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Resource Rent and its Distribution in Iceland’s Fisheries

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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 has gone 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.
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Resource Rent and its Distribution
in Icelands 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 sheries, 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 rst years; however, since
2008, rent has been signicant, averaging 380 million USD per year, which is around 17% of the export value
of the shing industry. Approximately 20% of the rent went to the public due to a special shing fee and
through corporate taxes. The remainder was evenly split between those who originally acquired their shing
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 shing industry, each receiving around 40% of the rent.
Key words: Resource rent, transitional gains trap, rent distribution, rent taxation, shing fee, ITQ, Icelandic sheries.
JEL Codes: Q22, Q28.
INTRODUCTION
For centuries, the shing industry in Iceland has played an important role in the nations 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 6070% and demersal species 2530%. Ice-
land is ranked among the worlds 20 major shing nations and among the 10 major demersal
shing nations (FAO 2017). Although the importance of the shing industry has declined con-
siderably with growth in the production and service sectors, seafood products still make up more
than 40% of the nations 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 sheries with individual transferable quota (ITQ) sys-
tems since 1990. Icelandssheries are, therefore, an excellent example to illustrate the develop-
ment in sheries 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
prots in sheries, as the implementation of ITQ management ends the race to sh and promotes
efciency (Annala 1996; Arnason 2012). Economic performance improves as shers 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 prots (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 efcient rms to more efcient 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 sheries under its auspices (Graf-
ton 1996b). RR is dened as the excess prot that arises when natural resources (e.g., diamonds,
gold, sh, 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,
prots. In most industries that do not depend on scarce natural resources, excess prot would
lead to current producers stepping up their level of production and new rms 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 dened as excess prot after all costs have been accounted for, including return
on capital, both borrowed and owned (Wessel 1967).
The allocation of shing rights when ITQ or quota systems have been introduced has most
commonly been based on historical participation in the shery (Shotton 2000; Anderson, Arnason,
and Libecap 2011). This grandfathering, or rst possession (Rose 1985; Lueck 1995), was the fa-
vored distribution mechanism when shing rights were granted in the Icelandic sheries. 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 sh-
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 shing industry as quota sellers.The amount
received from selling quotas represents the quota-sellersshare of the future RR created in the
sheries, because those transactions are mostly nanced by borrowing. They increase the debt
of the shing industry, and the borrowing cost represents a nancial 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 shery 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 protability, often re-
ferred to as RR, will take the form of capitalized shing rights, quotas, or intangible assets on
the balance sheet of rms 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, mostperhaps even allthe RR ITQ systems generate should accrue
to the quota sellers.
A few articles have explored rent in North Atlantic sheries, focusing on estimating potential
rent if sheries management was improved, quota systems introduced, and stocks rebuilt and uti-
lized efciently. Arnason et al. (2018) assessed the potential rent generation of the North Sea her-
ring (Clupea harengus)sheries, concluding that the RR could be substantial, but it is currently
squandered by excess shing effort, which, in combination with suboptimal stock size and inef-
fective shing effort, eliminates prots. Therefore, at present, the herring sheries produce no
RR. A Swedish study estimated that introducing individual vessel quotas (IVQs) in the cod
(Gadus morhua)sheries could, in combination with optimal utilization of the sh stock, result
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in a potential RR of 2530% of the catch value (Eggert and Tveterås 2007). Finally, the World
Banks well-known Sunken Billions report estimated that global losses in RR due to overexploi-
tation of sh stocks and overcapitalized shing eets amounted to 50 billion USD per year (The
World Bank 2009).
A number of studies has analyzed actual RR production in sheries. Andersen, Andersen, and
Frost (2010) estimated the RR generated in Danish sheries and concluded that the introduction
of ITQs into Danish sheries, 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 sheries after the introduction of ITQs due to exogenous factors, such as lower
catches and sh prices. Greaker, Grimsrud, and Lindholt (2017) estimated that the RR in Nor-
wegian sheries 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. Norwayssheries management is
complicated and mostly based on IVQs (Hannesson 2013). A new paper studying sheries man-
agement in the Northeast Atlantic pelagic sheries involving vessels from the Faroe Islands, Den-
mark, Norway, the United Kingdom, and Iceland, concluded that the sheries were very prot-
able and producing signicant RR (Nielsen et al. 2017). Those sheries 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 sheries. Flaaten, Heen, and Matthíasson (2017) stated
that RR in sheries 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 shing 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 sh. The government would receive part of the
RR through corporate taxes on prots and special RR taxes. A portion of the rent would go to
nancial institutions, as sellers of shing rights might deposit their nancial surpluses in these
institutions. Finally, shers 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 nancial institutions only provide a service that is not specicto
receivers of rents. Therefore, there is no reason to assume any additional benets to them from
managing rents. It has been argued that shers collect wages above their opportunity cost (Guillen
et al. 2015). In their paper, Grifn, 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
sheries management. Fishers in Iceland have historically been well paid and their wages are sig-
nicantly above the national average. (Flaaten, Heen, and Matthíasson 2017; Nielsen et al. 2018a).
