Economics of the Oceans

Rights, Rents and Resources

Paul Hallwood

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781136186271
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

It is an unfortunate truth that our oceans offer valuable resources that are too often used unsustainably. Time and again this is due to the failure of international law to provide a framework for adequate governance. Economics of the Oceans examines this issue and provides a comprehensive study of ocean uses from the perspectives of law and economics.

Themes covered in the book include ocean governance, the economics of oceanic resource exploitation, offshore oil, coral reefs, shipwrecks and maritime piracy. Analytical techniques such as basic game theory, environmental economics of the commons and cost-benefit analysis are employed to illuminate the topics.

This book will be of interest to students of environmental economics, natural resource economics and management, and the economics of international law as relating to the oceans.

Part I
Introduction

1
Ocean Resources, Ocean Governance

1 Resources

2 Regulating use of the oceans

3 Ocean governance

4 What is “international public law”?

5 The chapters

Economics of the Oceans: Rights, rents and resources studies the economic uses of ocean resources, rights to exploit them, and the division of surpluses (or economic rents) between the users and the “owners” of ocean space. But who owns the oceans? The answer is that within agreed exclusive economic zones coastal states have sovereign rights where national laws apply; beyond, lies the two-thirds of the oceans called the “high seas”, where loose and often ineffective international public law applies.

Until the end of the Second World War the oceans were tabula rasa. What international law did exist – for example, over the width of the territorial sea, freedom to fish, and freedom of navigation – was customary international law, itself a voluntary regime that independent countries could choose to obey or not. Much of this book is about the need for and progress of attempts to bring ocean resources under effective international law that promotes the rational economic use of ocean resources. As we will see, this progress is limited.

Economic theory is used to assess existing regimes governing the use of these resources. Two broad questions are investigated: are existing governance regimes economically rational in making best use of ocean resources? And, how are economic rents – approximately the profits – distributed between producers such as the fishing industry or offshore oil companies on the one side, and the sovereign owners of the submerged lands on the other?

In this book simple game theory is used to analyze governance regime formation and operation.¹ Environmental economics is used to analyze issues arising from the oceans as a commons. Theories of industrial organization are used in the analysis of some ocean industries; a “law and economics” framework is used to analyze laws governing the recovery of economic values from historic shipwrecks. Benefit–cost analysis is used in the analysis of issues such as the drawing of marine boundaries (“lines in the sea”) and the formation of joint development zones. Theories drawn from auction theory will be used in the analysis of offshore lease block sales and economic rent sharing. Standard fisheries economics is used to analyze fisheries regimes, and spatial economics is applied to assess the design of marine protected areas. Policing the oceans against maritime pirates is discussed in a public goods framework in which free riding and under-enforcement is a problem.

1 Resources

Ocean resources are diverse. There are economically and ecologically valuable fisheries as well as marine mammals (whales, seals, dolphins and walrus) and sea birds. Coastal and estuarine wetlands are vital as fish hatcheries. Offshore oil deposits are at the present time the most valuable ocean resource measured by dollar value of annual production. Some other mineral resources are polymetallic nodules widely scattered across the bed of the oceans. Wind farms for the generation of electricity are often situated on the continental shelf. Of course, the surface of the ocean is used by shipping. As in some places pirates attack ships, international cooperation against piracy at sea has been organized. The ocean beds also carry submarine cables and pipelines that are also organized under legal rules. Of special interest are historic shipwrecks, often surprisingly well-preserved “time capsules” of history. Then there is the matter of the use of the oceans as a dump for pollution – by ship and from land by point sources such as sewerage plants, and non-point sources such as agricultural nitrogen run off.

2 Regulating use of the oceans

Overuse of ocean resources – especially over-fishing, the hunting of marine mammals, and pollution – is at the forefront of concerns for managing the global commons for sustainability and the long-run benefit of mankind.

