Abstract: Caribbean cruise ship tourism presents threats to the natural environment that are failing to be addressed by existing policy and enforcement mechanisms. An environmental tax in the form of a ‘user fee’ is proposed as an incentive-based policy instrument. The two-fold effects would be 1) the capture of more economic rent for Caribbean destinations’ natural resources, and 2) a reduction of the environmentally harmful activity of mass cruise ship tourism in the area.
1. Cruise ships and the environment: the state of the situation
The cruise industry is a sector of tourism with two characteristics that are important to understanding its environmental impact: its rate of growth and spatial concentration in the Caribbean Sea. This rapid rate of growth combined with the tendency to concentrate on or near ecologically dynamic coastal environments (many of which are considered biodiversity hotspots) in the Caribbean raise important policy questions about how to preserve the natural resources upon which the industry depends.
In terms of measuring the size and growth of the cruise industry, different sources use different indicators, including number of passengers, number of beds, number of ships, etc. but all agree that cruise tourism is one major growth area of the travel industry. By one measure, cruise tourism as a global phenomenon has demonstrated an 8% annual growth rate since 1980 (Johnson, 2002) which is around double the growth rate of tourism overall. A cruise industry overview notes that 22 new state-of-the-art ships were contracted to be added to the North American fleet in 2009 (FCCA, 2009). The newest cruise ships are bigger and bigger. They rely on cutting edge technological features as well as economies of scale. In some destinations and ports of call, issues of congestion have emerged, and the environmental carrying capacity of the entire Caribbean region is being questioned.
The other striking characteristic of cruise tourism is its market concentration, spatially. The markets are highly concentrated around U.S. passengers in U.S. or Caribbean waters. In fact, six of the world’s eight leading cruise markets are in or adjacent to U.S. waters (National Research Council, 1995, p. 47). The dominant world destination is the Caribbean region, which accounts for 50% of total world market share. Insiders are quick to point out that the distribution of industry benefits is not concentrated in a parallel way. “Sixty-five percent of the cruise industry’s profit comes from the Caribbean, but only 7 percent of their employees come from the Caribbean, and only 1 percent of the taxes they pay come to the region,” reported Allan Chastanet, former Board of Directors for St. Lucia to Fortune Magazine, 1999. So, there is clearly a great need for the Caribbean region to capture more economic “rent” on the public goods it is providing to the industry.
Various information sources about the environmental implications of the cruises list a variety of different impacts that cruises have on the environment. An LCA (life cycle analysis) methodology identifies five areas of environmental impact: infrastructure impacts such as ship construction, operational impacts such as energy use and anchor damage, distribution impacts such as the transferring of people to and from departure points, use impacts such as congestion and water consumption, and waste impacts such as sewage, plastics and hazardous substances (Johnson, 2002). The most commonly mentioned problems are the generation of waste, and anchor damage to coral reefs.
Solid wastes. In the Caribbean, the links between tourism and solid waste are clear. Tourists in the Caribbean have been estimated to generate twice as much solid waste per capita as local residents (World Bank, 2001). The solid waste generated by cruise ships can be measured in several ways: by boat per trip, by boat per day, by passenger per day, etc. According to Davies and Cahill, a cruise ship carrying 2,700 passengers can generate at least a ton of garbage per day. An average passenger generates 2 pounds of dry garbage and one half pound of food waste.
Hazardous wastes. Cruise ships produce toxic chemicals and hazardous waste from dry-cleaning procedures, used batteries, and paint waste from brush cleaning (Malbin, 1999). On-board photo printing and processing also creates toxic waste, as well as sludge-contaminated filter materials. Sewage and grey water also present public health hazards if not properly treated. A typical cruise ship can generate 1,000,000 gallons of grey water on a one-week voyage (Johnson, 2002). There is evidence that disposal of wastewater and untreated sewage into the sea has already curtailed tourism activity in some areas, such as Negril, Jamaica, where there is less diving tourism than before (World Bank, 2001).
Anchor damage to coral reefs. The coral reefs are some of the most delicate and ecologically valuable ecosystems of the world, and are also at great risk from tourism activity. Much damage is incurred from snorkeling and diving, but there are also reports of anchor damage to coral reefs and sea floors caused by cruise ships. For example, In October 1988, a cruise ship dropped its anchor on a coral reef in Virgin Islands National Park, St. John, creating a distinct scar roughly 128 m long and 3 m wide from a depth of 22 m to a depth of 6 m. The anchor pulverized coral colonies and smashed part of the reef framework (Rogers and Garrison, 2001).
