%.
Reducing subsidies is seen as the most pressing policy as they come to $35 billion a year of 70% are given to more developed countries. It is estimated that $22bn of the subsidy helps destroy fish stocks. In giving subsidies you reduce the running costs of operators but it also brings certain fishing fields within reach for trawlers from developed economies. Only 10 countries received the money from high-seas catches between 2000 and 2010 and that is with Africa having more fishermen than Europe and America combined.
Closing off more areas fishing is another alternative and it has been suggested that 30% of oceans should be designated as ‘marine protected areas’. Countries could also take responsibility by creating marine reserves within their territorial waters. However technology has provided an opportunity to limit the over fishing. Compulsory cameras on board fishing vessels which can identify suspicious behaviour and illicit species should be compulsory especially in exclusive economic zones that define a country’s control over resources such as fish. Australia, America and New Zealand have invested heavily in this this area of surveillance. For example, reports of interactions with seabirds and mammals increased 7 times when electronic monitoring was introduced to Australia’s longline fisheries in 2015. Overall reported catch remained the same. In New Zealand regulations for on-board cameras on commercial fishing vessels came into effect in 2018 – they applied to vessels from 1 November 2019 in a defined fishing area on the west coast of the North Island. To mitigate the overfishing governments could agree on some policies:
National regulators to set basic standards for crew – no forced labour
Countries failing to follow rules – banned from fishing
Countries should only import fish from law abiding nations
WTO to scrap subsidies that encourage over fishing – see above
Outlaw bottom-trawling
Subsidies to fish farming – it now accounts for approximately 50 percent of the fish consumed globally
Source: The Economist July 16th 2016 & October 22nd 2020
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