However, the hours are long, the job is hard, and shers 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 shersshare of RR. There are usually no waiting lists for crew
membership on Icelandic vessels, which indicates that the wages are in accordance with the sh-
ersopportunity cost. Hence, this research assumes that the crewsshare 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 sheries, neither of which
addresses the issue of RR distribution. In their paper, Flaaten, Heen, and Matthíasson (2017) es-
timated that annual RR in Icelandic sheries between 2009 and 2013 amounted to between 331
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and 468 million USD per year, which was around 1319% of the export value of Icelandic sheries.
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 1019% of the export value of the shing industry (Gunnlaugsson and Agnarsson 2019).
In this article, the development of RR in Icelandssheries 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. Icelandssheries
are ideal when examining an ITQ-administered shing 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 sheries presented in this research, is of substantial signicance to all
interested in sheries 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 shing grounds (Hannesson 2004). Icelandic pelagic catches increased rapidly with the her-
ring (Clupea harengus)sheries 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 eet then
turned to capelin (Mallotus villosus) and demersal sheries (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 shmeal
factories have been scrapped since 2005 (Saevaldsson and Gunnlaugsson 2015).
Demersal catches around Iceland increased after WWII with a renovated eet 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 rst Icelandic stern trawlers began operating in 1970, when they replaced a former eet
of sidewinder trawlers. In 1975, there were 58 stern trawlers shing in the EEZ, but by 1985, this
number reached 100. Their shing 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 eets 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 shery 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 sheries during the previous year. When the nation gained con-
trol over Icelands 200-mile EEZ in 1976, serious concerns were raised that demersal stocks were
being overshed. From 1977 to 1983, effort limitations were in force. In 1983 effort limitations
were abolished, as shing effort and eet capacity had been rising while the number of days at
sea kept falling. Then, Icelands 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 shing vessels above 10 GRT in Icelandic waters in 1983 received shing licenses that
indicated their GRT. New licenses were not issued unless a vessel of similar size in GRT was
decommissioned. Restrictions controlling total eet 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 eet 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 shing
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 vessels
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
shing licenses (Nielsen et al. 2018b).
All participants in commercial shing in the Icelandic EEZ need a shing 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 edged. Since then, all
segments of the Icelandic eet 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 shing. The catch from vessels with hook-and-
line catch quotas is made up of demersal species. In recent shing 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 companys 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 rms from controlling all the shing 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 Icelandssheries is the shing 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 signicant expense for the shing 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 sheries.
The shing fee generated around 0.51.5% 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 prot and loss account and balance
sheet for the entire Icelandic shing industry. The data used in this study are an estimation of
the prot and loss account of shing and processing separately and the balance sheet of the entire
shing 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 ofcial 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 7090%) of rms operating in Icelandic sheries 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 shing rights was not presented for years prior to
1997. In addition, data from Statistics Iceland, which show the balance sheet and prot and loss
account of other industries, were used. They were compiled in a similar manner as the data on
sheries (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 nancial statements of most companies in Icelandssheries, were used to show the
corporate tax payment of the shing 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 rms operating in
Icelandssheries.
CAPITALIZED FISHING RIGHTS
Icelandic companies use international nancial reporting standards (IFRS) when compiling their
nancial statements. In accordance with IFRS principles, Icelandic shing businesses register the
value of shing 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 signicant 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 shing 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 Icelands reports, and almost all other assets are capitalized shing
rights. These estimates are used to assess the value of capitalized shing rights in Icelandic sh-
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 awless. 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 shing
industry. On the other hand, depreciation of shing rights was customary in the nancial 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 shing rights were normally depreciated over ve years (i.e., 20% per
year). From 1996 on, shing rights were depreciated over 1020 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 difcult and is
not attempted here. As a result, it is likely that the RR calculated in this article is, to some extent,
underestimatedespecially before 2005. This also leads to underestimation of the cumulative sum
of shing 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 sellersshare. This is because the depreciation of
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shing 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-sellersshare of the RR. However, it is likely that the depreciation of shing rights was
higher than the trading between companies that are still active in the industry. Therefore, the book
value of capitalized shing rights (used in this study) is probably an underestimation of the per-
manent quota share sold by the quota sellers; hence the quota-sellersRR share is possibly slightly
underestimated in this study.