2. Existing policy tools and their shortcomings.
The major environmental concerns for the cruise ship industry are congestion and limited environmental carrying capacity due to its rate of growth combined with its waste generation and impacts on fragile natural ecosystems such as coral reefs. The current regulatory framework is insufficient in addressing these concerns. Regulatory tools can be categorized into three major kinds: normative-based or command-and-control legislation, price-based or incentive-based tools, and voluntary self-regulations. All three kinds of regulation already exist for the cruise industry, but they are not unified or completely effective in addressing the environmental problems that the industry imposes.
Command-and-control regulation of the cruise ship industry is characterized by a lack of regional policy and a lack of local enforcement, since actors are spread over several countries. The current international regulatory body is MARPOL 73/78, the International Convention for the Prevention of Marine Pollution, which has established standards and guidelines that all sea vessels, including cruise ships, must meet. However, these regulations were deemed insufficient in protecting sensitive, high-traffic areas, which led to the Wider Caribbean designation as a “special area” in need of further regulation in 1991 (World Bank, 2001). MARPOL guidelines for dealing with ship-generated waste are also insufficient because, like many command-and-control regulatory measures, Caribbean governments lack the resources for proper monitoring and implementation. In the Caribbean the number of prosecutions has been less than in the United States, and it is not anticipated that the enforcement capabilities of the Caribbean will dramatically increase. Similarly, the U.S. Coast Guard has “Operation Cruise Watch” initiatives in Alaska, Florida, and California, but there are no indications that less developed nations are prepared to apply the same level of control (Johnson, 2002). Governments of the less-developed world have far greater priorities, e.g. economic development, health, welfare, and education, for their limited financial resources than environmental monitoring (Hall, 2001). Regulatory command-and-control instruments fall short in addressing environmental problems.
Regulations involving market-based incentives for cruise ships have been minimal and scattered. These policy tools generally take several forms, including taxes and subsidies. An example of a subsidy that is already in place is A Global Environment Trust Fund grant of US$5.5 million. This grant is designed to provide technical and legal assistance to the Caribbean region’s countries in implementing MARPOL 73/78. The subsidy highlights the need for a coordinated, regional effort in policy design and enforcement (World Bank, 2001). When evaluating a subsidy as a form of price-based incentive, it is important to criticize that it does not meet the “polluter pays principle,” meaning there is no penalty imposed on the source of the problem.
In terms of tax-based market incentives for cruise ships, tax legislation has been difficult to apply due to the political-economic structure of the industry. In addition to being geographically concentrated, the industry is also heavily economically concentrated, with a few major corporations representing the vast majority of the market. The top three parent companies, Carnival, Royal Caribbean, and Star Cruises, account for 91.5% of the North American cruise market share, making the cruise industry one of the most concentrated in the world. These major cruise lines are registered in countries such as Panama and Liberia outside of the U.S. in order to avoid various tax, labor, health, safety, and environmental regulations. Indeed, the huge lobbying power of these corporations has granted them substantial tax breaks and other savings that contribute to the competitiveness of cruise prices (Lumsdon and Page, 2004). In other words, corporate cruise line giants depend on lobbying power and deterritorialization in order to offer a competitive product. One port authority observes, “some sub-regional countries have tried to introduce an environmental levy to compensate for the costs they incur in dealing with solid wastes that are discharged by passengers while ashore. Needless to say, this has been met with the usual threats and many countries have had to absorb this cost by granting further concessions to the Lines” (Atherley, 2003).
Despite the political-economic clout of these major corporations, a few individual Caribbean countries have asserted their right to impose regulations and incentive-based policies on the cruise industry. In 1996, six small countries in the Eastern Caribbean (Antigua, Dominica, Grenada, St. Kitts, St. Lucia, and St. Vincent) jointly decided to charge a US$1.50 per passenger “cruise ship waste disposal fee” to finance environmental clean-up and conservation (The Nature Conservancy, 2004). Bermuda, as the strongest example of both normative-based and incentive-based policy, limits the number of regular callers to six vessels per week, 6500 maximum per day and an annual maximum of 200,000 visitors. Bermuda also has the highest cruise ship passenger fee in the region, at US$60 plus $20 for overnight in high season and $15 during the off-season (Limited, 2005). The Bahamas have set a head tax at US$15 (Johnson, 2002). Arguments have been made for further implementation of capturing economic “rent” on natural resources through taxes and fees, following examples such as Berumda and the Bahamas.
