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Resource Rent and its Distribution
in Iceland’s Fisheries
Stefan B. Gunnlaugsson, University of Akureyri; Hörður Saevaldsson, University of Akureyri;
Dadi M. Kristofersson, University of Iceland; Sveinn Agnarsson, University of Iceland
ABSTRACT
This article provides an estimate of resource rent creation and its distribution in Icelandic fisheries, which have
been administered by an individual transferable quota (ITQ) management system for almost three decades.
This study examined the period from 1997 to 2017. Little rent was produced in the first years; however, since
2008, rent has been significant, averaging 380 million USD per year, which is around 17% of the export value
of the fishing industry. Approximately 20% of the rent went to the public due to a special fishing fee and
through corporate taxes. The remainder was evenly split between those who originally acquired their fishing
rights by grandfathering but have cashed in their windfall gains and traded their quotas, hereinafter referred
to as quota sellers, and the companies working in the fishing industry, each receiving around 40% of the rent.
Key words: Resource rent, transitional gains trap, rent distribution, rent taxation, fishing fee, ITQ, Icelandic fisheries.
JEL Codes: Q22, Q28.
INTRODUCTION
For centuries, the fishing industry in Iceland has played an important role in the nation’s econ-
omy. It remains one of the main employers and the biggest source of export revenue, surpassed
only by tourism in 2015. Annual average catches over the past 20 years have been around 1.5 mil-
lion metric tons, of which pelagic species account for 60–70% and demersal species 25–30%. Ice-
land is ranked among the world’s 20 major fishing nations and among the 10 major demersal
fishing nations (FAO 2017). Although the importance of the fishing industry has declined con-
siderably with growth in the production and service sectors, seafood products still make up more
than 40% of the nation’s total value of exported goods. Consequently, the development of this
important industry and the management of its resources have always been of utmost importance
to the nation.
Iceland has been managing most of its fisheries with individual transferable quota (ITQ) sys-
tems since 1990. Iceland’sfisheries are, therefore, an excellent example to illustrate the develop-
ment in fisheries regulated by this key management system. A consensus has emerged in the ac-
ademic literature that quota systems, or more importantly ITQ systems, are ideal for producing
profits in fisheries, as the implementation of ITQ management ends the race to fish and promotes
efficiency (Annala 1996; Arnason 2012). Economic performance improves as fishers attempt to
Stefan B. Gunnlaugsson is an associate professor, University of Akureyri, Faculty of Business Administration, Borgir, 600
Akureyri, Iceland (email: stefanb@unak.is). Hörður Saevaldsson is an assistant professor, University of Akureyri, Faculty of Nat-
ural Resource Sciences, Borgir, 600 Akureyri, Iceland (email: hordurs@unak.is). Dadi M. Kristofersson is a professor, University
of Iceland, Faculty of Social Sciences, Sæmundargötu 2, 101 Reykjavik, Iceland (email: dmk@hi.is). Sveinn Agnarsson is an as-
sociate professor, University of Iceland, Faculty of Business Administration, Sæmundargötu 2, 101 Reykjavik, Iceland (email:
sveinnag@hi.is).
Received March 13, 2019; Accepted January 27, 2020; Published online April 22, 2020. https://doi.org/10.1086/708507
Marine Resource Economics, volume 35, number 2. © 2020 MRE Foundation, Inc. All rights reserved.
0738-1360/2020/3502-0002$10.00
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catch their quota in a way that maximizes their profits (Grafton 1996a; Kompas and Che 2005;
Arnason 2005; Andersen, Andersen, and Frost 2010; Asche, Bjørndal, and Gordon 2009; Kroetz
et al. 2017). Quotas are transferred from less efficient firms to more efficient ones, improving eco-
nomic performance (Arnason 2008; Asche et al. 2008; Dupont et al. 2002). When the ITQ system
matures, it should lead to the creation of resource rent (RR) in fisheries under its auspices (Graf-
ton 1996b). RR is defined as the excess profit that arises when natural resources (e.g., diamonds,
gold, fish, and forests) are utilized in economic activity. Because of resource scarcity, it is impos-
sible to saturate demand in the market, and this excess demand drives up prices and, therefore,
profits. In most industries that do not depend on scarce natural resources, excess profit would
lead to current producers stepping up their level of production and new firms entering the indus-
try, leading to increased output, lower prices, and dissipating rents. This does not happen in in-
dustries that utilize scarce natural resources, so RR production is possible in those industries
(Bulte, Folmer, and Heijman 1995; Grafton et al. 2008; Asche, Bjørndal, and Gordon 2009). For-
mally, RR may be defined as excess profit after all costs have been accounted for, including return
on capital, both borrowed and owned (Wessel 1967).
The allocation of fishing rights when ITQ or quota systems have been introduced has most
commonly been based on historical participation in the fishery (Shotton 2000; Anderson, Arnason,
and Libecap 2011). This grandfathering, or first possession (Rose 1985; Lueck 1995), was the fa-
vored distribution mechanism when fishing rights were granted in the Icelandic fisheries. The al-
location was usually based on catches in the previous three years (Arnason 1993), but the period
under consideration has sometimes included up to the six previous years in some Icelandic fish-
eries (Saevaldsson and Gunnlaugsson 2015). As the ITQ system matures, more of the initial quota
allocation is traded. This article refers to those who received their quota originally by grand-
fathering but have sold their quotas and left the fishing industry as “quota sellers.”The amount
received from selling quotas represents the quota-sellers’share of the future RR created in the
fisheries, because those transactions are mostly financed by borrowing. They increase the debt
of the fishing industry, and the borrowing cost represents a financial cost that goes indirectly
to the quota sellers (Flaaten, Heen, and Matthíasson 2017). Hannesson (2017) stated that if quota
trade is unrestricted, the return on capital in an ITQ-managed fishery should become the same as
in other industries, with an appropriate allowance for risk. Therefore, the gains for the industry as
a result of an ITQ management system will be transient, and the excess profitability, often re-
ferred to as RR, will take the form of capitalized fishing rights, quotas, or intangible assets on
the balance sheet of firms in the industry. This is one of the critiques Copes (1986) made about
the ITQ system, which he referred to as a transitional gains trap, a term originally used by Tullock
(1975) to describe the effects of handing transferable privileges to limited groups in society. Ac-
cording to this argument, most—perhaps even all—the RR ITQ systems generate should accrue
to the quota sellers.
A few articles have explored rent in North Atlantic fisheries, focusing on estimating potential
rent if fisheries management was improved, quota systems introduced, and stocks rebuilt and uti-
lized efficiently. Arnason et al. (2018) assessed the potential rent generation of the North Sea her-
ring (Clupea harengus)fisheries, concluding that the RR could be substantial, but it is currently
squandered by excess fishing effort, which, in combination with suboptimal stock size and inef-
fective fishing effort, eliminates profits. Therefore, at present, the herring fisheries produce no
RR. A Swedish study estimated that introducing individual vessel quotas (IVQs) in the cod
(Gadus morhua)fisheries could, in combination with optimal utilization of the fish stock, result
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in a potential RR of 25–30% of the catch value (Eggert and Tveterås 2007). Finally, the World
Bank’s well-known Sunken Billions report estimated that global losses in RR due to overexploi-
tation of fish stocks and overcapitalized fishing fleets amounted to 50 billion USD per year (The
World Bank 2009).
