Resolving Externality Problems in Maritime Economics - Essay Example

How economics can contribute towards resolving the externality problems that the shipping and ports industries cause for the wider maritime environment Introduction An externality is an effect that is exerted upon a different party other than the one intended by the primary economic entity, which the player had not anticipated. Sometimes these effects may affect those other parties negatively or it could be beneficial to them. This analysis will focus on the negative externalities that cause harmful effects on the wider maritime environment. Economics can assist in resolving these effects through externality theory. The latter concept refers to the study of the effects, responses and occurrences of economical agents to control externalities through incentives and other instruments. Environmental externalities of ports and shipping industries Ports and shipping industries have the ability to ruin the quality of water in oceans and seas as they emit fuels and chemicals that can contaminate them. Waste, dredging (removal of sediments from water bodies in order to increase depth of harbours), oil spills and ballast waters are the main culprits responsible for contamination of water bodies. All these processes destroy turbidity that is essential in preserving biological diversity in water bodies. Alternatively, ballast waters (waters in ships that maintain balance) could introduce invasive species in other water bodies and thus ruin biodiversity as well. Climate change is perhaps one of the most disturbing spill-overs that can emanate from the shipping industries, and this occurs when green house gases accumulate in the atmosphere. Some of them include carbon dioxide, nitrogen oxide, methane, volatile organic compounds, ash, lead, as chlorofluorocarbons. When ships, vessels and other associated machines release these gases into the atmosphere, they compromise the ozone layer which protects the earth from solar radiation. These vessels ought to be held accountable for their contribution to this problem. Marine engines also affect air quality through emission of particulate matters. Some of them can cause respiratory problems to those who operate in the marine environment. Industries that support ports and ships can cause excessive noise, which is an undesirable trait. Economics first contribution to all the above problems is its ability to decipher the problem. It allows individuals to assess and measure the added costs related to these industries in order to equip policy makers with adequate knowledge to carry this out (Ofiara and Seneca, 2000). Through knowledge emanating from economics, it will be possible for those entities to make primary agents bear the costs of carrying out their activities. On a general level, economics shows how negative externalities work or affect the prices of products in the market. In the price and quantity diagram, a market often works at equilibrium if it is unregulated. Consumer surplus may emanate whenever people get additional value between their prices and their willingness to pay (Whitehead, 2013). Conversely, producer surplus arises when the seller makes more than the marginal cost of production. If it happens that the production of a substance (in this case, transportation of commodities) causes some harmful effects like lower biodiversity, health problems and many others, then the full costs to society will be a combination of the marginal external cost as well as the equilibrium price. Environmental maritime regulations have the intention of internalising an externality in consideration of the external production costs. If shipping companies or maritime companies are required to pay a tax owing to these harmful effects, they are likely to reduce their quantities owing to higher product prices. The new equilibrium will thus increase government revenue, reduce costs to society through environmental regulation and still hold maritime firms accountable for spill over effects of their economic activities. Some opponents of environmental regulation may argue that it reduces jobs and should thus be reconsidered. However, what these opponents do not realise is that pollution control itself also requires the use of labour, so jobs will be created from it. Abatements costs create jobs but are also offset by the additional costs that firms have to spend on this. One must this be clear on the benefits and costs of pollution as overall it leads to unwanted consequences. Overall, economics allows one to understand the implications of acting in order to control these outcomes as it puts into perspective the effects of alterations done in order to minimise it. The subsequent section will show how specific economic instruments may be used to solve the problem. One of the most touted methods for resolving the negative externality problem is through the polluter pays principle (Barrett et. al., 1997). It makes sense that the person producing the negative effect be made to pay for it; however, a key complication in this issue is defining what exactly pollution is and what environmental benefits are. If a marine vessel discharges Guianese shrimp onto a certain island where the Frigate bird population lives, then reduction of fishing activities may be a danger to those birds; policies will thus aim at increasing fishing (Martinet and Blanchard, 2009). A study was done in the French Guianese Island in order to establish the tradeoffs between fishing and the bird population in that island. Conversely, some conservationists may think of the shrimp as the species under threat so policy recommendations could target reduction of fishing activities. This implies that some social considerations have to be done. Economists suggest allocation of property rights to the environment because they claim that the lack of private property gives many market players an incentive to pollute the maritime environment. If the environment belonged to certain players, then industries that rely on it would require permission in order to utilise those water resources, and this would bring down negative externalities. Critics however claim that transactions costs involved in implementing such a solution in the real world would be high if thousands of players are involved (Roe, 2003). Furthermore, the free rider problem could arise because property rights cannot be divided. Regardless, there is a place for this solution in the marine environment because of what experts call the tragedy of the commons. In oceans, fish stocks can be misused due to this phenomenon; people may be aware of the environmental degradation taking place but may choose to do nothing about it because no one else is doing it. Property rights would privatise these waters and thus give fishers an incentive to reduce use or cause pollution. This issue of global commons is especially pressing owing to the fact that certain fish species can transfer from one part of the ocean to another that falls under a different national jurisdiction. In 1995, the world worked towards solving this tragedy of commons by signing an agreement known as the Convention on Highly migratory and straddling stock (Harris et. al., 2014). It was an international agreement or