| Summary: | The research project objective was met by developing an alternative market-oriented approach for projecting the growth of the offshore aquaculture industry in New England, using synthetic models for firm-level offshore aquaculture investment and production and for regional seafood supply and demand balance. Specific steps of the project are discussed below. We carried out a comprehensive literature review of recent papers, books, and reports on aquaculture and the environment. The review covered seven areas: (1) aquaculture economics, including production and market demand models; (2) stochastic firm-level investment and production (e.g., input and output price uncertainties); (3) environmental effects associated with aquaculture operations (e.g., nutrient and sediment loadings); (4) strategies to achieve sustainable aquaculture (i.e., ways to reduce environmental impacts); (5) models used in environmental planning for aquaculture development; (6) measurement of the environmental costs of aquaculture including both theoretical frameworks and empirical studies; and (7) environmental management policy instruments. We identified a number of highly relevant papers. We collected a substantial amount of economic, biological, and environmental data from the literature and other sources. The marine aquaculture industry is unlikely to realize its full potential in the United States if operators ignore several types of external effects. First, aquaculture facilities, such as netpens for growing finfish, are sources of macronutrients (nitrogen and phosphorus) and sediment loads. Feces and unused food diminish water quality, increasing biochemical oxygen demand and enhancing the potential for eutrophication. Second, the application of therapeutants and pesticides can lead to chemical pollution. Third, in some circumstances, fish diseases can be introduced or spread more readily by aquaculture into healthy environments. Finally, the farming of carnivorous species requires large inputs of forage fish for feed, potentially stressing ecosystems with which the forage fish are associated. The destruction of mangrove forests and coastal wetlands for pond farming is another problem associated with the expansion of aquaculture in coastal areas. To evaluate the economic potential of offshore aquaculture, we model the interactions among various economic and biological factors in a specific production process (e.g., species, technology, and location). Typically, a firm-level investment-production model includes revenue from fish sales, different cost components, and a biological growth function. The total cost of a specific technology consists of fixed and variable components. Fixed cost (e.g., construction cost) is sunk cost once an investment has been made. Variable cost (e.g., feed, energy, and labor) may be controlled in future operations. In a simple (and unrealistic) case where revenue and cost projections for an open-ocean aquaculture project are accurate and there are no risks, a firm’s investment decisions can be made according to the traditional net present value (NPV) rule: invest when the value of the project is at least as large as the investment costs. The first synthetic model we developed was a firm-level aquaculture investment and production model. The model was originally developed in Microsoft Excel and successfully used in economic feasibility studies of several finfish and shellfish species (Kite-Powell, et al., 2003). For the purpose of this project, the firm-level model was reprogrammed using Matlab. The Matlab model significantly improved our ability to simulate different economic and environmental conditions. In addition, stochastic components have been added to the firm-level model. We extended the model to include pollution discharge associated with fish production at different levels. Based on the firm-level model, we developed a framework for risk assessment in offshore aquaculture (Jin, Kite-Powell, and Hoagland, 2005). The framework consists of three components: a firm-level investment-production model estimates a project’s benefit-cost values; a second model calculates the risk premium for a risk-averse investor; and a third model quantifies the option value for a risk-neutral investor. We showed that under uncertainty, the traditional NPV rule for making an investment should be modified. We illustrated our models using a case study of open-ocean aquaculture of Atlantic cod ( Gadus morhua ) in New England. The production technologies examined were large offshore cage farms with a high level of automation. The results suggest that investment level is related inversely to the risk level and the risk aversion parameter. As the risk level rises or as an investor becomes more risk averse, the amount of investment will decline. The scale of an aquaculture operation under uncertainty is smaller than that under certainty. The timing of investment is affected by the dynamics of project value. Both the growth in project payoff and any uncertainty in the payoff can create a benefit to waiting or delaying investment (option value). Generally, in forecasting the future expansion of aquaculture in coastal-ocean environments, most studies only focus on the constraint posed by the local environmental assimilative capacity. For nutrient pollution, the amount of pollutants produced at an aquaculture facility is a function of the fish species, type of production system, and type and quality of feed. How much of this pollution reaches different parts of the ecosystem, and in what concentrations, depends in turn on factors such as location, whether or not a pollution control system is used (operational protocols for feeding, etc.), characteristics of the water flow, and water temperature. In the case of offshore (deep water) aquaculture, however, the water quality assessment approach is inappropriate for anticipating aquaculture development because effluents disperse quickly. Further, changes in nutrient levels are difficult to gauge in an open-ocean environment. We have developed instead a market-oriented approach for projecting the growth of an aquaculture industry in the open ocean. We constructed another synthetic model to evaluate equilibria in the market for seafood, where the product was supplied either by a wild-harvest fishery or open-ocean aquaculture or both (Hoagland, et al., 2003; Jin, et al., 2003). In this second model, the net demand for farmed fish determines the size of the aquaculture industry and, in turn, the level of pollution discharges. Analogous to studies of environmental assimilative capacity, in near-shore locations the socially optimal industry size may be constrained by environmental damages resulting from pollution. In open-ocean environments, where the assimilative capacity is unlikely to be a serious constraint, however, the market-oriented approach is a superior method for projecting industry growth. We illustrated our approach with a case study of a groundfish fishery and the proposed offshore aquaculture of Atlantic cod in New England. In our simulations, the outputs from the firm-level model (e.g., marginal costs of aquaculture and farm-level pollution discharge) were used to assess aquaculture growth at the regional level. Results of our simulations suggest that, in the case of the New England groundfish market, the socially optimal solution involves a combination of the wild-harvest fishery and aquaculture. Aquaculture and the fishery are not mutually exclusive. It makes economic sense to rebuild and protect the groundfish stock, while also pursuing the industrial development of aquaculture. The aquaculture industry will be smaller if the industry is held to account for any damages to the environment through a pollution tax. Alternatively, the industry will be larger if effective pollution control measures can be implemented or if there is a significant expansion in the demand for seafood (Jin, et al., 2005b). The future size of the open-ocean aquaculture industry depends upon its costs and productivity. We used a detailed simulation model of firm-level investment and production to develop cost and production estimates for open-ocean aquaculture of cod. Based on these cost estimates, our analysis indicates that the optimal industry size implies 11 farms producing 23,000 mt per year, after the groundfish stock has been rebuilt to yield annual landings of 156,000 mt. The industry size will be much smaller (fewer than 10 farms) if effluent discharges cause significant damage to the marine environment. Indeed, at present, the cost of cod farming is relatively high with respect to the harvest fishery. If the actual production costs (e.g., feed cost) are higher than our baseline estimates, cod aquaculture may not yet be economically feasible, given the projected growth in future landings from the groundfish fishery. Although the present analysis suggests that proposed cod aquaculture in New England likely is to remain secondary to harvest fishery production in terms of volume, the scale of the industry may be significant if pollution control measures can be shown to be effective or if there is significant growth in fish demand in the future. Because there will be regulatory limits to landings from the wild-harvest fishery, future growth in demand likely is to be met only with contributions to supply from imports and from aquaculture operations. Aquaculture is an important and growing source of supply for protein from seafood. The potential expansion of the aquaculture industry into marine environments has become a subject of concern to other ocean users, conservationists, and pollution regulators. Existing studies project the future expansion of the marine aquaculture industry based on the assimilative capacity of the coastal environment, using water quality assessment models. In this study, we have developed a market-oriented approach for projecting future industrial expansion based on equilibria in the seafood market. The framework will contribute to policy analysis related to the sustainability of aquaculture.
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