A first step in the management of ocean resources was the enclosure of the oceans, which in modern times began with President Truman claiming the USA’s continental shelf and water column above it for the exclusive use of the USA. This set off a wave in the 1950s and later years of other coastal nations making claims to their own continental shelves. These claims were formalized in the Law of the Sea, which was ratified and came into force in 1994. Today, about one-third of the oceans are “nationalized”, being contained in exclusive economic zones (EEZs). The other two-thirds are “high seas”, but the most valuable ocean resources – fish and minerals – are today included in the EEZs (deep-sea polymetallic nodules are an exception) and are at least open to management under national jurisdiction. Management of high seas resources has to be through international agreement.

Management institutions include marine parks (or “marine protected areas”) often centered over coral reefs and other high biological value ocean substrata. There is quite well-developed international regulation of pollution from ships on the high seas. Some countries have well-developed effective systems of fisheries regulation in their own waters. The USA largely does not, and is flirting with destroying some of its fisheries; similarly, with the European Union, where 88 percent of fish stocks are over-fished, fishing quotas are often ignored, and fishing fleets are far too large, operating only with government subsidies.² International management of fisheries on the high seas exists, but is largely ineffective due to problems with fishing by non-signatories, non-agreement to critical treaty clauses by some signatories, and wastefully large fish by-catches – fish caught but thrown back, usually dead.

While effective management of ocean resources aimed at sustainability is desirable, development of effective management institutions is proving to be difficult. A major problem is that restricting use imposes costs on some people while creating benefits for others. This is the issue of dividing economic rents. If there are to be fewer fishermen some will have to leave the industry, while those that stay on will benefit as fish stocks recover. Moreover, even if agreement within a fishery can be reached there is also the issue of sharing benefits between fishers and governments – the effective owners of submerged lands within the EEZs. Should, for example, the right to access a fishery be paid for, as is the case with access to offshore oil exploration? On the high seas, agreement over exploitation of living ocean resources is proving just as hard to reach; national self-interest in sharing the oceans’ bounty is to the fore.

Another problem is impatience – if only fishing effort was to be reduced for just a few years many fish stocks would recover, but fishers are just too impatient to wait for what would be easier fishing days from recovered fish stocks.

As it is, worldwide over exploitation of fisheries is rife, with, on best estimates, for prime fish stocks such as cod and tuna, the oceans today supporting stocks of only 10 percent or less of what they supported shortly after World War II.

3 Ocean governance

There are four different high seas governance regimes – all of them examples of international public law:

1. Freedom of the high seas – res communis (something that belongs to a group of people and cannot be preempted by anyone) – effectively open access for navigation and fishing. This is customary international law – discussed in Section 4. The source of this is usually stated by legal scholars, such as Hugo Grotius in his book The Freedom of the High Seas (1604). He is taken as asserting that the high seas could not be occupied and that marine resources could not be exhausted.³ However, from the early nineteenth century res communis became qualified by specific international arrangements. The British banned the trans-Atlantic slave trade in 1807, so interfering with navigation, and was supported in this by Portugal and Spain. The International Convention for the Protection of Submarine Cables (1884) adopted the law of first possession of the sea bed, providing for both civil and criminal penalties; and the Fur Seal Arbitration of 1893 was based on “reasonable use” of marine resources.
2. Enclosure of ocean space by coastal states – as far out as 200 miles, or the width of the continental shelf to 350 miles. This allows coastal state governance in their exclusive economic zones (EEZs). Here they have sovereign rights. Enclosure has narrowed the geographic scope of the high seas for legal purposes, but international disputes over exactly where the “lines in the sea” should be drawn arise from time to time – for example in 2013 in the East China Sea between China and Japan over the islands known as Diaoyu in China and Senkakun in Japan.
3. Management of the high seas under the common heritage of mankind doctrine, whereby governance is through an international organization such as the United Nations and benefits are shared between countries. Prior to the signing of the United Nations Convention on the Law of the Sea in 1982, many developing countries and landlocked countries favored the common heritage concept, as it was thought to allow them larger shares of the oceans’ bounty. However, this regime exists for only one high seas resource – polymetallic nodules under the 1994 Agreement Relating to the Implementation of Part XI of UNCLOS – see Chapter 23.
4. Governance in the “common interest of the international community” (Vicuna, 1999, p. 10) – a concept that incorporates the idea of “regulated high seas freedoms” and “reasonable use”. Common interest trumps individual interest. At issue is how to implement governance in the name of “common interest” when there are so many cross-currents. Countries often have different ideas of what constitutes the common interest: should the objective be maximum sustainable yield from existing but depleted fish stocks, or should the objective be to allow fish stocks to re-attain those historical levels? Should the “common interest” be defined in terms of fisheries management or more broadly as environmental or ecosystem management? Reaching agreement is difficult when potential solutions create losers (e.g. countries that must restrain their fishing or whaling efforts) as well as winners, and also when impatience is a problem. Agreements may not be reached if policing of high seas is too costly. And international agreements may be ineffective if they run counter to national laws.⁴