1
Figure 2 (specically, the left axis) shows the development of estimated capitalized shing
rights (book value) from 1997 to 2017. No estimation of capitalized shing rights before that time
is available. The amounts are in USD and adjusted for ination. In addition, the right axis in g-
ure 2 shows the development of the book value of shing rights as a proportion of the total assets
of Icelandic sheries. 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 shing 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 shing rights inexpensive and easy (Gunnlaugsson and
Saevaldsson 2016). Therefore, many quota holders cashed in and sold their shing rights, becom-
ing quota sellers. The shing industry went through a reconstruction during this period and sh-
ing rights were rapidly consolidated (Agnarsson, Matthiasson, and Giry 2016). Since 2008, the
book value of capitalized shing rights has remained relatively stable. The development of the
book value of shing 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 shing
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 shing 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 shing 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 shing industry. In 1996, the 30 largest companies
had a combined share of around 54% of overall shing rights. In 2017, 16 of these 30 rms had exited the industry. Those
16 companies held 20% of the quotas. Therefore 37% (20/54) of the shing rights of the largest companies had been sold, and
the owners of those shing rights had exited the industry. Because a higher proportion of smaller rms exited the Icelandic sh-
ing industry, this strongly supports that the book value of capitalized shing rights is probably a conservative estimate of shing
rights that were traded permanently, and the quota sellersshare 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 sheries 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 difcult (Thébaud et al. 2014). Pure RR should not exist in open-access sheries re-
gimes; however, IMR should exist (Copes 1972). In this study, managed sheries 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 prot and loss accounts, as well as balance sheets from
1997 to 2017 for every company in the Icelandic shing 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 sheries to the return
of capital in other segments of the Icelandic economy (i.e., all companies except for nancial in-
stitutions, pharmaceuticals, and companies involved in sheries). Most companies in Iceland are
operating in competitive industries and should not have excess protably that comes from uti-
lizing a scarce natural resource, as the shing industry does. Therefore, excess ROC in sheries
(i.e., higher ROC than the weighted average of other industries in Iceland) is a good measure of
RR. ROC is dened 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 shing and
processing and revenue
from the leasing of
shing rights.
All income from shing and processing. Note that the
leasing of shing rights has no effect on EBIT,
because the lease payments constitute revenue for
one rm and an expense for another, cancelling
each other out for the whole industry.
Operating costs Insurance, raw material,
wages, fuel, gear, shing
fee, maintenance,
administration.
All costs except the shing 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 1shing 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 shing rights.
Taxes Corporate taxes Corporate taxes were excluded because they are simply
a transfer of RR from the industry to the government.
pProt Prot Estimated RR.
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equal to debts plus equity (equation (2)), this ratio shows how much prot the capital invested in
the business generates for both borrowed and own capital. A higher ratio shows more prot. 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 prot:
ROCtp
EBITt
Assetst
:(1)
This methodology (i.e., to assume that excess ROC in sheries 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 sheries is similar to that of other industries, and RR causes
a higher ROC in sheries.
2
The weighted average ROC of all companies in the Icelandic economy
(except for sheries, nancials, 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
sheries is available from 1997 (gure 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 sheries amounted to 6.4% during the years
1997 to 2017 with a standard deviation of 3.7%. ROC in sheries has, on average, been
higherbut at the same time more volatilethan 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 Icelandssheries. The base cost of capital was set 4.6% in
2. This methodology is based on the assumption that excess ROC in sheries 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 rms in the industries in question, and lowest in industries that were relatively capital intensive (Jiang and Koller
2016). The Icelandic shing industry has high barriers to entry. However, these barriers are caused by the ITQ system, as it is
necessary to buy expensive shing rights to enter the sheries. 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 shing industry is
relatively more capital intensive than the average of other industries in Iceland, mostly due to the capitalized shing rights, which
have amounted to 4043% of the total assets of the industry for the last decade. If the sheries were open access (and therefore with
no need to buy expensive quotas to enter the sheries), no shing rights would be capitalized. Therefore, it is likely that the amount
of necessary capital in Icelandsshers would be on par with the average of other industries. This leads us to conclude that the
higher ROC in Icelandssheries 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 sheries (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 sheries (e.g., Flaaten,
Heen, and Matthíasson2017; Nielsen et al. 2017), and it is also the same ratio that Statistics Iceland
applies when calculating protability 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 shing 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 sh, 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
prot in the processing portion at the cost of the shing component (Flaaten, Heen, and Mat-
thíasson 2017; Gunnlaugsson, Kristofersson, and Agnarsson 2018;Byrne, Agnarsson, and Davids-
dottir 2019). This is because shers in Iceland are paid wages proportionalto the value ofthe landed
catch. Their wages are usually approximately 3540% of the catch value. Therefore, earnings of
the vertically integrated companies increase if sh prices are lowered in intra-company trade as
sherswages 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 shing components of the Ice-
landic shing industry, instead of being conned to the harvesting component, as would be the
likely outcome if all the sh were sold on a fully competitive market. The path taken in this study
was to estimate the RR in both the shing and the processing components of the industry. Hence,
EBIT from shing and processing were used when calculating the RR and its distribution, as well
as all assets of the entire Icelandic shing 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 shing 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 shing fee is classied as a normal operating cost (e.g., wages, cost of shing 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 shing fee was added to the EBIT in this study when measuring RR.