A number of studies has analyzed actual RR production in fisheries. Andersen, Andersen, and
Frost (2010) estimated the RR generated in Danish fisheries and concluded that the introduction
of ITQs into Danish fisheries, initiated partially in 2003 and fully in 2007, increased RR. Merayo
et al. (2018) however, arrived at different results and concluded that rents did not increase in the
Danish demersal fisheries after the introduction of ITQs due to exogenous factors, such as lower
catches and fish prices. Greaker, Grimsrud, and Lindholt (2017) estimated that the RR in Nor-
wegian fisheries was negative in the 1980s and 1990s, but economic performance has since im-
proved, and that the RR had been around zero in recent years. Norway’sfisheries management is
complicated and mostly based on IVQs (Hannesson 2013). A new paper studying fisheries man-
agement in the Northeast Atlantic pelagic fisheries involving vessels from the Faroe Islands, Den-
mark, Norway, the United Kingdom, and Iceland, concluded that the fisheries were very profit-
able and producing significant RR (Nielsen et al. 2017). Those fisheries are mostly managed by
IVQs or ITQs.
To our knowledge, no studies have been published examining the distribution of rents between
major stakeholders in ITQ-administered fisheries. Flaaten, Heen, and Matthíasson (2017) stated
that RR in fisheries managed by an ITQ system would accrue to six groups of stakeholders. Some
of the rent would accrue to former quota holders who sold their grandfathered fishing rights (i.e.,
the quota sellers) and some could accrue to current quota owners. Processors might acquire a
share of the RR through transfer pricing of raw fish. The government would receive part of the
RR through corporate taxes on profits and special RR taxes. A portion of the rent would go to
financial institutions, as sellers of fishing rights might deposit their financial surpluses in these
institutions. Finally, fishers might collect some of the RR if their wages are above their opportunity
cost. This study assumes that there are three stakeholders that have received the RR. They are the
government, companies that still operate in the industry (processors and harvesters are calculated
together), and quota sellers. The financial institutions only provide a service that is not specificto
receivers of rents. Therefore, there is no reason to assume any additional benefits to them from
managing rents. It has been argued that fishers collect wages above their opportunity cost (Guillen
et al. 2015). In their paper, Griffin, Lacewell, and Nichols (1976) argued that when labor salary was
proportional to catch, rents would accrue to crews as well as to vessel owners under limited-entry
fisheries management. Fishers in Iceland have historically been well paid and their wages are sig-
nificantly above the national average. (Flaaten, Heen, and Matthíasson 2017; Nielsen et al. 2018a).
However, the hours are long, the job is hard, and fishers are absent from friends and family. Their
job is dangerous and uncomfortable (Kaplan and Kite-Powell 2000). All this complicates the es-
timation of opportunity cost and fishers’share of RR. There are usually no waiting lists for crew
membership on Icelandic vessels, which indicates that the wages are in accordance with the fish-
ers’opportunity cost. Hence, this research assumes that the crews’share of RR is close to zero. If
this assumption is false, it will result in an underestimation of rents, but not in estimation errors of
the amount of rents shared by other groups.
The literature contains two papers estimating the RR in Icelandic fisheries, neither of which
addresses the issue of RR distribution. In their paper, Flaaten, Heen, and Matthíasson (2017) es-
timated that annual RR in Icelandic fisheries between 2009 and 2013 amounted to between 331
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and 468 million USD per year, which was around 13–19% of the export value of Icelandic fisheries.
Another study, covering the period from 1989 to 2016, revealed thatno RR was present until 2008,
but that since then, annual rent averaged between 250 and 500 million USD per year, which was
around 10–19% of the export value of the fishing industry (Gunnlaugsson and Agnarsson 2019).
In this article, the development of RR in Iceland’sfisheries is charted from 1997 to 2017. More
importantly, we show how RR has been distributed among the three major stakeholders since
1997: the government, quota sellers, and enterprises operating in the industry. Iceland’sfisheries
are ideal when examining an ITQ-administered fishing industry, and this study is based on ex-
tensive data covering the entire industry for a long period. Therefore, the development of RR and
its distribution in Icelandic fisheries presented in this research, is of substantial significance to all
interested in fisheries management, policy, and economics.
ICELANDIC FISHERIES
HISTORY
Fishing around Iceland used to be open access with the participation of foreign nations until the
1950s. The Exclusive Economic Zone (EEZ) was extended in three steps between 1952 and 1976.
Finally, in May 1976 Icelanders won full jurisdiction over the 200-mile EEZ, thus fully controlling
their fishing grounds (Hannesson 2004). Icelandic pelagic catches increased rapidly with the her-
ring (Clupea harengus)fisheries in the 1950s and 1960s, reaching a peak of 690 thousand metric
tons in 1966. However, only two years later, the herring stocks collapsed. Part of this fleet then
turned to capelin (Mallotus villosus) and demersal fisheries (Nielsen et al. 2018b). The years be-
tween 1995 and 2005 were record years in terms of pelagic catches. Figure 1 charts this develop-
ment. Since then, the pelagic catch has been almost halved in the wake of reduced capelin quotas.
Figure 1. Catch of the Icelandic Fleet and Foreign Nations in Icelandic Waters since 1945 and the EEZ
Extension
Note: The area under the dotted line represents Icelandic trawlers part of the demersal catch; that is, side-
winder trawlers, until the introduction of stern trawlers in the 1970s. The EEZ Extension is represented by gray
dots on the x-axis.
Source: Statistics Iceland (2019) and ICES (2019).
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Pelagic companies have adjusted to these changes; thus, almost half of the vessels and fishmeal
factories have been scrapped since 2005 (Saevaldsson and Gunnlaugsson 2015).
Demersal catches around Iceland increased after WWII with a renovated fleet of smaller boats
and newly built sidewinder trawlers. Between 1950 and 1970, annual average demersal catches in
Icelandic waters amounted to 770 thousand metric tons, of which foreign harvests were almost
half. The first Icelandic stern trawlers began operating in 1970, when they replaced a former fleet
of sidewinder trawlers. In 1975, there were 58 stern trawlers fishing in the EEZ, but by 1985, this
number reached 100. Their fishing effort with expanding vessel and engine sizes increasedsharply,
and, within a few years, their proportion of the total demersal catch surpassed 50% (Nielsen et al.
2018b). Since 1990, the demersal catch has been almost halved in terms of quantity, remaining at
around 450 thousand metric tons for the past 20 years. The fleet’s excess capacity and overcapi-
talization issues were gradually solved with the consolidation of quotas and scrapping of vessels
and factories, affecting a number of occupations in the industry (Gunnlaugsson and Saevaldsson
2016).
FISHERIES MANAGEMENT
The collapse of the Atlantic herring fishery in 1968 sounded an alarm to the nation (Arnason
2005). Consequently, the management of pelagic species was initiated in 1969 with a total allow-
able catch (TAC) of Icelandic herring. In 1975, the government announced individual quotas
(IQs) and issued them for capelin in 1980 (Matthíasson 2003). Initial allocations were divided be-
tween vessels participating in the fisheries during the previous year. When the nation gained con-
trol over Iceland’s 200-mile EEZ in 1976, serious concerns were raised that demersal stocks were
being overfished. From 1977 to 1983, effort limitations were in force. In 1983 effort limitations
were abolished, as fishing effort and fleet capacity had been rising while the number of days at
sea kept falling. Then, Iceland’s Althing (national parliament) voted on and accepted a demersal
management system; vessel allocation was based on catch performance between 1981 and 1983.
The initial demersal quotas were allocated in 1984 to vessels above 10 gross registered tonnage
(GRT), not including small boats that mainly target demersal species. This caused their numbers
to escalate. The initial quotas were partly transferable by authority of the Ministry of Fisheries.
