WORLD TRADE
ORGANIZATIONWT/CTE/W/111
11 March 1999
(99-0982)
Committee on Trade and Environment Original:  English
ON THE ENVIRONMENTAL IMPACT OF FISHERIES SUBSIDIES
A short report by the Icelandic Ministry of Fisheries
1 February 1999
Submission by Iceland
I. INTRODUCTION
1. The economics of the world’s marine fisheries are heavily distorted not only by the well
known fisheries common property problem but also by direct and indirect government subsidies to the
fishing industry.  Both kinds of distortions work in the same direction.  They encourage excessive
fishing effort, overinvestment in fishing capital and overexploitation of the fish stocks.  Thus,
fisheries subsidies, generally speaking, tend to be environmentally damaging.
2. It is useful to distinguish between two kinds of environmental damage due to fisheries.  On
the one hand overexploitation of specific fish stocks leads to an excessive biomass reduction thatimplies ecological readjustments that may or may not be reversible.  On the other hand excessive
fishing effort may cause unnecessary damage to the marine habitat that will reduce its biological
carrying capacity more or less permanently.
3. It is important to realise that the environmental effects of fisheries subsidies depend on the
fisheries management system in place.  Thus, adding government subsidies to a common property
fishery generally results in more economic waste and a greater risk of permanent damage to the
biological resource.  By contrast, government subs idies to a property-rights based fishery, i.e. a
fishery where the common property problem has been substantially alleviated, may in certain cases
merely amount to a non-distortive financial transfer to the holders of fishing property rights.
II. ESTIMATES OF THE GLOBAL AMOUNT OF FISHERIES SUBSIDIES
4. The extent of subsidies, direct and indirect, in ocean fisheries is, perhaps understandably, not
a well-researched topic.  However, by all available accounts, the amount of fisheries subsidies world-wide can hardly be described as anything but very substantial, at least relative to the total revenues of
the industry.  Thus, based on 1989 data, FAO in 1993 (FAO 1993) estimated that global fisheries
costs exceeded revenues by 54.5 billion USD or 78 per cent.  According to FAO, this shortfall must
have been met by direct or indirect subsidies.
5. More recently, in a World Bank publication, Milazzo (1998) has produced a much more
detailed examination of the subsidy issue.  A ccording to his results aggregate global fisheries
subsidies are between 14 and 20 billion USD annually.  This amounts to some 17-25 per cent of the
industry’s revenues.
6. Although Milazzo’s (1998) World Bank study carefully avoids pointing a finger to the most
extravagant fisheries subsidisers around the world, it is possible to glean from his report that theWT/CTE/W/111
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European Union, Japan and China feature close to the top of the list.  In fact, per volume of catch, the
European Union may very well be the world champion of fisheries subsidies.
7. It is informative to compare fisheries subsidies with other food industry subsidies.  Many
agricultural food products are notorious as recipients of high subsidies.  According to Milazzo’s
study, fisheries are firmly placed in the same premier class of subsidy receivers.  Thus, includingglobal trade protection (e.g. tariff barriers) on top of financial subsidies, Milazzo’s study produced the
following comparison:
Table 1:  Average Global Food Subsidies
(Including Trade Barriers)
Product Subsidy
Wheat 48%
Coarse grains 36%
Rice 86%
Oilseeds 24%
Sugar 48%
Beef and veal 35%
Pork 22%
Poultry 14%
Lamb and mutton 45%
Eggs 14%
Fish 30-35%
Source: Milazzo, 1998
III. THE ENVIRONMENTAL IMPACT OF SUBSIDIES
8. Subsidies to fisheries usually lead to increase d fishing effort and, consequently, to (a) lower
fish stocks and (b) more habitat damage than would otherwise be the case.  The only significant
exception from this rule may, as previously mentioned, occur when the fishery is subject to a property
rights-based fisheries management regimes such as ITQs (individual transferable quotas).  The basic
impact of subsidies on fishing effort and biomass can be analysed with the help of the standard simplefisheries model (see e.g. Gordon 1954) as depicted in Figure 1.WT/CTE/W/111
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9. The upper part of this diagram represents sustainable fisheries harvest and costs1 as a function
of fishing effort.  The volume of harvest or yield initially increases with increasing fishing effort butat a declining rate as the fish stocks are reduced.  It reaches a maximum, usually referred to as the
maximum sustainable yield (MSY), at an effort level e
MSY in the diagram.  Any increase in fishing
effort above this level merely reduces the sustainable yield until finally the fishery collapses.  In the
diagram this happens at effort level e ∞.  The optimal fishing effort, i.e. the fishing effort that
maximises net profits from the fishery is at e* in the diagram.  The bionomic equilibrium for the
fishery is found at fishing effort level e c.  At this level of fishing effort, costs equal revenues so there
are no net profits in the fishery.  This is genera lly at a much higher fishing effort level than the
optimal one.  Due to the forces of competition, this  is the point at which most fisheries operate unless
subjected to an efficient property rights-based fisheries management system.