An adjustment was also made to nancial cost. According to IFRS principles, costs in nancial
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 prot and loss account according to IFRS
principles (Florou and Kosi 2015). In addition, because the IFRS calculates nancial costs on all
debts, a signicant adjustment must be made when calculating the RR. Consequently, nancial
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costs resulting from any investments in shing rights (quotas) should be excluded, as they rep-
resent a nancial cost that goes indirectly to the quota sellers (Flaaten, Heen, and Matthíasson
2017). This research set the nancial cost at 4.6% every year, for all assets except for capitalized
quota holdings (shing rights), effectively setting a nancial 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 scal 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 shing 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 denition, assets (A) at time tequal debt (D) and equity (E) (equation (2)). Therefore, ap-
plying nancial 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 shing and processing plus the shing fee
(FF) minus ctimes the difference between the book value of total assets (A) of the whole shing
industry and the booked value of capitalized shing rights (V), (i.e., c(A-V)). The coefcient c
represents the cost of capital, both the cost of debt and the cost of equity:
AtpDt1Et:(2)
RRtpEBITt1FF tcA
tVt
ðÞ:(3)
RENT DISTRIBUTION
This study assumes that the RR produced in Icelandic sheries has beneted three stakeholders:
the government (RR
g
), the rms still active in the industry (RR
a
), and the quota sellers (RR
s
). To-
tal RR in time tmay then be dened as:
RRtpRRgt 1RRat 1RRst :(4)
As stated in equation (5), the government has accrued its share of the RR through shing fees (FF)
and excess corporate taxes (ET):
RRgt pFFt1ET t:(5)
The FF is RR tax paid by the shing component of the Icelandic shing industry for access to the
shing 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 shing resource. Estimating this
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proportion of total corporate taxes paid by the Icelandic shing industry is fraught with difcul-
ties, because in an open-access shery no RR is present. However, the industry would pay cor-
porate taxes even under an open-access regime without yielding any extraordinary prots. This
is because the better-run companies, with lower costs than the marginal companies, would make
a prot (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 prot
might pay corporate taxes levied on prots, because the opportunity cost of ownersequity is not
a base for cost when corporate taxes are levied. In this article, it was decided to dene excess
corporate taxesas taxes paid above a certain historical average. Figure 4 charts the payment
of corporate taxes in the Icelandic shing 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 sheries did not really start to produce any RR until 2008. The higher prots
of the industry are, however, not immediately transformed into a larger income tax base, as rms
often carry losses from previous years that may be deducted from current year prots and, thus,
decrease the base on which income tax is levied. Consequently, the improved nancial perfor-
mance of the shing industry since 2008 is not reected 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 shing industry.
3. The booked prot in quota trading was mostly taxed as corporate taxes levied on prots 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 nancial
bubble in Iceland and its crash, when the Icelandic stock market lost 95.4% of its value in 2008 to 2009. In the nancial 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 shing 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 insignicant, 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 rms still active is calculated as EBIT both in shing 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 shing fee, which lowers the EBIT. They pay the excess
corporate taxes and bear the full cost of all capital invested in the Icelandic shing industry:
RRat pEBITtcAtET 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 shing rms
still active in the industry (equation (7a)). As shown in equation (7b), the share of the quota sell-
ers can also be dened as the opportunity cost of capitalized shing rights:
RRst pRRtRRgt RRat :(7a)
RRst pcVt:(7b)
RESULTS
RESOURCE RENT ESTIMATION
Figure 5 illustrates the development of RR in Icelandic sheries from 1997 to 2017 as calculated
by using equation (3) and setting the cost of capital (c) at 4.6%. The gure 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 sh caught by Icelandic vessels is exported, the export value is a good measure of
revenue of the Icelandic shing industry. The gure reveals that the Icelandic sheries 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 signicant, averaging
380 million USD per year, which is around 17% of the export value.
It took the Icelandic shing industry almost two decades to rationalize under the ITQ system
and yield a signicant 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 Icelandssheries. The shing 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 Icelandssheries was the exchange rate. The Icelandic shing industry
benets 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 beneted the industry. Catches were also good at the time, landings started
to increase in 2009, and prices were relatively highespecially 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 protability of the Icelandic shing industry suffered.
RESOURCE RENT DISTRIBUTION
The estimated RR in the Icelandic sheries 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 ndings 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 rst period (i.e., from 1997 to 2003), RR amounted to only 0.1 billion USD. The governments
share was zero during that time, because there was no shing fee and excess corporate taxes were
paid by the shing 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%, reecting the fact that the indus-
try was experiencing only limited prots for most of the period, and even signicant 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 protability of the industry increased signicantly;
especially in the last two years of this period, and the total RR amounted to 1.2 billion USD.
The governments share was only 6% of the rent during this period, as the shing 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 protability. 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 ination) 0.1 1.2 2.7 4.0
Government share of RR 0% 6% 25% 19%
Quota-sellersshare of RR 225% 55% 25% 39%
Active-companiesshare 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 governments share was around 19%. Of the governments
share of the rent, around 69% came from the shing fee and 31% was excess corporate taxes (ET).
The quota sellers and the rms 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 industryslightly more than half. However, the
quota-sellersshare decreases and the governments 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 signicant, as it is estimated at 3.1 billion USD.
The share of those operating in the industry becomes smaller when the nancial 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 signicant RR has been produced in Ice-
landssheries. Changing the cost of capital does not have a substantial effect on the RR created,
as signicant RR was present even though the nancial cost was set at the highest, at 6.0%. The
sensitivity analysis also demonstrates that all three stakeholders received a signicant portion of
the RR. Almost certainly, the quota sellers and those operating in the industry received most of
the rent, and the governments share was slightly less than the share of either of the other two
stakeholders.
