Capacity and compliance in quota regulated industries

Production quotas can restore efficiency in industries characterized by production externalities, such as resource industries and industries with environmental regulations. However, with imperfect quota enforcement, firms may have incentives to build up excess capacity relative to their quotas. Firms with more excess capacity may, in turn, have stronger incentives to violate quotas. We consider regulation with non-transferable and transferable quotas and investigate the relationship between enforcement, compliance and capital levels in the short and long run. In the short run, excess capacity leads to increased illegal production but a well-functioning quota market may alleviate the problem. In the long run, the possibility to exceed quotas gives firms incentives to build up excess capacity relative to their quotas. Furthermore, we show that the tougher the enforcement, the lower the firms’ production capacity. With non-transferable quotas, only violating firms are affected by tougher enforcement. When quotas are transferable, however, tougher enforcement causes violating firms to demand more quotas, which yields an increase in the quota price that effects all firms. The higher the quota price, the lower the production level. Hence, with tradable quotas, the quota price strengthens the effect of tougher (or weaker) enforcement. At the aggregate level, our results have strong policy implications because production quotas do not fully internalize the production externality when enforcement is imperfect. In such situations, additional management instruments are required to correct the firms’ incentives to build up excess capacity, which exacerbates the non-compliance problem

The Role of Capacity Regulations in Compliance

Production quotas can restore efficiency in industries characterized by production externalities, such as resource industries and industries with environmental regulations. However, with imperfect quota enforcement, firms may have incentives to build up excess capacity relative to their quotas. Firms with excess capacity may, in turn, have stronger incentives to violate quotas. We investigate the relationship between enforcement, compliance and capital levels in the short and long run. In the short run, excess capacity leads to increased illegal production but a well-functioning quota market may alleviate the problem. Furthermore, we show that the tougher the enforcement, the lower the firms' production capacity. With tradable quotas, the quota price strengthens the effect of tougher (or weaker) enforcement. At the aggregate level production quotas do not fully internalize the production externality when enforcement is imperfect. In such situations, additional management instruments are required to correct the firms' incentives to build up excess capacity, which exacerbate the non-compliance problem.Keywords: Compliance, Enforcement, and the Lack Thereof Part I, Fisheries Management, Fisheries Economic

Capacity and Non-Compliance in A Quota Regulated Fishery

Two of the main problems in fisheries management are over-fishing and over-capacity driven by the production externality inherent in common property resource use. Quotas have been introduced to cap total catches, and regulations such as input restrictions and limited entry have been used to reduce the capacity problem. Economists generally agree that to ensure efficiency, quotas should be individual and transferable. Individual quotas remove the incentive to race to fish and thereby the incentive to build up or maintain excess capacity, while transferability ensures efficiency since the more efficient agents in the industry can buy quotas from less efficient agents. However, when firms have the opportunity to exceed their quotas (at the risk of being detected and punished) and enforcement is imperfect, it is not necessarily the case that efficiency can be achieved by use of individual transferable quotas. The production externality is only dealt with imperfectly. With imperfect enforcement of quotas, firms may have incentives to build up excess capacity relative to what is needed to produce the quantities specified by their quotas. Furthermore, firms with more excess capacity may have stronger incentives to violate quotas. In this paper, we investigate these links between production capacity, quotas and illegal fishing. We start out by theoretically analyzing the relationship between production capacity and illegal fishing. We show that excess capacity leads to increased illegal fishing, and that the possibility to exceed quotas (imperfect enforcement) gives firms incentives to build up excess capacity relative to what is needed to produce the quantity specified by their quotas. We then provide an empirical analysis of the relationship between illegal fishing and fishing capacity using data on the Norwegian cod fishery. The implications are that unless quotas can be enforced perfectly, additional management instruments are required to deal with the incentives to build excess capacity, which in turn exacerbates the problem of illegal fishing

Past and Future Management of A Collapsed Fishery: the Anchovy in the Bay of Biscay

In this paper, we analyze the efficiency of the existing management regime of the Bay of Biscay anchovy fishery, which has been closed since 2005 due to stock collapse. We also study Pareto improving strategies to improve management of the fishery once the moratorium is lifted, expected for spring 2011. The fishing rights are shared between France and Spain. The main different between the fleets is in terms of the harvesting technologies. The existing international agreement establishes the timing of fishing activities and the shares of the stock for each country. The optimality of this agreement is first analytically analyzed using a sequential game framework. Second, the model is calibrated using data from 1987 to 2004, the period between the current agreement was introduced and the fishery was closed down. Our results suggest that the existing international agreement is suboptimal. Several alternative management regimes are suggested and analyzed. The first alternative is to allow for changes and improvements in the technology of the fleets. Second, the creation of a market to rent or sell quota across national borders. Both alternative management regimes are shown to be Pareto improving.Keywords: Fisheries Economics, Modeling and Economic Theory, Fisheries Modelin