Between 1985 and 1987, an effort option was in effect that offered vessel operators an opportunity
to boost their share of the initial allocation (Arnason 1993; Runolfsson and Arnason 2001a).
Vessel renewals or enlargements were integrated into the 1984 demersal ITQ quota regula-
tions. All fishing vessels above 10 GRT in Icelandic waters in 1983 received fishing licenses that
indicated their GRT. New licenses were not issued unless a vessel of similar size in GRT was
decommissioned. Restrictions controlling total fleet capacity were abolished in 1999; then, the
renovation and/or new building of vessels could be carried out without additional cost (Runolfs-
son and Arnason 2001b). Since then, the fleet has been gradually modernized with the import of
both newly built and used vessels.
CURRENT MANAGEMENT SYSTEM
The structure of the Icelandic ITQ system remains similar to the initial uniform ITQ system im-
plemented in 1990. The uniform ITQ system allowed the majority of ITQs to be almost freely
transferable, which led to consolidation. Since 1990, the number of vessels and companies has
gradually decreased. The authorities did not centralize these adjustments, but mostly left them
to the companies (Saevaldsson and Gunnlaugsson 2015). Fisheries legislation was reformed in
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2006, resulting in the current Fisheries Management Act No. 116/2006. According to the Fisheries
Management Act, the TAC is issued annually by regulation of the Minister of Fisheries, having
obtained recommendations from the Marine Research Institute. The TAC is valid for one fishing
year, a 12-month period commencing September 1 every year. All species subject to the system
are issued an annual TAC, but prior to the issuance, the authorities deduct and retain 5.3%. This
proportion is then utilized as temporary support to coastal region communities. Finally, the Di-
rectorate of Fisheries issues the annual vessel catch quota (harvesting right), based on a vessel’s
permanent quota share (i.e., TAC minus 5.3%, then multiplied by the vessel quota share). The
annual and permanent quotas for each species are divisible and transferable among vessels with
fishing licenses (Nielsen et al. 2018b).
All participants in commercial fishing in the Icelandic EEZ need a fishing permit. The permits
are split into two types: a general catch quota and a hook-and-line catchquota. The hook-and-line
catch quotas were issued in steps from 1996 to 2004, when they were fully fledged. Since then, all
segments of the Icelandic fleet have been issued with ITQ quotas and later (in 2009) an open-
access costal jigging system was installed. Restrictions are valid in quota trade between vessels with
general catch quotas and vessels with hook-and-line catch quotas. In general, hook-and-line catch
quotas may only be used for longline and handline fishing. The catch from vessels with hook-and-
line catch quotas is made up of demersal species. In recent fishing years, vessels with general catch
quotas have been allocated about 90% of the demersal quotas, calculated in cod-equivalent kilos
(Nielsen et al. 2018b). The cod-equivalent is a special conversion factor used within the system to
assess all species at the same value as cod, which always equals one; the Directorate of Fisheries
thus calculates all species and the results are issued annually (Gunnlaugsson, Kristofersson, and
Agnarsson 2018). For example, if the cod-equivalent kilo of capelin is 0.13, it means that 7.70 kilos
of capelin equal 1 kilo of cod (1/0.13), or the value of capelin is 13% of the cod value.
In 1998, a maximum quota share was introduced, thus restricting a company’s quota allow-
ance. This was commonly named a “quota ceiling,”whose objective was to reduce the consolida-
tion of ongoing quotas and to prevent a handful of firms from controlling all the fishing in the
country. The current maximum quota share is 12% of the total quota issue in cod-equivalent ki-
los. For individual species, the ceiling is normally 20%, although for certain species it reaches 35%
(Nielsen et al. 2018b). A notable development in Iceland’sfisheries is the fishing fee. The fee was
introduced in 2004 and it replaced previous fees. The fee was small in the beginning. However, in
2012, it increased and has since been a significant expense for the fishing component of the in-
dustry. The fee is levied on landed catch and, hence, is directly related to the allocated quota. The
fee is a form of RR taxation, as its main purpose is to tax the RR produced in Icelandic fisheries.
The fishing fee generated around 0.5–1.5% of the total revenue of the Icelandic government from
2012 to 2017. The literature contains a detailed description of the fee, its amounts, and the
problems arising when setting the fee (Gunnlaugsson, Kristofersson, and Agnarsson 2018).
MATERIAL AND METHODS
DATA
Statistics Iceland provided most of the data used in this analysis. The agency publishes yearly data
showing the development of individual components of the profit and loss account and balance
sheet for the entire Icelandic fishing industry. The data used in this study are an estimation of
the profit and loss account of fishing and processing separately and the balance sheet of the entire
fishing industry. These numbers give an overall weighted average sum of the industry, treating
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the whole industry as one company. These are the official Icelandic records and the best available
source of data for analysis. The data are based on annual reports and tax returns on a very large
sample (around 70–90%) of firms operating in Icelandic fisheries and, therefore, are accepted as
reliable. Good data have existed only since 1997; the data before that time were less detailed, and
most importantly, an estimation of capitalized fishing rights was not presented for years prior to
1997. In addition, data from Statistics Iceland, which show the balance sheet and profit and loss
account of other industries, were used. They were compiled in a similar manner as the data on
fisheries (from annual reports and tax returns). These data have been available only since 2002.
Data from Íslandsbanki, one of the largest banks in Iceland, and Deloitte, which is the agency that
audits the financial statements of most companies in Iceland’sfisheries, were used to show the
corporate tax payment of the fishing industry. These data show the total corporate tax payment
of the entire industry every year from 2001 to 2017. These numbers are based on the data supplied
by the Icelandic tax authorities and, hence, founded on tax statements of all firms operating in
Iceland’sfisheries.
CAPITALIZED FISHING RIGHTS
Icelandic companies use international financial reporting standards (IFRS) when compiling their
financial statements. In accordance with IFRS principles, Icelandic fishing businesses register the
value of fishing rights (quotas) in their capital accounts when permanent quota shares are pur-
chased (Chalmers et al. 2012). Permanent quota shares that were grandfathered are not registered
on the balance sheet. For the past three decades, a significant proportion of quota purchases have
been conducted through company acquisition; that is, when one company buys another com-
pany completely, (i.e., buys all the shares) and then normally merges the newly acquired company
with itself. Next, the fishing rights are generally booked at an estimated market value. Permanent
quota shares traded and quotas purchased by company acquisition are reported as other assets
(aðrar eignir) in Statistics Iceland’s reports, and almost all other assets are capitalized fishing
rights. These estimates are used to assess the value of capitalized fishing rights in Icelandic fish-
eries in this research, as they represent a reasonable estimation of the cumulative sum the quota
sellers received for the permanent quota share they sold.
The estimates are, however, not flawless. They include some risk of overestimation due to
quotas purchased from companies still in operation. These quota deals do not represent rents
leaving the industry, since the sellers are still operating within it. No reliable information is avail-
able as to the ratio of these transactions still booked in the balance sheet of the Icelandic fishing
industry. On the other hand, depreciation of fishing rights was customary in the financial reports
of Icelandic companies before 2005, and occasionally until 2009, leading to an underestimation of
capitalization. The quotas were linearly depreciated (Ben-Shahar, Margalioth, and Sulganik 2009).