DISCUSSION
The ITQ system has managed Icelandssheries 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 signicant 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 ination) 4.0 4.4 3.6 3.1
Government share of RR 19% 17% 21% 24%
Quota sellersshare of RR 39% 31% 49% 66%
Active companiesshare 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 sh stocks have on
costs and, therefore, protability. The cod stock is a prime example of this. In 2000, the size of
its shable 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 (shers) 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 sh cost less to catch and process, because less
labor is needed per every kilogram. Therefore, better utilization of the shing stocks and the end
of overshing are important contributors to the emergence of RR in Icelandssheries. A similar
development has occurred in Icelands 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 Icelandssheries. 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 signicance. 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 signicant 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 shers went on strike for almost two months, which lowered protability,
the shing 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 sh-
ing fee) can receive all the RRand even more. History has shown that the Icelandic shing in-
dustry has been quick to adjust to negative developments. Therefore, unsatisfactory economic
performance results in further consolidation of shing rights, closure of shing 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 companiesshare 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 Icelandssheries.
Pinkerton and Edwards (2009) conducted extensive research on the Pacic halibut (Hippo-
glossus stenolepis)sheries in British Columbia (BC), Canada. Since 1999, a fully free ITQ system
has been used in the management of the local halibut shery. 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 sh for halibut on their own vessels or even to possess vessels at all. Therefore,
enterprises and individuals not participating in the shing industry now own most of the shing
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rights (quotas). Consequently, a signicant percentage of those vessels shing halibut now own
very little halibut quota, or even none. As a result, shing 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 15% of the revenues of those boats from which
the entire quota was leased, whereas this ratio was 1020% of revenues before the introduction of
the ITQ system. Thus, BCs halibut shery 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 shery 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 shers are members of a work-
ers union. Their wages are determined by a collective agreement whereby shers receive a xed
proportion of the catch value (around 35%, on average). Hence, the lease value cannot push down
shersshare of the catch value, as happened in the BC halibut shery. All of this has prevented
Icelandic sheries from developing in the way of the BC halibut shery. This is because almost all
Icelandic shers are well paid, and the current quota holders own vessels and are active partici-
pants in the shing industry.
Hannesson (2017) predicted that the return on capital in ITQ-managed sheries 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 signicant amount of the assets were capitalized shing
rights. As these costs are included in the capital base in the nancial accounts of rms operating
in the shing 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 Icelandssheries. Hence the so-called tran-
sitional gains traphas not become apparent in Icelandssheries, even after almost three decades
under an ITQ management regime, as active rms 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 shing in-
dustry was not protable and not producing RR. However, there was plenty of cheap credit ow-
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 protable, 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 protability of the shing industry im-
proved immensely. Therefore, it is possible that the size of the balance sheet (i.e., capitalized sh-
ing rights nanced by borrowing) has not yet adjusted to the improvement of the economic per-
formance of the Icelandic shing industry for the past decade. Nevertheless, it is unlikely that that
debt levels will become unsustainable and improbable that active rms in the Icelandic shing
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 Icelandssheries 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 sheries 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 articles 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 awless. The exact distribution of RR among these three stakeholders in Icelandic sheries is,
therefore, difcult or nearly impossible to assess. Nevertheless, the broad picture presented in this
study is clear. All three of the stakeholders have received a signicant share of the rent, with the
governments share of the rent being the smallest.
CONCLUSIONS
This article shows the estimated RR in Icelandssheries and its distribution since 1997. The
methodology applied in was to assume that excess return on capital in sheries 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 shing fee; the quota sellers, who sold their shing rights and received a share of
the rent; and, nally, companies still active in the industry that obtained their share of the rent
after the two other stakeholders received theirs. The ndings are that substantial rent was pro-
duced. Since 2008, the rent has been signicant, 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 signicant portion has
accrued to quota sellers (around 40%). Finally, harvesters still active in the shing 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 sheries. The Icelandic government received
a signicant portion of the RR produced in Icelandic sheries. The shing 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 prots in sheries distributed to the public. Higher taxes are also a substantial and
overlooked part of the governments share of the rent, as around 30% of the governments share
of the RR was collected by higher taxes on prots. 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 shing 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 sheries 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 sh 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
Distribution of Resource Rent in Icelands Fisheries |131
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in Icelandssheries. Thus, patience and long-term planning is needed. The rent should be taxed,
and the taxes and fees collected should at least cover the governments cost of managing the sh-
ing resource. Iceland has chosen to tax the rent accruing to companies currently operating in the
industryalbeit 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 sheries. In our
opinion, Iceland should have considered implementing this form of taxation. As quota sellers will
always receive a signicant portion of RR in the sheries, 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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... This development was considered negative by many Icelandic politicians, and a law was subsequently passed in 1998 introducing a quota ceiling. The maximum permanent quota share that individual companies may own is 12 % in cod-equivalent tonnes [39]. The quota ceiling has slowed consolidation in the industry during the last 20 years [35]. ...