Finally, voluntary self-regulation is probably the most common environmental policy tool in place for the cruise ship industry today. Initiatives from within the industry have been used to address environmental problems and to preempt further top-down regulation. Individual corporations project themselves as environmentally responsible through campaigns such as Royal Caribbean’s “Save the Waves” and Holland America’s “Seagoing Environmental Awareness” campaign, although the argument has been made that these are primarily public relations tools (Klein, 2002). Volunteer associations, non-governmental organizations, and certification bodies offer a more unified effort by the industry to impose environmental standards upon itself (Hall, 2001). Examples include Green Globe 21 certification for various resorts in Barbados and Jamaica, and a current project to adapt the Blue Flag certification of of water quality program from Europe to the Caribbean region (World Bank, 2001).
3. Policy proposal: arrival fees as an environmental tax on cruise ship tourism
Environmental taxes on tourism Is an area of tourism policy that deserves attention, due to the dual function of environmental protection and revenue generation that such taxes can provide to ecologically fragile, less-developed destinations that are in great need of both. This is often referred to as a “double dividend.” The reasons for taxing tourism are “linked to its capacity to act as a substitute of price for the public goods and services consumed by tourists” as well as the “corrective (i.e. environmental) role that these taxes can be given.” So the three justifications of a tourism tax are often to generate revenue, cover conventional costs of public services, and internalize external costs, such as environmental ones (Gago, et al).
Environmental and tourism taxation has taken on many forms. Tourism is taxed both indirectly by taxing tourism business and by taxing the tourist directly through consumption taxes and special tourism taxes such as entry and exit fees. Environmental taxes in tourism are ones that are designed to internalize external environmental costs that are not reflected in market prices. In order to be considered an environmental tax, a tax must meet the design criteria of internalizing external environmental costs and not simply the criteria of generating revenue that may be earmarked for environmental projects. The tax base must be the physical unit that has a proven specific negative impact on the environment. The idea of an environmental tax, then, is to correct the market failure of too-low prices that create a gap between an inefficient private optimum and an efficient or optimum social solution (Palmer, Riera, 2002).
In the case of cruise tourism in the Caribbean, the need for further environmental taxation on tourism is clear. Caribbean countries are failing to capture taxation revenue in proportion to the services they offer. It is not collecting sufficient “rent” on the infrastructure services, public goods, and natural resources it is providing. The result is a market failure and inefficient allocation of resources. As World Bank points out, rents are a type of payment for the use of a resource, and in tourism these natural resource rents often go un-captured. Therefore, an increase of user fees would help to capture rents at the source: the tourist and the consumer surplus derived from the use of the natural resource. A case is made for a direct tourism tax: “although tourism operators should be expected to pay their fair share of taxes like any other good corporate citizen, taxing tourists is likely to be the most effective means of rent capture.” (World Bank, 2001).
A good policy proposal for the environmental problem of cruise tourism in the Caribbean would be arrival taxes for cruise ship passengers. This tool is already in place in Bermuda and the Bahamas, but all Caribbean nations with cruise ports of call could highly benefit from such a tax. The World Bank includes this as a policy option, but specifies that the arrival fee should be explicitly identified as environmental or resource user fees, so as to be more acceptable.
4. Implementation, evaluation, and prediction of consequences.
The implementation of an arrival fee per capita for cruise ship passengers at each port of call would mirror the systems that are already in place in destinations such as Bermuda and the Bahamas. However, due to the political problem of the balance of power against small Caribbean countries and in favor of large corporate interests, a better solution may be a region-wide policy of arrival fees implemented through a voluntary association of Caribbean governments. This could help governments gain leverage when imposing a tax on the cruise industry. This could also prevent loss of competitiveness for destinations that decide to impose the arrival fee.