Before 1996, capitalized fishing rights were normally depreciated over five years (i.e., 20% per
year). From 1996 on, fishing rights were depreciated over 10–20 years (Michaelsen 2009). The re-
sult is a considerable depreciation of capitalized permanent quota shares traded from 1989 to
2004, and a minor depreciation from 2005 to 2009. Correcting for this is quite difficult and is
not attempted here. As a result, it is likely that the RR calculated in this article is, to some extent,
underestimated—especially before 2005. This also leads to underestimation of the cumulative sum
of fishing rights that were traded and the amount the quota sellers received. Although these two
issues affect the estimation of the RR share the quota sellers received, they tend to cancel each other
out, at least partially, when calculating the quota sellers’share. This is because the depreciation of
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fishing rights leads to an underestimation of the amount quota sellers received, and the unknown
capitalized trading between companies still operating in the industry leads to an overestimation of
the quota-sellers’share of the RR. However, it is likely that the depreciation of fishing rights was
higher than the trading between companies that are still active in the industry. Therefore, the book
value of capitalized fishing rights (used in this study) is probably an underestimation of the per-
manent quota share sold by the quota sellers; hence the quota-sellers’RR share is possibly slightly
underestimated in this study.
1
Figure 2 (specifically, the left axis) shows the development of estimated capitalized fishing
rights (book value) from 1997 to 2017. No estimation of capitalized fishing rights before that time
is available. The amounts are in USD and adjusted for inflation. In addition, the right axis in fig-
ure 2 shows the development of the book value of fishing rights as a proportion of the total assets
of Icelandic fisheries. The graph shows that quotas were booked at around 300 million USD in
1997. There was a gradual increase in this value, and in 2003 it had reached 940 million USD.
Then, the value increased rapidly, and, in 2007, capitalized fishing rights stood at 2,300 million
USD. The main reason for this increase was cheap and plentiful credit on the eve of a bank crisis
that made funding the purchases of fishing rights inexpensive and easy (Gunnlaugsson and
Saevaldsson 2016). Therefore, many quota holders cashed in and sold their fishing rights, becom-
ing quota sellers. The fishing industry went through a reconstruction during this period and fish-
ing rights were rapidly consolidated (Agnarsson, Matthiasson, and Giry 2016). Since 2008, the
book value of capitalized fishing rights has remained relatively stable. The development of the
book value of fishing rights as a proportion of total assets tells a similar story. This ratio was
around 9% in 1997. Thus, in that year, 9% of the book value of all assets of the Icelandic fishing
Figure 2. Development of Fishing Rights as a Percentage of Total Assets (right axis) and the Amount of
Capitalized Fishing Rights in USD at Constant Prices (left axis) in Icelandic Fisheries from 1997 to 2017
Source: Statistics Iceland (2018).
1. Supporting this statement is the fact that Statistics Iceland estimated the total capitalized book value of quotas in the Ice-
landic fishing industry at around 2.3 billion USD in 2017. This is the total sum accruing to quota sellers according to the meth-
odology of this study. The estimated market value of all fishing quotas in Iceland at that time was around 7.5 billion USD, indi-
cating (without proof because the price in the permanent quota trading is unknown) that 31% (2.3/7.5) of all quotas were cashed in
and sold permanently; that is, traded and capitalized on the balance sheets of the fishing industry. In 1996, the 30 largest companies
had a combined share of around 54% of overall fishing rights. In 2017, 16 of these 30 firms had exited the industry. Those
16 companies held 20% of the quotas. Therefore 37% (20/54) of the fishing rights of the largest companies had been sold, and
the owners of those fishing rights had exited the industry. Because a higher proportion of smaller firms exited the Icelandic fish-
ing industry, this strongly supports that the book value of capitalized fishing rights is probably a conservative estimate of fishing
rights that were traded permanently, and the quota sellers’share of the estimated resource rent is probably underestimated.
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industry was quotas. In 2003 it stood at 23%, and it was 38% in 2007. Since then, this ratio has
remained very stable, just above 40%.
RESOURCE RENT ESTIMATION
According to classical economic models, no rents exist in open-access fisheries in equilibrium,
with constant cost per unit of effort and one-dimensional homogeneous effort (Gordon 1954;
DuPont 1990). A simple alteration to the model, for example by introducing heterogeneous ef-
fort, opens it to the appearance of rent, especially intra-marginal rent (IMR) in open-access equi-
librium (Manning and Uchida 2016). In this equilibrium, the marginal vessels break even. How-
ever, other vessels with lower costs may earn IMR (Arnason et al. 2018). Disentangling IMR and
RR may be difficult (Thébaud et al. 2014). Pure RR should not exist in open-access fisheries re-
gimes; however, IMR should exist (Copes 1972). In this study, managed fisheries governed by an
established ITQ system were examined in which rent should appear and, hence RR. To distin-
guish between RR and IMR, extensive data are necessary. To do so perfectly in this research, it
would have been necessary to have profit and loss accounts, as well as balance sheets from
1997 to 2017 for every company in the Icelandic fishing industry. These data are not available;
hence, a second-best solution was chosen.
The methodology applied was to compare the return of capital (ROC) in fisheries to the return
of capital in other segments of the Icelandic economy (i.e., all companies except for financial in-
stitutions, pharmaceuticals, and companies involved in fisheries). Most companies in Iceland are
operating in competitive industries and should not have excess profitably that comes from uti-
lizing a scarce natural resource, as the fishing industry does. Therefore, excess ROC in fisheries
(i.e., higher ROC than the weighted average of other industries in Iceland) is a good measure of
RR. ROC is defined by equation (1). It states that ROC is simply EBIT (earnings before interests
and taxes) divided by assets. (For a better explanation of EBIT, see table 1.) Because assets are
Table 1. Overview of IFRS Principles and Explanation of RR Calculations Applied in this Research
Financial Statements (IFRS) RR Calculation
Revenue Income from fishing and
processing and revenue
from the leasing of
fishing rights.
All income from fishing and processing. Note that the
leasing of fishing rights has no effect on EBIT,
because the lease payments constitute revenue for
one firm and an expense for another, cancelling
each other out for the whole industry.
–Operating costs Insurance, raw material,
wages, fuel, gear, fishing
fee, maintenance,
administration.
All costs except the fishing fee are recognized. Fishers’
share of RR was not measured.
–Depreciation Assets are depreciated
based on original pur-
chase price by using the
straight-line method.
Depreciation was used as a measure of the replacement
cost of assets.
pEBIT EBIT EBIT 1fishing fee.
–Financial charges Financial cost and
currency difference
on all debts.
Financial cost was set at 4.6% and charged on all
assets except capitalized fishing rights.
–Taxes Corporate taxes Corporate taxes were excluded because they are simply
a transfer of RR from the industry to the government.
pProfit Profit Estimated RR.
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equal to debts plus equity (equation (2)), this ratio shows how much profit the capital invested in
the business generates for both borrowed and own capital. A higher ratio shows more profit. This
ratio must be higher than the cost of borrowing and the opportunity cost of equity; if not, the
companies are not making any economic profit:
ROCtp
EBITt
Assetst
:(1)
This methodology (i.e., to assume that excess ROC in fisheries represents RR) should exclude
IMR rent in the calculation, because the IMR of companies, in general, is part of their ROC. It
is also likely that the scale of IMR in fisheries is similar to that of other industries, and RR causes
a higher ROC in fisheries.
2
The weighted average ROC of all companies in the Icelandic economy
(except for fisheries, financials, and pharmaceuticals) was 4.6% for the period 2002 to 2017. The
data for all sectors of the economy is available only from 2002, whereas data for the Icelandic
fisheries is available from 1997 (figure 3). The ROC was quite stable during the period 2002 to
2017 and was at its highest in 2004, 6.1%, and lowest in 2010, 3.4%, with a standard deviation
of only 0.8%. By contrast, the average ROC in fisheries amounted to 6.4% during the years
1997 to 2017 with a standard deviation of 3.7%. ROC in fisheries has, on average, been
higher—but at the same time more volatile—than in other industries in Iceland, indicating a
presence of RR.