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Small boat fishers are often the lifeblood of remote coastal communities in Iceland, contributing to employment, jobs and economic prosperity. This study conducts exploratory but highly practical research into the productive efficiency of onboard catch handling practices by Icelandic small boat fishers using fish handling tools called automatic jigging machines. Using applied research methods, this study researches whether standardisation of operations could be applied to make catch handling practices on small boats more time and resource efficient, leading to reduced waste, a consistently higher quality product, and potential increases in economic efficiency and sustainability. Thematic analysis, value stream mapping, flow analysis and Kaizen ideology were adopted to identify gaps and continuous improvement opportunities to standardise processes, leading to exemplary performance. Eight core recommendations are identified, seven of which are classed as straightforward , 'do now' measures according to a Kaizen Priority Matrix. These include human and technological interventions in the areas of safety, organisational arrangements, hygiene, fish handling and bleeding, and cooling. Questionnaire responses reveal four main themes of importance to the sub-sector: changes in recent decades; the importance of small boat fishers; education and improvement; and the particularities of the sub-industry. The latter include the perception of a 'race against time' to land the catch, an issue that sometimes contributes to sub-optimal catch handling practices. Although this study has decidedly practical connotations for small boat fishers, its outcomes are also likely to be of interest to academics, particularly those focused on the organisational management of natural resources and general applications of the project management methodology and applied research methods as a means of solving practical problems in everyday life.
... Iceland is one of the largest fishing nations in the world, with annual average catches of about 1.4 million tonnes during the last two decades, and is classified as one of the world's leading demersal fishing nations (FAO, 2017). It is also well managed, with a conservative harvest rule and an effective management system (Elvarsson et al., 2020;Gunnlaugsson et al., 2020). In this research a theoretical model is developed that describes the production of a wanted good, in this case fish, which also leads to the production of an unwanted good, GHG emissions. ...
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Fishing produces low CO 2 emissions per unit output compared to other animal protein sources. However, emissions from fishing grew by 28% from 1990 to 2011 and fishing currently contributes about 4% of the emissions of world food production. The purpose of this paper is to identify the relationship between various factors and emissions in fisheries. We analyze the development of CO 2 emissions from the Icelandic individual transferable quota (ITQ) regulated fishing fleet from 1997 to 2018. The results show that emissions per unit of catch fell around 40% during this period. The main findings are that overall catches and abundance are by far the most important factors determining emissions, the bigger the catches and the greater the abundance, the smaller the emissions per unit of output. Fuel prices are a distant third factor and technological change has played a minor role in this development. In addition, the importance of different factors affecting emissions, varies between vessels depending on types of fishing gear. The results indicate that building up fish stocks not only increases output but also increases profitability and reduces emissions per unit of output, as long as the fisheries management system preserves incentives for efficient fishing.
... Iceland is one of the largest fishing nations in the world, with annual average catches of about 1.4 million tonnes during the last two decades, and is classified as one of the world's leading demersal fishing nations (FAO, 2017). It is also well managed, with a conservative harvest rule and an effective management system (Elvarsson et al., 2020;Gunnlaugsson et al., 2020). In this research, a theoretical model is developed that describes the production of a wanted good, in this case fish, which also leads to the production of an unwanted good, GHG emissions. ...
Article
Fishing produces low CO2 emissions per unit output compared to other animal protein sources. However, emissions from fishing grew by 28% from 1990 to 2011 and fishing currently contributes about 4% of the emissions of world food production. The purpose of this paper is to identify the relationship between various factors and emissions in fisheries. We analyse the development of CO2 emissions from the Icelandic individual transferable quota regulated fishing fleet from 1997 to 2018. The results show that emissions per unit of catch fell around 40% during this period. The main findings are that overall catches and abundance are by far the most important factors determining emissions, the bigger the catches and the greater the abundance, the smaller the emissions per unit of output. Fuel prices are a distant third factor and technological change has played a minor role in this development. In addition, the importance of different factors affecting emissions, varies between vessels depending on types of fishing gear. The results indicate that building up fish stocks not only increases output but also increases profitability and reduces emissions per unit of output, as long as the fisheries management system preserves incentives for efficient fishing.
... The fishing industry is one of the most important sectors in Iceland, constituting the nation's largest source of export revenue (more than 40%) until 2015, when the sector was surpassed in significance by tourism [1]. Annual average caches over the past 30 years, the era since the introduction of Individual Transferable Quotas, have been around Preprints (www.preprints.org) ...