treaty in which the precautionary principle replaced the maximum sustainable principle on fisheries. This means that countries were required to control fishery early before depletion occurs and also to reduce bycatch (unwanted fish caught together with economically viable ones). Another alternative proposed by economics to externality problem is price-based measures like taxes. This strategy would require polluters to align the social costs of the externality with private costs. This method would require an analysis of the extent of damage caused by the polluter in order to charge them a fair amount. If a flat rate were paid by all users of water sources, then those who take the trouble to avoid pollution would be subjected to the same penalties as those who do not. In New Zealand, fishing firms are expected to pay tax on the use of diesel tax for fuel (Hughey et. al., 2000). The government affirms that this was done in order to reduce externalities associated with diesel fuels. It was also claimed that the method was more effective because it targeted a particular output. Some analysts however believe that more improvements may be necessary in order to consider fishing time, areas and equipment used rather than just the fields. Industry opposition has arisen owing to the reductions in profitability brought about by the taxes. Conversely, economics also offers another similar solution to this externality problem by suggesting the use of subsidies among users of the water resources. One may state that instead of penalising shipping and port stakeholders for doing the right thing, they can be rewarded for pollution prevention by giving them subsidies or grants. An example of such a strategy is the Alaska Marine Conservation Council quota passed in the 90s (Fujita et. al., 1998). In this approach, clean fishers were encouraged to maintain the practice through higher initial quotas. They were given a financial incentive for creation of a lower externality. The financial inducement was implemented by continually monitoring the bycatch rates of the vessels in the surrounding waters. On the flipside, countries have the option of using emission permit trading. The market-based alternative works by setting pollution targets for ships, marine vessels and other related industries and then making it relatively easy to meet those targets. For instance, if a target has been set for sulphur production, all marine vessels within a certain areas are given a permit that allows them to use sulphur-based fuels only to a certain extent. Only those vessels that really require these fuels would be willing to but the permits and this would minimise the excess use of the same. Non-market based approaches have also been suggested as possible solutions to maritime externalities; however, how they work and their possible effects on the targeted community can also be better understood through economics. These may come in the form of performance standards where emissions standards are set within a certain area. Alternatively, they could come in the form of design standards where water users are required to manage water use in certain ways. The strategies often occur through Directives or Acts within one nation or regional bodies like the European Union (Antoniou and Stamtiou, 2007). Economics shows the complexities of carrying out the above idea by pointing out that regulation can lead to high costs of abatement. If a vessel owner tries to comply with certain regulations, his costs of adherence would increase if he has fewer units. Conversely the vessel owner with many such ships would find it easier to follow the Directive as the costs of reduction would be spread among a wide variety of units than the small owner. One example of such a Directive is the European Union Directive 2012/33/EU, which requires marine fuels not to exceed a certain level of sulphur content especially for those that operate within the Baltic Seas. Russian bunkering companies have explained that they will have difficulties in switching to another fuel as most of their supplies are not within the 0.1 limit (Gritsenko and Yliskyla-Peuralahti, 2013). Since these bunkering organisations tend to be vertically integrated, they have had to invest in new infrastructure as well as in refinery and production processes. All the production, storage and bunkering terminals will exert a significant tool on the competitiveness especially since other regions of the EU do not have to do this. Overall, the Russian gas industry will be under threat if they do not find the support from their federal state in the process of modernising and developing the right infrastructure for the change. The EU-Russia case thus illustrates the economic complications that multiple-stakeholder maritime environments create when implementing regulatory approaches. Its threat to competitiveness of bunkering firms, cargo owners, ship owners, port service providers and other players feel that environmental regulation tend to make them uncompetitive owing to the investments needed. Conclusion On a general level, economics offers a better understanding of the stakeholders involved in creation of negative externalities. It also provides various market-based and non market-based solutions to the problems. Provision of taxes, grants and subsidies to control maritime pollution can be better analysed through economics as one fully learns about the implications, costs and effects of various financial incentives. The discipline of economics also sheds light on the possible implications of regulatory approaches in curbing this menace. Overall, economics shows the complexities of resolving the negative externality problem thus empowering policy-makers to pick the best solution. References Antoniou, E. and Stamtiou, K., 2007. Environmental protection and management of sea ports. [pdf] South Africa: Magnesia. Available at [Accessed 14 Jun. 2008] Barrett, A., Lawlor, J. and Scott, S., 1997. The Fiscal System and the Polluter Pays Principle. Aldershot: Ashgate. Fujita, R., Foran, T. and Zevos, I., 1998. Innovative approaches for fostering conservation in marine fisheries. Ecological Applications, 8, 139-150. Gritsenko, D. and Yliskyla-Peuralahti, J., 2013. Governing shipping externalities: Baltic ports in the process of SOx emission reduction. Maritime Studies, 12(10), 2-21. Harris, J., Codur, A., & Institute, G., 2014. Economics of fisheries. Available at: http://www.eoearth.org/view/article/151944 [Accessed 14 Jun. 2008] Hughey, K., Cullen, R., Kerr, G. and Memon, 2000. Instruments for internalising environmental externalities in commercial fisheries. Report to Ministry of Fisheries SEC 1999/05, 242, 12-62. Martinet, V. and Blanchard, F., 2009. Fishery externalities and biodiversity: Trade-offs between the viability of shrimp trawling and the conservation of Frigatebirds in French Guiana. Ecological Economics, Q29, 1-9. Ofiara, D. and Seneca, J., 2000. Economic losses from marine pollution. Washington DC: Island Press. Roe, M., 2003. Safety, security, the environment and shipping: The problem of making effective policies. UK: University Plymouth. Whitehead, J., 2013. Negative externality. Available at: http://www.env-econ.net/negative-externality.html [Accessed 14 Jun. 2008] Read More