In addition, a sensitivityanalysis was performed of to evaluate the effects changes in the cost of
capital had on RR and its distribution in Iceland’sfisheries. The base cost of capital was set 4.6% in
2. This methodology is based on the assumption that excess ROC in fisheries is a good measure of RR. However, a question
remains about the certainty of that assumption. Results for various industries in the US reveal that ROC has been stable over time,
but varied between industries. ROC was highest in industries with little competition, which was mainly due to the brand or to
patents held by firms in the industries in question, and lowest in industries that were relatively capital intensive (Jiang and Koller
2016). The Icelandic fishing industry has high barriers to entry. However, these barriers are caused by the ITQ system, as it is
necessary to buy expensive fishing rights to enter the fisheries. Without these barriers, entry would be cheap and easy, thus elim-
inating all rents and probably generating ROC on par with the average in the Icelandic economy. The Icelandic fishing industry is
relatively more capital intensive than the average of other industries in Iceland, mostly due to the capitalized fishing rights, which
have amounted to 40–43% of the total assets of the industry for the last decade. If the fisheries were open access (and therefore with
no need to buy expensive quotas to enter the fisheries), no fishing rights would be capitalized. Therefore, it is likely that the amount
of necessary capital in Iceland’sfishers would be on par with the average of other industries. This leads us to conclude that the
higher ROC in Iceland’sfisheries compared to other industries is because of the RR produced in the industry.
Figure 3. Weighted Average Return on Capital (ROC) in all Industries in Iceland and ROC in Fisheries
Sources: Statistics Iceland (2018) and author calculations.
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this study, as it was the average ROC in other industries. The sensitivity analysis ranges from a
minimum cost of capital of 4.0%, which been used in the literature when measuring rent in Nor-
wegian fisheries (Greaker, Grimsrud, and Lindholt2017). The maximum cost of capital was set at
6.0%, as this is the ratio normally used when measuring RR in Icelandic fisheries (e.g., Flaaten,
Heen, and Matthíasson2017; Nielsen et al. 2017), and it is also the same ratio that Statistics Iceland
applies when calculating profitability according to the “annuity method”(árgreiðsluaðferðin). The
sensitivity analysis was performed because it is impossible to completely dismantle IMR from RR.
That is because the IMR of companies, in general, is part of their ROC. By changing the cost of
capital, it is possible to analyze if RR is present, even when the cost of capital is altered. A higher
cost of capital assumes that more IMR was produced and, hence, less RR, and a lower cost of capital
means lower IMR was present and, therefore, higher RR.
One of the characteristics of the Icelandic fishing industry is that it is dominated by vertically
integrated companies (Knútsson, Kristófersson, and Gestsson 2016). Those companies own quo-
tas, boats, and factories. They catch the fish, process it, and sell their own products. The monetary
value of the catch is an intermediary product, and the pricing mechanism for the catch of those
companies is partially arbitrary. The tendency in those companies is to maximize revenues and
profit in the processing portion at the cost of the fishing component (Flaaten, Heen, and Mat-
thíasson 2017; Gunnlaugsson, Kristofersson, and Agnarsson 2018;Byrne, Agnarsson, and Davids-
dottir 2019). This is because fishers in Iceland are paid wages proportionalto the value ofthe landed
catch. Their wages are usually approximately 35–40% of the catch value. Therefore, earnings of
the vertically integrated companies increase if fish prices are lowered in intra-company trade as
fishers’wages are reduced. However, a government institute, the Fresh Fish Price Directorate
(Verðlagsstofa skiptaverðs), monitors intra-company pricing. It sets guiding prices in intra-
company trade and audits all contracts to enforce fair pricing in all intra-company transactions.
Nevertheless, RR is probably produced in both the processing and fishing components of the Ice-
landic fishing industry, instead of being confined to the harvesting component, as would be the
likely outcome if all the fish were sold on a fully competitive market. The path taken in this study
was to estimate the RR in both the fishing and the processing components of the industry. Hence,
EBIT from fishing and processing were used when calculating the RR and its distribution, as well
as all assets of the entire Icelandic fishing industry.
The data used in this study are based on the IFRS accounting standards and need adjusting
when calculating the RR, so some alterations were necessary. The only changes made in this study
were regarding the fishing fee and the cost of capital. Table 1 provides an overview of IFRS prin-
ciples and an explanation of the RR calculations applied in this research.
The fishing fee is classified as a normal operating cost (e.g., wages, cost of fishing gear, and cost
of oil) according to IFRS guiding principles (De George, Li, and Shivakumar 2016). However, this
fee is a form of RR taxation (Gunnlaugsson, Kristofersson, and Agnarsson 2018). Industry taxes
should not be included in operating costs in a measurement of the RR, because they are simply a
transfer of RR from the industry to the government (Greaker, Grimsrud, and Lindholt 2017). As a
result, the fishing fee was added to the EBIT in this study when measuring RR.
An adjustment was also made to financial cost. According to IFRS principles, costs in financial
statements comprises interest expenses and currency charges on all debts. However, the cost of
equity; that is, its opportunity cost, is not charged in the profit and loss account according to IFRS
principles (Florou and Kosi 2015). In addition, because the IFRS calculates financial costs on all
debts, a significant adjustment must be made when calculating the RR. Consequently, financial
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costs resulting from any investments in fishing rights (quotas) should be excluded, as they rep-
resent a financial cost that goes indirectly to the quota sellers (Flaaten, Heen, and Matthíasson
2017). This research set the financial cost at 4.6% every year, for all assets except for capitalized
quota holdings (fishing rights), effectively setting a financial cost of capital 4.6% for all, both debt
and equity. This was the average ROC of the Icelandic industry from 2002 to 2017.
An adjustment is sometimes made for depreciation in RR estimations. The purpose of depre-
ciation is to match the cost of productive assets to their duration (Jeanjean and Stolowy 2008). In
the case of a mismatch (e.g., depreciation exceeding the cost of assets), an alteration might be re-
quired to calculate RR (Greaker, Grimsrud, and Lindholt 2017). Icelandic companies use the
straight-line method when calculating depreciation in their fiscal accounts. This method is well
aligned with the economic life and value of real assets (ships, equipment, plants, etc.). Therefore,
the book value and depreciation charges are a good estimation of the real value of assets and the
cost of replacing those assets. However, as previously mentioned, there was considerable depre-
ciation of quotas capitalized between 1989 and 2004, and a minor depreciation from 2005 to 2009.
Consequently, before 2009 and especially before 2005, depreciation may have overestimated the
replacement cost of assets, as depreciation charges on fishing rights were part of the total depre-
ciation charges during that period. Here, it was assumed that depreciation appropriately matched
the replacement cost of assets and no adjustments were made, but this might lead to an under-
estimation of RR from 1997 to 2009.