4 What is “international public law”?

Any governance arrangement for managing ocean resources has to be set in a legal framework. What is the nature of this arrangement as it now stands in international public law?

By definition, international public law (IPL) governs legal relationships between states and it is created by states. There are two main forms of IPL: customary and treaty. Customary international law is “standard practice” between states and is not written down so as to bear signatures. Treaty law is written down and countries choose whether to sign and ratify it. IPL is weaker than national law as sovereign states can refuse to abide by laws they don’t like. Many legal scholars question whether international public law in fact changes state behavior at all; states merely choose to abide by IPLs that allow continuation of existing behaviors.

We distinguish between international public law that results from pursuit of self-interest – “utility maximization” (or “utilitarianism”) that really doesn’t affect state behavior – and IPL based on moral obligation. We offer the view that the development of shared social norms among states – such as those of human rights or environmentalism – creates moral obligations, changes objectives (“change utility payoffs”), and thereby leads to new international laws. Thus, utility payoffs are endogenous, as they are influenced by new social norms.

International law and utilitarianism

Goldsmith and Posner (1999) and Gould (2011) reject the notion of jus cogens: “obligations that are absolute, unconditional, exceptionless, and (perhaps) not dependent upon consent” (Gould, 2011, p. 255).⁵ These and some other authors mentioned below prefer the explanation of “positivism” – behavior that can be explained as resulting from rational utility maximizing decision-making not beholden to moral obligations. Guzman (2009) and Goldsmith and Posner (1999) view the development of international law as growing out of the resolution of a series of prisoners’ dilemma games where both parties are made better off by reaching an agreement to constrain a damaging behavior.⁶ This theory of international public law applies standard rational-choice assumptions common in economics: the theory is utilitarian.

While noting the near absence of enforcement mechanisms to encourage compliance with international public law, Guzman (2009) offers an explanation as to why IPL can be effective in constraining behavior. According to him, the disciplining device is “reputation for compliance” – failing to comply with IPL may cause a state to lose reputation for being a good “global citizen”; but a state’s reputation for complying with international law in one area has value in dealing with other states in other areas of IPL. Guzman also recognizes roles for fear of retaliation (if you don’t comply we won’t either), and for reciprocity (if you comply we will too). A strong reputation for fair dealing is likely to negate the former and promote the latter. Brewster (2009) elaborates, pointing out that a good reputation for compliance is used by other states to predict future behavior. A state’s word is valuable because by gaining the trust of other states they are more likely to want to cooperate in the resolution of other prisoners’ dilemma problems. Moreover, collective good reputations (and presumed wishes to maintain them) are transaction cost-reducing devices, especially reducing costs of policing and even enforcement.

The above authors therefore argue that international public law – customary and treaty – exists because countries that adhere to it see themselves as benefiting from it; not adhering would make them worse off in a utilitarian sense. Similarly, Koskenniemi (2011) points to the “mystery of [international] legal obligation” and the search by scholars to develop a unified theory of it. Like the preceding authors he too largely rejects the idea that international public law is based upon moral obligation, and he endorses the idea that binding international law is a voluntary and self-interested choice on...