10. The lower part of Figure 1 illustrates the relationship between fishing effort and biomass.  As
shown, biomass declines monotonically as fishing effort increases.  Thus the bionomic equilibrium
                                                     
1 Measured in units of yield.Figure 1
The simple fisheries model
Fishing effort, eRevenues,
        costs
Biomass, xRevenuesCosts
e∞ ec e*
x*
xc0
Fishing effort, eec e*0BiomasseMSYWT/CTE/W/111
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fishing effort, e c, corresponds to a relatively low biomass level, while the profit maximising fishing
effort level, e*, corresponds to a relatively high biomass level.  In fact, the biomass corresponding to
the optimal fishing effort is higher than the one corresponding to the MSY.  In this sense, profit
maximising fisheries are even more environmentally protective than the MSY policy.
11. Now, consider subsidies.  The effect of subsidies is either to reduce fishing costs (cost
reduction subsidies) or increase revenues (price supports and price supplements).  The effects of both
on fish stock biomass and fishing effort are similar as illustrated in Figures 2 and 3.
Figure 2
Effect of cost subsidies
Fishing effort, eRevenues,
        costs
Biomass, xRevenuesOld costs
e∞ ec e*
xc0
Fishing effort, eec e*0BiomassNew costs
ecc
eccxccWT/CTE/W/111
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12. As illustrated in Figures 2 and 3, both types of subsidies increase bionomic equilibrium
fishing effort (from e c to e cc) and reduce fish stock biomass (from x c to x cc) compared to what would
otherwise be the case.  This effect is easy to understand.  Both types of subsidies make fishing effort
more profitable to the fishing firms (albeit not society as a whole).  As a result fishing firms find it to
their advantage to expand fishing effort.  The envir onmental impact is twofold.  First, the fish stock
biomass is reduced.  Second, habitat damage from fishing operations and the use of fishing gear is
increased.  Given the current overexploitation of most valuable fish stocks and marine habitats both
effects must be regarded as negative.Figure 3
Effect of price supports
Fishing effort, eRevenues,
        costs
Biomass, xOld
revenuesCosts
e∞ ec e*
xc0
Fishing effort, eec e*0BiomassNew
revenues
xccecc
eccWT/CTE/W/111
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13. Although, the diagrams are drawn in terms of a zero-profit, bionomic equilibrium, it is
important to realise that the same effect also applies in a fundamental way to fisheries that are not
operating at the bionomic equilibrium point, e c, due, for instance, to fisheries management measures.
Also in these fisheries, the subsidies create incent ives for the fishing firms to expand fishing effort.
Under most fisheries management regimes, except perhaps the ITQ system, this would be extremelydifficult to counteract.