By definition, assets (A) at time tequal debt (D) and equity (E) (equation (2)). Therefore, ap-
plying financial cost to assets gives the opportunity cost for both debt and equity. The RR was
estimated for each year from 1997 to 2017 by using equation (3). By applying the equation,
RR was estimated to be the reported EBIT in both fishing and processing plus the fishing fee
(FF) minus ctimes the difference between the book value of total assets (A) of the whole fishing
industry and the booked value of capitalized fishing rights (V), (i.e., c(A-V)). The coefficient c
represents the cost of capital, both the cost of debt and the cost of equity:
AtpDt1Et:(2)
RRtpEBITt1FF t–cA
t–Vt
ðÞ:(3)
RENT DISTRIBUTION
This study assumes that the RR produced in Icelandic fisheries has benefited three stakeholders:
the government (RR
g
), the firms still active in the industry (RR
a
), and the quota sellers (RR
s
). To-
tal RR in time tmay then be defined as:
RRtpRRgt 1RRat 1RRst :(4)
As stated in equation (5), the government has accrued its share of the RR through fishing fees (FF)
and excess corporate taxes (ET):
RRgt pFFt1ET t:(5)
The FF is RR tax paid by the fishing component of the Icelandic fishing industry for access to the
fishing resource, while excess corporate tax represents taxation over and above normal corporate
taxes and is a direct result of the RR, produced by utilizing the fishing resource. Estimating this
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proportion of total corporate taxes paid by the Icelandic fishing industry is fraught with difficul-
ties, because in an open-access fishery no RR is present. However, the industry would pay cor-
porate taxes even under an open-access regime without yielding any extraordinary profits. This
is because the better-run companies, with lower costs than the marginal companies, would make
a profit (i.e., IMR). In addition, the opportunity cost of equity is not recognized as a cost, accord-
ing to IFRS accounting standards. Therefore, a company that does not earn any economic profit
might pay corporate taxes levied on profits, because the opportunity cost of owners’equity is not
a base for cost when corporate taxes are levied. In this article, it was decided to define “excess
corporate taxes”as taxes paid above a certain historical average. Figure 4 charts the payment
of corporate taxes in the Icelandic fishing industry from 2001 to 2017. During the period 2001
to 2010, these payments ranged from 16 to 31 million USD, with an average of 24.2 million
USD, but have since increased substantially, mostly due to higher RR. As shown in the results
section, the Icelandic fisheries did not really start to produce any RR until 2008. The higher profits
of the industry are, however, not immediately transformed into a larger income tax base, as firms
often carry losses from previous years that may be deducted from current year profits and, thus,
decrease the base on which income tax is levied. Consequently, the improved financial perfor-
mance of the fishing industry since 2008 is not reflected in higher tax payments until 2011. In
this study, it was consequently assumed that all corporate taxes above 24.2 million USD per an-
num each year from 2011 to 2017 were excess corporate taxes (ET
t
) and the result of RR.
This article assumes that capital gains taxes caused by quota trading were negligible.
3
As stated
in equation (6), some of the rent has accrued to enterprises still operating in the fishing industry.
3. The booked profit in quota trading was mostly taxed as corporate taxes levied on profits but not as capital gains taxes and is,
therefore, part of corporate taxes. Capital gains taxes were small in other instances because various laws and regulations made
postponing tax payments possible. Additionally, the capital tax percentage was low (only 10% from 1997 to 2008) when most
of consolidation happened and quotas were traded. Further, much of the money the quota sellers received was lost in the financial
bubble in Iceland and its crash, when the Icelandic stock market lost 95.4% of its value in 2008 to 2009. In the financial crash,
corporate bonds and bond issued by Icelandic banks became almost worthless, and owners lost almost all their investments. Fi-
nally, it is likely that some (how much is impossible to assess) part of the money quota sellers received when fishing rights were
traded was stored in various offshore tax shelters, where little or even no taxes were paid. All of this leads to the assumption that
capital gains tax payments were insignificant, and they are omitted in this research.
Figure 4. Corporate Taxes Paid by the Icelandic Fishing Industry from 2001 to 2017 (million USD) at Con-
stant Prices
Note: The solid line is the average from 2001 to 2010 (i.e., 24.2 million USD).
Source: Íslandsbanki (2017) and Deloitte (2018).
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The share of firms still active is calculated as EBIT both in fishing and processing minus the cost
of capital (c) times the book value of assets (A) and minus excess corporate taxes (ET). Therefore,
those operating in the industry pay the fishing fee, which lowers the EBIT. They pay the excess
corporate taxes and bear the full cost of all capital invested in the Icelandic fishing industry:
RRat pEBITt–cAt–ET t:(6)
What is left of the RR is allocated to the quota sellers. Therefore, RR accruing to the quota sellers
equals the total RR minus the share of the RR accruing to the government and the fishing firms
still active in the industry (equation (7a)). As shown in equation (7b), the share of the quota sell-
ers can also be defined as the opportunity cost of capitalized fishing rights:
RRst pRRt–RRgt –RRat :(7a)
RRst pcVt:(7b)
RESULTS
RESOURCE RENT ESTIMATION
Figure 5 illustrates the development of RR in Icelandic fisheries from 1997 to 2017 as calculated
by using equation (3) and setting the cost of capital (c) at 4.6%. The figure shows RR both in mil-
lion USD (at constant prices) and as a share in percentages of the export value of the catch. Be-
cause almost all fish caught by Icelandic vessels is exported, the export value is a good measure of
revenue of the Icelandic fishing industry. The figure reveals that the Icelandic fisheries yielded
limited RR until 2008, with the exception of the year 2001, when the rent was around 280 million
USD or 13% of the export value of the industry. Since 2008, rent has been significant, averaging
380 million USD per year, which is around 17% of the export value.
It took the Icelandic fishing industry almost two decades to rationalize under the ITQ system
and yield a significant RR, as rent has only been produced consistently since 2008. Gunnlaugsson
Figure 5. Development of the Estimated Amount of Resource Rent (million USD) at Constant Prices (right
axis) and Resource Rent as a Percentage of Export Value (left axis) from 1997 to 2017
Source: Statistics Iceland (2018) and author calculations.
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and Agnarsson (2019) mention that the main reason for this long delay was lower catches. From
1989 to 2008, the catch in cod-equivalent kilos was almost halved, which led to the late arrival of
RR in Iceland’sfisheries. The fishing industry was rationalizing during that period, closing down
factories and scrapping boats. However, the rationalization merely kept up with lower catches, so
no rent was produced. When catches started to increase in 2008, RR emerged. The second factor
affecting RR creation in Iceland’sfisheries was the exchange rate. The Icelandic fishing industry
benefits from a weaker exchange rate of the Icelandic krona, because almost all its products are
exported and paid for in foreign currencies. The fall of the Icelandic krona in 2008, when it lost
almost half its value, was also a very important contributor in the emergence of the RR in the
following years.
The RR peaked between 2011 and 2013, mainly because of an exceptionally weak Icelandic
krona that immensely benefited the industry. Catches were also good at the time, landings started
to increase in 2009, and prices were relatively high—especially for pelagic species. An interesting
RR development was in fall of 2017, caused mostly by a strengthening of the Icelandic krona. The
Icelandic economy has been booming because of expanding tourism since 2012. This led to a
stronger currency in the period 2015 to 2017, with the Icelandic krona being exceptionally strong
in 2017. As a result, the profitability of the Icelandic fishing industry suffered.
RESOURCE RENT DISTRIBUTION
The estimated RR in the Icelandic fisheries and the distribution of rent between the three stake-
holder groups during the period 1997 to 2017 is shown in table 2. The cost of capital (c) was set at
4.6% when calculating the findings presented in the table. The periods of the research were di-
vided into three seven-year periods, as RR generated varied considerably between periods. In
the first period (i.e., from 1997 to 2003), RR amounted to only 0.1 billion USD. The government’s
share was zero during that time, because there was no fishing fee and excess corporate taxes were
paid by the fishing industry. The quota sellers received more than all the RR, as their share was
225%. Hence, those active in the industry had a share of –125%, reflecting the fact that the indus-
try was experiencing only limited profits for most of the period, and even significant losses in
some years. The middle subperiod (i.e., 2004 to 2010) was eventful. Most of the permanent quota
shares were traded during this period. The profitability of the industry increased significantly;
especially in the last two years of this period, and the total RR amounted to 1.2 billion USD.