In order to determine the appropriate tax rate (the per-passenger arrival fee) the amount of waste that each passenger generates could be taken into account. Then, using economic valuation methodologies, the economic cost of this waste could be determined. So, the final arrival fee per person per port would be determined by the size and kind of cruise ship and its employment of cleaner waste management technologies and policies. This would, in turn, require reporting by each cruise ship of its waste generation in relation to its passenger capacity.
When evaluating an incentive-based policy instrument, a series of criteria are generally used: environmental effectiveness, static efficiency, dynamic efficiency, polluter pays principle, and revenue generating ability. A regionally implemented arrival fee per capita per port of call would pass all of these criteria.
• The policy is environmentally effective because its tax base is each individual tourist on each cruise ship, and this corresponds directly with the environmental problems of marginal waste generation of cruise ships, environmental degradation from cruise ships, and congestion because of cruise tourism. If the tax rate is high enough, it could actually have the desired environmental effect of decreasing the tax base, cruise mass-tourism in the Caribbean.
• The policy is statically efficient because it is cost-effective in achieving the objective. Since ships already pay port fees, etc, to local Caribbean governments, the administrative infrastructure is already in place. Little additional administration would be needed to implement a per-passenger arrival fee for each ship. The costs would be lower than an alternative incentive-based tool such as the creation of a cap-and-trade-style market for waste permits, which would require the creation of an entire new administration system.
• The policy is dynamically efficient because it could offer an incentive to continuously reduce the environmental problem. If the arrival fee is determined based, for the most part, on the amount of waste that each passenger generates, then the ships would have an incentive to adopt new technologies and on-board policies to reduce per-passenger waste generation.
• This policy abides by the polluter pays principle because the arrival fee would be transferred directly to the tourist. The arrival fee would appear on the passenger’s bill as an environmental user fee or something to that effect. The cruise line would only be the substitute, or instrument of tax collection, much like a V.A.T.
• Finally, the policy meets the criteria of ability to generate revenues to the government instead of costs. Because cruise tourism is a form of large-scale mass tourism, its revenue generating ability is significant. As World Bank observes, “even though economic rents per person may be small, the millions of visitors mean that the total economic rent associated with sites may still be substantial (World Bank, 2001).
So, a prediction of the consequences is as follows, using Belize as an example. As part of an association of governments for the environmental protection of the Caribbean, Belize would introduce a per-passenger arrival fee on each cruise ship that docks in one of its ports of call. The fee would be calculated based on the ratio of solid and liquid waste generated to the number of people on board. If it is found to be true, for example, that each passenger generates 7.7 pounds of solid waste per day on a particular kind of ship, and that this has an environmental economic cost of $5 per day as determined my economic valuation methodologies, then this $5 would be part of the arrival fee. The same would be done to calculate the cost of liquid wastes and the cost of damage done by cruise tourism to natural environments. The total arrival fee per person would be the total of these three measurements. The final fee would depend on each ship’s waste efficiency, and an acceptable fee would be around the $20 that Bermuda presently charges.
Calculating the environmental cost of cruise tourism in monetary terms would be an expensive process. Although earmarking environmental tax revenues for environmental purposes creates a new set of problems and paradoxes, it may be important in this case to use part of the tax revenue for the environmental valuation process. This could avoid the implementation of an arbitrary arrival fee based on political consent, and could also hold cruise lines accountable for their waste generation by putting an economic value on their environmental impacts based on the performance of each kind of ship. This, in turn, would have the desired environmental effect of promoting newer, cleaner technologies .
In their seminal work on the economics of cruise ship tourism, Dwyer and Forsyth foresaw the possible environmental externalities. They observed, “cruise tourism will create some environmental costs, though it may also lead to environmental benefits such as improved environmental standards in shipping and waste management” (Dwyer and Forsyth, 1998). Since that time, the industry’s environmental costs have been disproportionate to the environmental benefits it has induced. However, this reality can change with the implementation of carefully designed environmental policy tools. Already, there are normative-based, incentive-based, and voluntary self-regulating policies in place, but these fall short of fully addressing environmental externalities and they lack region-wide coordination. If a region-wide effort were made on behalf of all the governments of the Caribbean to implement an environmental tourism tax such as a per-passenger arrival tax, then the economic “rent” on public goods and natural resources could be more efficiently captured.
Policies such as the environmental tourism tax proposed here could have the double dividend of addressing the cause of an environmental problem by correcting its too-low price and generating much-needed public revenues for destination governments at the same time.
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