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Small boat fishers are often the lifeblood of remote coastal communities in Iceland, contributing to employment, jobs and economic prosperity. This study conducts exploratory but highly practical research into the efficiency of onboard catch handling practices by Icelandic small boat fishers using fish handling tools called automatic jigging machines. Using applied research methods, this study researches whether standardisation of operations could be applied to make catch handling practices on small boats more time and resource efficient, leading to reduced waste, a consistently higher quality product, and potential increases in economic efficiency and sustainability. Thematic analysis, value stream mapping, flow analysis and Kaizen ideology were adopted to identify gaps and continuous improvement opportunities to standardise processes, leading to exemplary performance. Eight core recommendations are identified, seven of which are classed as straight-forward, ‘do now’ measures according to a Kaizen Priority Matrix. These include human and technological interventions in the areas of safety, organisational arrangements, hygiene, fish handling and bleeding, and cooling. Questionnaire responses reveal four main themes of importance to the sub-sector: changes in recent decades; the importance of small boat fishers; education and improvement; and the particularities of the sub-industry. The latter include the perception of a ‘race against time’ to land the catch, an issue that sometimes contributes to sub-optimal catch handling practices. Although this study has decidedly practical connotations for small boat fishers, its outcomes are also likely to be of interest to academics, particularly those focused on the organisational management of natural resources and general applications of the project management methodology and applied research methods as a means of solving practical problems in everyday life.
... Buying a quota is necessary to enter fisheries managed by ITQs. For a young person without significant capital, competing on the quota market with the largest fishing companies in Iceland is difficult Gunnlaugsson et al., 2020). Consequently, it is hard for recruits to enter the fishing industry, as buying a vessel, and especially the needed quota, is challenging and too expensive . ...
Article
Iceland adopted a derby fishery strategy throughout its coastal fisheries, which opened for all vessels in 2009. For simplicity, this paper refers to these fisheries as coastal fisheries (strandvei ar), in which small vessels mostly catch cod (Gadus morhua) during the summer. This article describes the coastal fisheries and compares their results to those of other fisheries in Iceland, all of which are managed by an individual transferable quota (ITQ) system. The profitability and the rate of accidents are examined. According to observations of numerous fisheries around the world, the coastal fisheries are assumed to be much less profitable than other fisheries in Iceland—indeed, nonprofitable—because of the derby nature of the fisheries. The findings of this study validate this assumption: the coastal fisheries have been on average generating losses, while other fisheries in Iceland have been profitable. Moreover, it was hypothesized that the derby management system of the coastal fisheries might lead to the rate of accidents in the coastal fisheries being higher than others in Iceland because of incentives generated by the race to fish, which could result in coastal fishers disregarding safety. The findings did not support this; accidents in which a person was injured were uncommon in the coastal fisheries and were relatively less frequent than in other fisheries. However, reported incidents without personal injuries, which were mostly caused by mechanical failures, occurred comparatively more often in the coastal fisheries than in other Icelandic fisheries.
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Fishery resources face a depletion crisis due to accelerated international trade. Therefore, some countries have introduced local individual transferable quotas (ITQs). However, even if the government in a home country adequately manages fishery resources, fishers in a foreign country may overcatch fish because they can obtain allocation rent for the ITQ. If the home country actively imports marine products from foreign countries with allocation rent, the depletion of fishery resources could further accelerate. This leads to international political conflicts over fishery resource management. To address this problem, this study investigates the effect of quotas on welfare using a two-country model with a renewable resource as the fishery resource. The model considers a local ITQ market with rent seeking for the quotas. Opening up trade improves welfare in the foreign country, while the welfare effect in the home country depends on the degree of foreign rent-seeking activities. Under an international economy, welfare in the foreign country may increase by sufficiently decreasing resource firms' rent seeking via increased foreign quota levels. However, the policy decreases welfare in the home country because the total income falls due to a decrease in the domestic quota price. Therefore, the competition for increasing ITQs between governments may deplete fishery resources. This study thus suggests that a cooperative marine policy between governments is important for the international management of fishery resources.
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Fishery policies are broadly debated in the Nordic countries, focusing on balancing biological concern of fish stocks, economic return to society and coastal communities’ interests. Market Based Fisheries Management is used in several Nordic countries today and is the core of these debates. While it by many is considered a powerful tool that works towards ensuring improved economy of fisheries, it is also considered a controversial tool. This report “Structural Adjustment and Regulation of Nordic Fisheries until 2025” document the effects of Marked Based Management of selected Nordic fisheries, forecast the structural development of these until 2025 under the current alternative fishery management. Nordic lessons on Market Based Fisheries Management are also provided as a basis for the political debate on the future of Nordic Fisheries.
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The large gap between observed profitability and estimated potential efficiency of the ITQ-based Icelandic harvesting sector begs the question – how much is due to rent dissipation and how much to transfers? This paper examines the contribution of rent transfers from vessel owners to other stakeholders, focusing on processors, fishermen and the government, and finds evidence of substantial transfers, particularly to the first two groups. The mechanisms underlying these transfers are shown to involve internal transfer prices of fish within integrated harvester-processors and fishermen crew shares, both of which are centrally negotiated by vessel owner and fishermen organisations. A speculative model is proposed whereby the security of grandfathered quota property rights is undermined by public pressure to tax visible resource rent. Vessel owners alleviate this pressure by shifting profits downstream to vertically integrated processing facilities, in cooperation with fishermen unions.f
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The development of resource rent in Icelandic fisheries has been charted since the introduction of the individual transferable quota system in 1990. An estimation of the rent capture of the fishing fee, which is a form of resource rent taxation, is also presented. Two methods were applied to calculate the resource rent. One method is based on the weighted average cost of capital of the Icelandic fishing industry, and the other method involves comparing the return of the capital of fisheries to the general aggregate Icelandic economy. The findings indicate no presence of the resource rent in Icelandic fishing and processing until 2008. Since that time, the rent has been, on average, 16–19% of the export value of the fishing industry, depending on the methods that were applied. The most obvious reason for the long delay before the rent appeared is the almost continual decline of fish catches from 1990–2008. The industry was rationalized during that time, but the rationalization kept up only with the reductions in landings; thus, no resource rent was produced. The rent appeared when the catches started to increase in 2009. In addition, the exchange rate and the weakening of the Icelandic krona were major contributors to the emergence of rent after 2008. The fishing fee captured approximately 13–15% of the calculated rent from 2009. The fee has been relatively modest but was significant in 2016, when it was increased and set at approximately 26–29% of the estimated resource rent of Icelandic fisheries.