The government’s share was only 6% of the rent during this period, as the fishing fee was low,
and no excess corporate taxes were paid. The quota sellers received more than half of the RR,
and the companies active in the industry received around 40% during this period.
Most of the RR generated was created in the last subperiod, (i.e., 2011 to 2017), as this period
was characterized by high profitability. Half of the 2.7 billion USD produced accrued to those still
Table 2. Resource Rent and its Distribution to the Three Stakeholders (1997 to 2017)
1997 to 2003 2004 to 2010 2011 to 2017 1997 to 2017
RR (billion USD adjusted for inflation) 0.1 1.2 2.7 4.0
Government share of RR 0% 6% 25% 19%
Quota-sellers’share of RR 225% 55% 25% 39%
Active-companies’share of RR –125% 39% 50% 42%
Source: Statistics Iceland (2018) and author calculations.
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operating in the industry, and the rest was evenly distributed between the government and the
quota sellers. Finally, the table shows that total RR during the entire period (1997 to 2017)
was estimated at 4.0 billion USD. The government’s share was around 19%. Of the government’s
share of the rent, around 69% came from the fishing fee and 31% was excess corporate taxes (ET).
The quota sellers and the firms active in the industry received a similar portion of the rent, or 39
and 42%, respectively, during those 21 years.
SENSITIVITY ANALYSIS
A sensitivity analysis was performed to measure what effects changes in the cost of capital (i.e., c
in equations (3) to (7)) had on the RR and its distribution. The results are presented in table 3.
The most likely cost of capital and the rate this article is based on is cp4.6%. At that cost, the
results are the same as presented in table 2 as the RR for the whole period. The minimum cost of
capital in the sensitivity analysis was set at 4.0%. This rate gives a slightly higher RR of around
4.4 billion USD than if the cost of capital had beensetat4.6%.AnincreaseinRRleadstomoreofit
going proportionally to those operating in the industry—slightly more than half. However, the
quota-sellers’share decreases and the government’s share remains the same; even though it de-
creases proportionally. When the cost of capital is set at 6.0%, which is the maximum, the esti-
mated RR created decreases. However, it is still significant, as it is estimated at 3.1 billion USD.
The share of those operating in the industry becomes smaller when the financial cost is set so high
(i.e., only 10%). At such an elevated cost of capital, the opportunity cost of capital is high and,
therefore, the quota sellers receive most of the RR.
The sensitivity analysis clearly demonstrates that significant RR has been produced in Ice-
land’sfisheries. Changing the cost of capital does not have a substantial effect on the RR created,
as significant RR was present even though the financial cost was set at the highest, at 6.0%. The
sensitivity analysis also demonstrates that all three stakeholders received a significant portion of
the RR. Almost certainly, the quota sellers and those operating in the industry received most of
the rent, and the government’s share was slightly less than the share of either of the other two
stakeholders.
DISCUSSION
The ITQ system has managed Iceland’sfisheries for almost three decades. Initially, the ITQ sys-
tem did not lead to RR creation. However, as the necessary rationalizing materialized, factories
were closed and vessels were scrapped, and RR appeared. This rent became significant after 2008,
when landings, especially of cod, the most important species (e.g., in 2016 around 44% of the
value of all landings was cod), started to increase. It is likely that the rent appeared mostly because
of better utilization of input factors (i.e., labor and capital). An important reason leading to the
Table 3. Sensitivity Analysis of Resource Rent and its Distribution (1997 to 2017)
cp4.6% (the base case) cp4.0% cp5.2% cp6.0%
RR (billion USD adjusted for inflation) 4.0 4.4 3.6 3.1
Government share of RR 19% 17% 21% 24%
Quota sellers’share of RR 39% 31% 49% 66%
Active companies’share of RR 42% 52% 30% 10%
Source: Statistics Iceland (2018) and author calculations.
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better utilization of these factors is the effects that rebuilding of important fish stocks have on
costs and, therefore, profitability. The cod stock is a prime example of this. In 2000, the size of
its fishable stock (i.e., cod four years old and older) was estimated at only 600 thousand metric
tons. Conservation and reduction in catches led to this stock increasing in size to 1,400 thousand
metric tons in 2016. The effect of this increased size was an increase in the catch per unit effort
(CPUE). In 2000, the average catch per hour for cod when using a bottom trawl, which is the
method most widely used; was around 550 kilograms. This increased to 1,400 kg per hour in
2016. This has resulted in considerably less capital (ships) and labor (fishers) being used now than
were used previously per unit of catch. The size of the cod has also increased. In 2000, around 25%
of cod caught (by weight) by bottom trawl was longer than 80 cm; however, in 2016, this ratio had
reached 50% (Hafrannsóknastofnun 2019). Bigger fish cost less to catch and process, because less
labor is needed per every kilogram. Therefore, better utilization of the fishing stocks and the end
of overfishing are important contributors to the emergence of RR in Iceland’sfisheries. A similar
development has occurred in Iceland’s processing industry. Increased utilization of technology
leading to more automation and higher productivity have all resulted in better use of labor
and capital (Knútsson, Kristófersson, and Gestsson 2016; Gunnlaugsson and Saevaldsson 2016).
It is unlikely that the RR will disappear from Iceland’sfisheries. For that to happen, a signif-
icant decline in catch or an extreme appreciation of the value of the Icelandic krona would be nec-
essary. Because the catch is composed of many species, this reduces the risk of overall decline in
catches. As often happens, an increase in the catch of one species coincides with a decline of an-
other. An exception to this is the cod stock, because of its significance. A substantial decline in cod
catch could not be compensated fully by a greater catch of other species. Because the cod stock is
well managed and in a healthy state, the species has an average length of lifespan and the stock is
composed of many cohorts. A significant fall in the cod catch is unlikely. Looking at the second
factor, the Icelandic krona has been strong for the last few years. Even as the krona was exception-
ally strong in 2017, and fishers went on strike for almost two months, which lowered profitability,
the fishing industry produced RR that year. However, active companies received none of theRR in
2017, as the government and the quota sellers received more than all of it. As companies active in
the industry are the last in line of the three stakeholders presented in this study, their economic
performance can be unsatisfactory even though limited RR is produced, as happened in 2017.
Their share of the RR can be negative, as the quota sellers and the government (through the fish-
ing fee) can receive all the RR—and even more. History has shown that the Icelandic fishing in-
dustry has been quick to adjust to negative developments. Therefore, unsatisfactory economic
performance results in further consolidation of fishing rights, closure of fishing plants, and scrap-
ping of boats. This would ultimately improve economic performance and lead to improvement in
the economic performance of the industry and a “fair share”(at least not an economic loss, which
occurs when the active companies’share of the RR is negative) of the RR for those companies
active in the industry. All of these arguments lead to the conclusion that it is unlikely a situation
will arise in the near future where no RR is present in Iceland’sfisheries.
