Dynamics of Permit Transfers in Alaska Salmon Fisheries

1. Dynamics of Permit Transfersin Alaska Salmon Fisheries Gunnar Knapp Professor of Economics Institute of Social and Economic Research University of Alaska Anchorage Gunnar.Knapp@uaa.alaska.edu 907-786-7717 Presented at CNREP 2010 Challenges of Natural Resource Economics & Policy New Orleans, Louisiana May 27, 2010

2. Management systems have been introduced in numerous fisheries worldwide which restrict participation in the fisheryto holders of access rights • Permits—right to participate in a fishery • Alaska example: Salmon limited entry permits • Catch shares—right to harvest a share of the total allowable catch • Alaska example: Halibut individual fishing quotas (IFQs)

3. Management systems based on access rights bring significant economic benefits. • More sustainable fisheries • More efficient and profitable fisheries • Higher catches • Lower costs • Higher prices

4. An important issue which arises with access rights in where the holders of the access rights live. Where they live may have important economic and social consequences for regions and communities,by affecting: • where fish are landed and processed • where vessels are home-ported • where fishing income is spent • where fishing crew are hired • opportunities for young people to learn about and enter into fishing • the extent to which communities are (and perceive themselves as) fishing communities.

5. Factors which may affect where holders of access rights include: • Allocation of rights among residents of different regions and communities • Migration of rights holders between regions and communities • Transfers of rights between residents of different regions and communities

6. Transferability of access rights is controversial.

7. Most mainstream economists—and many fishermen—argue that transferability is desirable. • Tietenberg (widely used resource economics textbook): • “Quotas should be freely transferable among fishermen. . . . With transferability, the entitlement to fish flows naturally to those gaining the most benefit from it because their costs are lower. Transferable quotas also encourage technological progress. Adopters of new cost-reducing technologies can make more money . . .” • A practical method of facilitating entry and exit from the fishery • Permit holders benefit from being able to sell to the highest bidder

8. Other social scientists, in particular anthropologists—and some fishermen--express significant concerns about transferability. • Windfall gains to initial recipients • Difficulty of entry for new participants • Transfers of access rights away from communities

9. I have been studying issues associated with transfers ofAlaska salmon limited entry permits. • 26 Alaska salmon fisheries • Each fishery defined in terms of a geographic area and type of fishing gear. • Limited entry implemented in mid-1970s • Only permit-holders may deliver commercially harvested salmon • Permits were “initially allocated” for free to persons with a history of participation in the fisheries • “Point” system for determining who received permits favored local residents • 11,047 transferable limited entry permits have been initially allocated, beginning in 1975 • Permits are transferable by gift, inheritance or sale

10. Two types of issues are important to Alaskans with regard to geographic distribution of permit holdings • Are permit holders Alaskans? • Are permit holders “local residents” who live in the region where the fishery occurs?

11. Significant shares of Alaska salmon permits areheld by non-local residents and non-Alaska residents.These shares have increased over time.

12. Alaska’s Commercial Fisheries Entry Commission (CFEC) has been tracking permit distribution for many years. FROM THE INTRODUCTION TO THE ANNUAL CFEC PERMIT DISTRIBUTION REPORT:“. . . Many people remain concerned that permit transfers might result in undesirable consequences with regard to the distribution of permits. There is a concern that permits will leave the state, or that permits will disappear from isolated fishing communities which are local to a limited fishery, thereby eroding the economic base. Because of these concerns about free transferability, CFEC has produced this updated report so that the legislature, the administration, and other interested parties will be kept accurately apprised of the facts. . . “

13. The causes and implications of changes in the distribution of permit holdings is a big and complex topic.

14. My research to date has focused on the causes and implications ofnet permit transfers for permit holdings by local residents,particularly in the Bristol Bay drift gillnet salmon fishery.

15. My talk today is about research in progress! • Trends in local permit holdings • Causes of changes in local permit holdings • Review of research literature • A theory of the causes of net permit transfers • Hypotheses based on this theory • Empirical evidence for hypotheses • Policy issues

16. Alaska’s salmon fisheries vary widely with respect to gear, harvests, value, permit numbers, participation, and permit prices.

17. There are significant differences between fisheries with respect to the “local” share of initial allocations as well as subsequent trends.

18. In general, local permit holdings have declined for most fisheries.The extent of the decline varies widely between fisheries.

19. Alaska’s salmon fisheries vary widely with respect to the causes of changes in local permit holdings over time.

20. The Bristol Bay Drift Gillnet Salmon Fishery • World’s largest sockeye salmon fishery • 1980-2006 average real ex-vessel value of $154 million (2006 $) • Historically 20-40% of total value of Alaska salmon fisheries • Limited entry management since 1975 • About 1900 permits issued Source: www.cf.adfg.state.ak.us/region2/finfish/salmon/maps/bb_all.php Bristol Bay drift gillnetter

21. Bristol Bay catches vary significantly from year to year.Record catches in the early 1990s were followed by much lower catches in the 1997-98 and 2001-2003. Since 2004 catches have rebounded significantly.

22. Real (inflation-adjusted) prices in the Bristol Bay fishery declined dramatically from the late 1980s to 2001 due to competition from farmed salmon and other factors. Prices have risen slightly since 2001.