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This paper assesses the potential for rent generation in the North Sea herring fishery. The assessment distinguishes between rents and intra-marginal profits-the sum of which constitutes variable profits in the fishery. A bioeconomic model combining fish population dynamics and the economics of the fishery is constructed to allow the computation of these different components of profits. In order to assess the dynamics of both rents and intra-marginal profits, the model is computed under various assumptions with regard to price, costs, and discount rates. Potential total profits are measured at £88 to £89 million annually, of which rents make up about £87 million with intra-marginal profits measured in the order of only £2 million. The study further shows that, in this fishery, rent is dissipated mainly due to excess effort but also due to suboptimal stock size.
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In 1990, Iceland established a comprehensive fisheries management system based on individual transferable quotas (ITQs). Simultaneously, low-cost licence fees, which the fishing industry paid to the government, were introduced. As the ITQ system became more mature and the financial performance of the fisheries improved, there was increasing public demand for the sharing of its resource rent. A special resource committee was set up in 1998 to address these views and concluded that a new fishing fee should be established to cover the cost associated with managing and supervising the use of marine resources, as well as making certain that a visible share of the resource rent accrued to the public. Although the fishing fee has changed since its introduction in 2004, the basic principles behind the taxation remain the same. Five issues have made the introduction and implementation of the fishing fees difficult. The first regards the fee amount for different species. The second relates to the variance in profitability between harvesting companies. The third concerns measurement of revenue and profits from harvesting in vertically integrated firms. The fourth issue is related to how to deal with the debt burden that became quite large for many Icelandic harvesting firms after the financial crisis of 2008. Finally, obtaining reliable data has been a major challenge. This paper provides a background to the implementation of the Icelandic fishing fee, describes and investigates fishing fees issues and their address by the government. In 2014, the fee amounted to 52 million euros, 6.0% of the catch value of Icelandic fishing vessels and around 1.2% of the total revenue of the Icelandic Treasury.
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Fishers are often perceived to be poor, and low income levels are used to justify subsidies and other types of direct and indirect income support to maintain coastal communities. In this study fishers’ income levels are investigated in four Nordic countries; Denmark, Iceland, Norway and Sweden for different types of fishers and vessels and in comparison to alternative occupations. The most important result is that fishers in these countries are doing relatively well, and only in Sweden is the fishers’ average income level below the average national income. Within the fleets, there are substantial differences. Owners of coastal vessels tend to have the lowest income, and also lower than crews. Owners as well as crews on larger vessels tend to do much better and in the largest fishing nations, Iceland and Norway, they do especially well.
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Individual Transferable Quotas stand in large parts of the fisheries economic literature as the panacea that solves all problems of overfishing and overcapacity of world´s fisheries. However, they are also criticized by a number of authors based on their negative social effects. Individual Transferable Quotas have been increasingly used during the past decades and are the main management system in a number of countries today. This paper provides evidence of the economic, social and environmental effects of one such system ten years after its introduction in Danish fisheries starting in 2003 with herring and being fully implemented from 2007. It is found that together with an important reduction in the fleet size, economic profitability improved. The direct contribution to GDP from the fleet in terms of economic return increased and indirectly through the capital and labour released from the fisheries sector, which have been absorbed by other sectors. Full-time employment has been reduced by 68% with fishermen salary largely unchanged, which might have affected the social cohesion in the local fishing communities negatively. However, no significant difference in the evolution of unemployment in local fishing communities compared to the national average was found. The Danish experience proves that Individual Transferable Quotas can be an adequate solution with regards to overfishing and overcapacity with also positive effects on the environment due to reduced fuel consumption and fishing activity. The social effects are ambiguous seeing that fisheries employment decreases; however, unemployment rates in the affected communities are below the national average.
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Individual transferrable quotas (ITQs) are used in Norway's fisheries, but only partly and with restrictions on transferability. This paper examines how this has affected return on capital. The return on boat capital in three of four fisheries examined has increased since ITQs were introduced. A part of this increase is due to an increase in value of fish landings, but accounting for that still leaves room for increases due to ITQs. Return on total capital (including quota value) has either stagnated or fallen. This is consistent with the rate of return in ITQ fisheries being comparable with other industries in the long run. © 2017 by the Board of Regents of the University of Wisconsin System.