Pinkerton and Edwards (2009) conducted extensive research on the Pacific halibut (Hippo-
glossus stenolepis)fisheries in British Columbia (BC), Canada. Since 1999, a fully free ITQ system
has been used in the management of the local halibut fishery. Few restrictions have been placed
on quota ownership (except for a 1% quota ceiling of the TAC), and there has been no obligation
for quota owners to fish for halibut on their own vessels or even to possess vessels at all. Therefore,
enterprises and individuals not participating in the fishing industry now own most of the fishing
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rights (quotas). Consequently, a significant percentage of those vessels fishing halibut now own
very little halibut quota, or even none. As a result, fishing boats normally lease the quota, and
lease payments amounted to 78% of catch value in 2008 for those vessels that leased their quota
entirely. Therefore, crew wages were only around 1–5% of the revenues of those boats from which
the entire quota was leased, whereas this ratio was 10–20% of revenues before the introduction of
the ITQ system. Thus, BC’s halibut fishery is an extreme case wherein undoubtedly most of the
RR produced in the industry is now taken by those owning quotas and leasing them out to the
industry.
A similar development to the BC halibut fishery has not occurred in Iceland. That is because
the quota has always been allocated to vessels, so owning a vessel has always been necessary to
own a quota. Since 1998, complex rules have stated that each vessel has to catch at least half of
its quota. The current rules are that each vessel is now obliged to catch at least half the allocated
quota, on average, every two years. More importantly, all Icelandic fishers are members of a work-
er’s union. Their wages are determined by a collective agreement whereby fishers receive a fixed
proportion of the catch value (around 35%, on average). Hence, the lease value cannot push down
fishers’share of the catch value, as happened in the BC halibut fishery. All of this has prevented
Icelandic fisheries from developing in the way of the BC halibut fishery. This is because almost all
Icelandic fishers are well paid, and the current quota holders own vessels and are active partici-
pants in the fishing industry.
Hannesson (2017) predicted that the return on capital in ITQ-managed fisheries would be-
come like other industries with similar levels of risk. That is because an ITQ system would lead
to a bigger balance sheet on which a significant amount of the assets were capitalized fishing
rights. As these costs are included in the capital base in the financial accounts of firms operating
in the fishing industry, the return of their total capital should decline. Therefore, almost all the RR
would fall to the quota sellers and little to companies operating in the industry. Similar arguments
were previously presented by Flaaten, Heen, and Salvanes (1995). Our research does not support
this prediction; at least this has not yet happened in Iceland’sfisheries. Hence the so-called “tran-
sitional gains trap”has not become apparent in Iceland’sfisheries, even after almost three decades
under an ITQ management regime, as active firms in the industry receive a considerable share of
the RR. What is the reason for this? There are many probable explanations. The most likely is that
the bulk of quota trading occurred from 1997 to 2007. During that time, the Icelandic fishing in-
dustry was not profitable and not producing RR. However, there was plenty of cheap credit flow-
ing in the Icelandic economy. Financing quota purchases was, therefore, easy and quota trading
was blooming. However, there is a limit to how much debt can possibly be placed on an industry.
As the industry was not very profitable, an imaginary debt ceiling was probably reached in that
era, as reports at that time estimated the debt situation was unsustainable (Gunnlaugsson and
Saevaldsson 2016). This changed when the Icelandic banking system collapsed in 2008. Trading
in permanent quota shares almost stopped (as well as mergers and acquisitions) for a few years
because credit dried up at exactly the same time as the profitability of the fishing industry im-
proved immensely. Therefore, it is possible that the size of the balance sheet (i.e., capitalized fish-
ing rights financed by borrowing) has not yet adjusted to the improvement of the economic per-
formance of the Icelandic fishing industry for the past decade. Nevertheless, it is unlikely that that
debt levels will become unsustainable and improbable that active firms in the Icelandic fishing
industry will not receive any part of the RR in the near future. There are many reasons for this
prediction. One is that the current return on capital is high in Iceland’sfisheries and there is
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no need for capital to leave the industry, as there is little opportunity for higher returns in other
industries or in other forms of investments in the current low-interest environment.
A question of validity is bound to arise concerning research of this kind, as it is based on a few
simplifying assumptions that inevitably affect the results. This article starts by estimating the RR
produced in Icelandic fisheries from 1997 to 2017. The estimated RR is similar to amounts cal-
culated by Flaaten, Heen, and Matthíasson (2017) from 2009 to 2013 and also akin to the estimate
presented by Gunnlaugsson and Agnarsson (2019), wherein the RR was assessed from 1989 to
2016. However, this article’s main contribution to the literature is the calculation of RR distribu-
tion among major stakeholders. This estimation is based on a few assumptions and is, therefore,
not flawless. The exact distribution of RR among these three stakeholders in Icelandic fisheries is,
therefore, difficult or nearly impossible to assess. Nevertheless, the broad picture presented in this
study is clear. All three of the stakeholders have received a significant share of the rent, with the
government’s share of the rent being the smallest.
CONCLUSIONS
This article shows the estimated RR in Iceland’sfisheries and its distribution since 1997. The
methodology applied in was to assume that excess return on capital in fisheries compared with
other industries in Iceland was a good measure of the RR. The rent was divided among three ma-
jor stakeholders: the government, which received a share of the rent through higher corporate
taxes and the fishing fee; the quota sellers, who sold their fishing rights and received a share of
the rent; and, finally, companies still active in the industry that obtained their share of the rent
after the two other stakeholders received theirs. The findings are that substantial rent was pro-
duced. Since 2008, the rent has been significant, averaging 380 million USD per year, or around
17% of the export value of the industry. The rent distribution has been fairly even. A substantial
proportion (around 20%) was allocated to the Icelandic government. A significant portion has
accrued to quota sellers (around 40%). Finally, harvesters still active in the fishing industry re-
ceived a portion of rent similar to the quota sellers.
As the economics literature predicted, this article clearly shows that a quota system, especially
an ITQ system, ultimately leads to RR production in fisheries. The Icelandic government received
a significant portion of the RR produced in Icelandic fisheries. The fishing fee is a major contrib-
utor to this development. The fee is now an important part of the ITQ system and a clear indi-
cation of the profits in fisheries distributed to the public. Higher taxes are also a substantial and
overlooked part of the government’s share of the rent, as around 30% of the government’s share
of the RR was collected by higher taxes on profits. The quota sellers have not received all of the
RR, as some had predicted. Nevertheless, the windfall gains the quota sellers received when they
sold their fishing rights and cashed in their quotas are among the key aspects of a negative per-
ception of the ITQ system in Icelandic politics. This, however, is an almost unavoidable part of
ITQ management.
The results presented in this study have profound policy implications. The lessons learned
from Iceland are that ITQ management in well-governed fisheries will lead to RR creation. How-
ever, it took a long time (almost two decades) for the rent to appear. The most likely reason for the
long delay was the almost continual decline in fish catches from 1990 to 2008. The industry was
rationalizing during that time, but the rationalization only kept up with the reductions in land-
ings; therefore, no resource rent was produced. When catches started to increase, the rent ap-
peared. In addition, the rebuilding of the cod stock was a major contributor to the arrival of rent
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in Iceland’sfisheries. Thus, patience and long-term planning is needed. The rent should be taxed,
and the taxes and fees collected should at least cover the government’s cost of managing the fish-
ing resource. Iceland has chosen to tax the rent accruing to companies currently operating in the
industry—albeit moderately. The taxation is low because higher resource rent taxes could dis-
courage investments, lead to loss of employment, and reduce the competitiveness of the industry.
However, the quota sellers have not paid any form of RR taxation in Icelandic fisheries. In our
opinion, Iceland should have considered implementing this form of taxation. As quota sellers will
always receive a significant portion of RR in the fisheries, they should not be exempt from RR
taxation. Applying a special form of RR taxation specially aimed at quota sellers should normally
be considered when ITQ systems are introduced. This would lead to higher government revenue,
and, more importantly, wider political acceptance of ITQ systems.
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