23. Falling catches and prices led to a dramatic decline in real ex-vessel value after the late 1980s. Value has rebounded sharply since 2002 to about $75 million but remains less than half the record values of the late 1980s.

24. There are twenty-six small “local” villages in the Bristol Bay region with predominantly Alaska Native populations. Historically these villages have been heavily economically dependent on the Bristol Bay fishery.

25. There has been a significant decline in thenumber and share of permits held by local Bristol Bay residents. 614 in 1978 319 in 2008

26. Of the 713 permits initially issued to local residents,322 permits (45%) are no longer held by local residents. 713 391

27. While local permit holdings have declined,holdings by both other Alaskans and non-Alaska residents have increased.

28. Annual changes in local permit holdings have not been uniform.

29. Net transfers have been the most important cause of declining local permit holdings over time

30. Net local permit loss due to transfers declined during the 1990s.There were net gains in local permits due to transfers from 2000-2002.Net local permit loss resumed in 2003.

31. Net local permit loss due to migration began in the 1980sand has continued since then in all but a few years.

32. The relative importance of transfers and migrationhas changed over time.

33. There has been little theoretical or empirical analysisof inter-regional net transfers of fishery access rights. • Why inter-regional net transfers occur • How they are affected by economic factors • How they are affected by fisheries management policies

34. In Alaska, several studies of permit transfers were undertaken in the early 1980s, in response to concerns about local permit loss. • Langdon (1980) suggested two factors contributing to local permit loss would be: • Lower average earnings of rural permit holders • Less access to capital for potential rural permit buyers

35. Since the early 1980s: • The Alaska Commercial Fisheries Commission (CFEC) has carefully documented trends in transfers and permit ownership • Almost no further analysis has been done of: • The causes of local permit decline • How local permit holdings are likely to change in the future • How local permit holdings are affected by policy

36. An economic theory of permit transfers • Permit transfers among individuals • Net permit transfers between groups • Net permit transfers between “local” and “non-local” fishermen

37. Every individual has a potential benefit from fishingand a potential cost of fishing which determines his potentialnet benefit from fishing. Net benefit from fishing = Benefit from fishing - Cost of fishing Benefit from fishing = value of fish sales + non-market benefit Cost of fishing = Operating cost + capital cost + opportunity cost

38. Different individuals have different potential benefits, costs and net benefitsfrom fishing. C2 N1 N2 N4 N3 B1 C1 B2 C2 B4 C4 B3 C3

39. If a permit is required to fish, and permits are transferable, then every individual has a permit valuation driven by his potential net benefit from fishing and his cost of capital PERMIT VALUATION = Maximum price the individual would pay to buy a permit or Minimum price for which the individual would sell a permit Maximum annual willingness to pay or Minimum annual willingness to accept Net benefit from fishing Benefit from fishing Interest rate at which individual can borrow or Rate of return on alternative investments Cost of fishing

40. Suppose permits are not initially distributed by sale.They will not necessarily be distributed to the personswith the highest valuations. Valuation Valuations of permit holders Valuations of non-permit holders Number of permits Number of persons

41. Transfers will allocate permits to the persons with the highest valuations. These transfers are market adjustments to the initial allocation. Permit demand and supply before market adjustment to initial allocation Valuation PERMIT SUPPLY CURVE Distribution of valuation for initial permit holders Price PERMIT DEMAND CURVE Distribution of valuation for non-initial permit holders Number of transfers Number of permits

42. Market adjustments to the initial allocation may take time.We would expect transfers for market adjustments to the initial allocation to be relatively high at first and to decline over time. Number of transfers per year Transfers due to market adjustments to initial allocation Initial allocation years

43. After adjustments to the initial allocation is complete, permits will be held by the persons with the highest valuations. Valuation Valuations of permit holders Permit price Valuations of non-permit holders Number of permits Number of persons

44. If all individual permit valuations stayed the same, then after adjustments to initial allocation are complete, there would be no more permit transfers Permit demand and supply after market adjustment to initial allocation Valuation Distribution of valuation for permit holders after adjustments Price Distribution of valuation for non-permit holders after adjustments Number of permits

45. However, individual permit valuations change over time: • Random changes in individual circumstances • Accidents and illness • Alternative employment opportunities • Demographic changes • Aging and death of permit holders • Entry into work force of younger non-permit holders • Changes in environmental, economic, and policy factors • Changes in fish abundance • Changes in fish prices • Changes in fishing costs

46. Different relative changes in individual permit valuationwill lead to continuing transfers over time. Valuation Distribution of valuation for permit holders after changes in valuation New price Distribution of valuation for non-permit holders after changes in valuation Old price Transfers due to changes in valuations Number of permits

47. Following market adjustments to the initial allocation transfers will continue due to changes in individual permit valuation. Number of transfers per year Market adjustments to initial allocation Market adjustments to changes in individual permit valuation Year of initial allocation years

48. Net permit transfers between groups will occurfor the same reasons as permits transfers among individuals.

49. Suppose we divide all persons into two groups.We may draw a permit valuation curve for each group. Valuation All valuations Group 1 valuations Group 2 valuations Number of persons V1 V2 V

50. If the initial allocation to the two groups differs from the market allocation, net transfers will occur between the two groups. Valuation Net transfers from Group 1 to Group 2 Net transfers to Group 2 from Group 1 Permit price M1 I1 I2 M2 Number of permits V1 V2 V