IV. OVERCAPITALIZATION IN FISHERIES
14. Given the above analysis and the high level of subsidies, in addition to the common property
problem in the world’s fisheries, it not surprising that fisheries are heavily overcapitalized.  According
to a recent FAO estimate (FAO 1995), the global  fishing fleet in 1992 measured some 26 million
GRT.  Since then the fleet has still expanded by 0.7 million GRT (Newton 1998).  More importantly,
however, due to technological advancement and refi tting, the harvesting capacity of the fleet has
increased much more, perhaps as much as 22 per cent (Newton 1998 and Fitzpatrick and Newton,
1998).
15. FAO has not published estimates of the needed reduction in the world’s fishing fleets.
However, high-ranking FAO experts have proved willing to come forward with such estimates.
According to one recent estimate, the reduction in  global fishing capacity required for reasonably
efficient sustainable fisheries is of the order of magnitude 50 per cent (Garcia and Newton 1997).
16. This estimate may well be too conservative. Given an optimal sustainable yield in ocean
capture fisheries of 80 million metric tonnes this will lead to a catch per unit of fleet of approximately
6 metric tonnes per GRT.  In Iceland, however, the actual yield per unit fleet capacity has in recent
years ranged between 12-15.mt/GRT.  Moreover, similar performance has been registered in severalother property rights based fisheries around the world.  If the same level of capital efficiency can be
replicated on average in the remainder of the world’s fisheries, the fleet size required to take a
sustainable yield of 80 million would be about 6 million GRT, or just over 1/5 of its current size.
17. Irrespective of whether the current overcapacity of the world's fishing fleets is 50 per cent or
80 per cent, it is safe to assume that excessive fishing effort is of a similar magnitude.
V. CONCLUSION
18. Fisheries subsidies, irrespective of whether they take the form of cost reduction or price
supports, encourage increased fishing effort.  Thus, fisheries subsidies exacerbate the already serious
common property problem of ocean fisheries.  The environmental impact is twofold.  First, increased
fishing effort further diminishes exploited fish stocks.  Second, increased fishing effort implies more
ocean habitat damage due to fishing operations.  Both effects further destabilize the underlying
ecosystem, already under considerable stress, increasing the risk of irreversible ecological shifts thatmay be difficult to reverse and even of permanent environmental damage.
19. The magnitude of the environmental impact depends on the size of the subsidies and several
other variables.  However, given recent estimates of fisheries subsidies world-wide (Milazzo 1998,
FAO, 1993), it appears that a substantial part of the current overexploitation of the world's fish stocks
and habit damage in the oceans is a direct consequence of past and current fisheries subsidies.WT/CTE/W/111
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REFERENCES
Arnason, R., 1998.  Fisheries Subsidies, Overcapitalization and Economic Losses.  Mimeograph
presented at the Workshop on Overcapacity, Overcapitalization and Subsidies in EuropeanFisheries.  CEMARE, Portsmouth.
FAO, 1993.  Marine Fisheries and the Law of the Sea: A Decade of Change .  Special Chapter
(Revised) of the State of Food and Agriculture, 1992.  Food and Agriculture Organization,
Rome.
FAO, 1995.  State of the World’s Fisheries and Aquaculture .  Food an Agriculture Organization,
Rome.
Fitzpatrick, J., and C. Newton, 1998.  Assessment of the World’s Fishing Fleet.  Mimeograph,
submitted to Greenpeace International.
Garcia, S.M., and C. Newton, 1997.  Current Situat ion, trends and prospects in World Capture
Fisheries.  In Pickitch et al. (eds.), Global Trends:  Fisheries Management .  American
Fisheries Society, Bethesta, Maryland.
Gordon, H.S., 1954.  Economic Theory of a Common Property Resource:  The Fishery.  Journal of
Political Economy  62:124-42.
Milazzo, M., 1998.  Subsidies in World Fisheries:  A Reexamination .  World Bank Technical Paper
no. 406, Fisheries Series.  World Bank, Washington DC.
Newton, C., 1998.  Review of Issues for the Control and Reduction of Fishing Capacity on the High
Seas.  Mimeograph submitted at the FAO Technical Working Group on the management ofFishing Capacity, La Jolla.
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