K nearest neighbor equality: giving equal chance to all existing classes

The nearest neighbor classification method assigns an unclassified point to the class of the nearest case of a set of previously classified points. This rule is independent of the underlying joint distribution of the sample points and their classifications. An extension to this approach is the k-NN method, in which the classification of the unclassified point is made by following a voting criteria within the k nearest points. The method we present here extends the k-NN idea, searching in each class for the k nearest points to the unclassified point, and classifying it in the class which minimizes the mean distance between the unclassified point and the k nearest points within each class. As all classes can take part in the final selection process, we have called the new approach k Nearest Neighbor Equality (k-NNE). Experimental results we obtained empirically show the suitability of the k-NNE algorithm, and its effectiveness suggests that it could be added to the current list of distance based classifiers.This work has been supported by the Basque Country University and by the Basque Government under the research team grant program

Do Fossil fuel Taxes Promote Innovation in Renewable Electricity Generation?

We evaluate the role of a fossil fuel tax and research subsidy in directing innovation from fossil fuel toward renewable energy technologies in the electricity sector. Using a global firm-level electricity patent database from 1978 to 2011, we find that the impact of fossil fuel taxes on renewable energy innovation varies with the type of fossil fuel. Specifically, a tax on coal reduces innovation in both fossil fuel and renewable energy technologies while a tax on natural gas has no statistically significant impact on renewable energy innovation. The reason is that easily dispatchable energy sources like coal-fired power plants need to complement renewable energy technologies in the grid because renewables generate electricity intermittently. Our results suggest that a tax on natural gas, combined with research subsidies for renewable energy, may effectively shift innovation in the electricity sector towards renewable energy. In contrast, coal taxation or a carbon tax that increases coal prices has unintended negative consequences for renewable energy innovation

Quota Enforcement and Capital Investment in Natural Resource Industries

We investigate the relationship between quota enforcement, compliance, and capital accumulation in ITQ regulated fisheries. Over-extraction and over-capacity represent two of the main fisheries management challenges, and we aim to model and analyze the two jointly. In a stylized resource model, quota violating and complying firms invest in capital, buy quotas, and choose their harvest. We show that in the short run, more capacity increases illegal extraction, while a well-functioning quota market partially alleviates this effect. We also show how tougher enforcement yields a double benefit by directly improving compliance, and by indirectly reducing incentives to invest in capacity, which improves future compliance. Our analysis thus contributes to the literature on market-based management of renewable resources

From Fossil Fuels to Renewables: The Role of Electricity Storage.

We analyze the role of electricity storage for technological innovations in electricity generation. We propose a directed technological change model of the electricity sector, where innovative firms develop better electricity storage solutions, which affect not only the relative competitiveness between renewable and nonrenewable electricity sources but also the ease with which they can be substituted. Using a global firm-level data set of electricity patents from 1963 to 2011, we empirically analyze the determinants of innovation in electricity generation, and the role of storage in directing innovation. Our results show that electricity storage increases innovation not only in renewables but also in conventional technologies. This implies that efforts to increase innovation in storage can benefit conventional, fossil fuel-fired electricity plants as well as increasing the use of renewable electricity

Adaptation to Climate Change: How does Heterogeneity in Adaptation Costs Affect Climate Coalitions?

Nous examinons comment l'adaptation au changement climatique influence les incitations à ratifier les accords internationaux environnementaux. En particulier, nous nous intéressons à deux effets liés à l'adaptation sur les incitations à approuver les accords climatiques. Tout d'abord, nous examinons les effets de l'hétérogénéité des coûts d'adaptation à travers les pays. Deuxièmement, nous étudions le rôle du « leakage » entre pays. Nos résultats indiquent que les incitations à ratifier restent inchangées même en présence de l'hétérogénéité dans les coûts d'adaptation quand il n'y a pas de « leakage ». Cependant, l'hétérogénéité entre pays peut accroitre les incitations à ratifier ces accords en présence du « leakage ». Nos résultats soulignent que les politiques visant à réduire la différence des coûts d'adaptation et le « leakage » peuvent influencer le succès ou l'échec des accords internationaux environnementaux.We examine how adaptation to climate change affects the incentives to ratify international environmental agreements (IEAs). In particular, we study the effects of two aspects on the incentives to join a coalition. First, we analyze cross-country differences in adaptation costs. Second, we investigate the role of carbon leakage. Wefind that the incentives to join IEAs remain unchanged with cross-country differences in adaptation when there is no carbon leakage, while these cross-country differences may strengthen the incentives to join IEAs with leakages. Our results emphasize that policies directed at reducing cost differences and carbon leakage may also affect the success and failure of IEAs