1V1ESI_] RETURNING MATERIALS: P1ace in book drop to LJBRARJES remove this checkout from Ail-(Sl-IL your record. FINES wil] be charged if book is returned after the date “,4, stamped below. THE ECONOMICS OF SURFACE COAL MINING ON MICHIGAN AGRICULTURAL LANDS By Mary E. Patrino A THESIS Submitted to Michigan State University in partiai fulfiiiment of the requirements for the degree of MASTER OF SCIENCE Department of Agricuitura] Economics 1984 ABSTRACT THE ECONOMICS OF SURFACE COAL MINING ON MICHIGAN AGRICULTURAL LANDS By Mary E. Patrino Surface coal mine operators have expressed interest in developing coal resources located underneath agricultural land in southeastern Michigan. The use of agricultural land for surface coal mining elicits concern over the impact of mining on the agricultural sector of the state economy, the environment and the communities located near mining sites. This research analyzes surface coal mining on Michigan agricul- tural lands within an economic framework to provide guidance for future land use policy decisions. Background for the analysis is provided through data on the loca- tion, quality and quantity of the Michigan coal resource, as well as in- formation relating the characteristics and importance of agriculture in the Michigan economy. Economic concepts are utilized to develop an analytical framework within which the allocation of land between farming and surface coal mining can be structured and understood. A procedure is presented and applied to estimate local economic impacts of land con- versions from farming to surface coal mining. The analysis indicates that surface coal mining in Michigan will not significantly affect the state's agricultural sector. Rather,impacts will be experienced primarily by communities located near mining sites. ACKNOWLEDGEMENTS Several people deserve recognition for their contributions to the completion of this thesis. My major professor and thesis supervisor. Dr. Larry Libby, deserves special thanks fbr his guidance and continu- ing enthusiasm throughout the course of this research. I also wish to thank Dr. Dan Chappelle and Dr. Milton Steinmueller for serving on my committee and providing helpful comments for improving this study. A special word of thanks for my friend. Geoff Huntington. for his unwavering support and encouragement throughout my masters program. Finally, sincere appreciation goes to my family for their enthusiasm and understanding throughout the final months of this research project. ii TABLE OF CONTENTS Page LIST OF TABLES ......................... 'Vi LIST OF FIGURES ......................... Viii CHAPTER 1 THE ECONOMICS OF SURFACE COAL MINING 0N MICHIGAN AGRICULTURAL LAND ............. . ....... I Introduction ..................... l Exhaustible Natural Resources ...... . . . . . . . 3 Overview . . .............. . ..... 3 Coal ........................ 4 Economic Determinants of Land Use ........... 5 Overview ....... . .............. 5 Coal and Agriculture ................ 6 Approach of Thesis ................... 7 Organization of Thesis .............. . . . 7 2 COAL MINING AND AGRICULTURE IN MICHIGAN .......... 10 Coal Resources of Michigan ............... l0 History of Coal Mining in Michigan . . . . ..... lO Coal Reserves ........... . ........ 15 Coal Basin. . . ............... 15 Quality of Michigan Coal ...... . ...... 17 Quantity of Michigan Coal ............ 17 Legislation. . . . . . . . . . . . . . . . . . . . . 18 Surface Mining Technique .............. 24 Market Characteristics . . ............. 26 Reclamation. . . . ........... . . . . . . 29 Michigan Agriculture ................. 30 Role of Agriculture in the Michigan Economy ..... 31 Description of Michigan Agriculture. . . . . . . . . 34 Institutional Framework. . . ...... . ..... 39 Private Institutional Framework . . . . . . . . . 39 Public Institutional Framework .......... 43 The Michigan Farmland and Open Space Preservation Act ..... . . . ..... 43 Sumary............ ...... 47 3 ECONOMICS OF A STOCK RESOURCE AND PUBLIC CHOICE ECONOMICS. . . . . . . . . . . . . . . . . . . . . . . . . 49 Introduction. . . . . . . . . . . . . . . . . . . . . 49 The Economics of a Stock Resource ........... 50 Efficiency. . . . . . . . . . . . . . . . . . . . . 51 iii Chapter 6 Pareto Efficiency ................ Maximum Social Nell-Being ............ Constant Proportional Shares ........... Pareto Safety .................. Maximum Value Social Product ........... Potential Pareto Improvement. . . . ....... Sources of Inefficiency ............... Barriers to Internalizing Externalities ....... Optimal Allocation Over Time ........ . . . . Uncertainty .............. . ...... Intergenerational Equity .............. Resource Scarcity and Resources as Constraints on Growth . . . . ................. Public Choice Economics ................ Introduction ............... . . . . . Nature of Good. . . ........... Structure and Performance of a Regulatory System ................ . . . . . . . Summary ........................ ANALYSIS OF THE ALLOCATION OF LAND BETWEEN AGRICULTURE AND SURFACE COAL MINING IN MICHIGAN ............ Introduction. . . . . . . . . . . ........ Investment Decisions .................. Discounting Returns Over Time .......... ‘. . Net Present Value Criterion. . . . . . . . . . . . . Choice of Discount Rate ............... Economics of Allocation of Land Between Agriculture and Surface Coal Mining Uses ............. Summary .................. . ..... LOCAL IMPACTS OF SURFACE COAL MINING AND PROCEDURE FOR ECONOMIC IMPACT ASSESSMENT . . . . . . . . . . . . . . Introduction ...................... Distribution of Impacts ................ Identification of Impacts . . ............. Environmental Impacts ................ Transportation Infrastructure ............ Economic Impacts ................. Income Changes and the Multiplier Effect ........ . ........... Tax Impacts ................... Employment. . . . . . . . . . . . . . Procedure for Local Impact Assessment. . . . ..... Estimating Costs and Returns to Michigan Agriculture. by Fanm Type and Size ......... Estimating Costs and Returns to Surface Coal Mining in Michigan . . . . . . . . . . . . . . SUMMARY AND CONCLUSIONS. . . . . . . . . ..... . . . . Swmmw. ... ... ................. iV' 96 96 98 100 102 103 104 105 106 108 110 119 128 128 Chapter BESS. Conclusions ...... . ............... 131 General Conclusions ................. 133 Agricultural Impact Conclusions ........... l35 Local Impact Conclusions .............. l37 Policy Implications ................. 139 Future Research Suggestions .............. 141 APPENDICES ........................... l43 BIBLIOGRAPHY .......................... l7l Table 2-1 2-2 2-3 2-4 2-6 2-7 2-8 2-9 5-4 5-5 5-7 LIST OF TABLES Michigan Coal Production, 1860-1976 .......... 1980 Sources of Michigan Bituminous and Lignite Coal Imports ..................... Michigan's Rank in the Nation's Agriculture, 1981. . . . Cash Receipts from Marketings, Michigan ........ 1981 Michigan Counties Leading in Agricultural Production ...................... Farm Production Expenses. Michigan .......... Gross and Net Income, Michigan . ........... Income Per Farm, Michigan ............... Acres Enrolled in P.A. 116 Program, By County, 1983 ......................... Potential Environmental Effects of a Surface Coal Mine Operation .................... Estimated Costs and Returns Per Acre of Farmland, by Acreage and Farm Type. ($/acre). 1982 . . . . . . . . Average Multiplier Value and Ranges. By Size Class, for County Employment ............. Allocation of Costs In and Out of Local Economy, In General and Saginaw Valley Cash Crop Farm (400-800 acres) .................... Estimated Costs and Returns to the Local Economy, Per Acre, by Farm Type and Size ............ Discounted Estimated Agricultural Benefits Per Acre to Local Economy. by Farm Type and Size. For Infinite Period (S) .......... . ..... Worksheet for Estimating Returns to the Local Economy from an Acre of Surface Coal Mining in Michigan . . . . ................... Page 12 27 33 36 37 38 40 41 45 101 112 114 115 116 118 Table Page. 5-8 Worksheet for Calculating Annual Mine Production Costs/Acre ....... . .......... . . . . . 122 5-9 Worksheet for Estimating Expenditure Allocation In and Out of Local Economy ............... 123 vii LIST OF FIGURES E19211: 2993 1-1 Michigan Coal Basin ................... 2 2-1 Coal Production in Michigan, 1860-1976 ......... 13 2-2 Diagram of Area Surface Mining Technique ..... . . . 25 viii CHAPTER 1 THE ECONOMICS OF SURFACE COAL MINING ON MICHIGAN AGRICULTURAL LANDS Introduction Beginning in the late 1970's, small surface coal mine operators began expressing interest in developing the bituminous coal resources located in the southeastern portion of the lower peninsula of Michigan (see Figure 1-1). Although Michigan has never been a major coal pro- ducing state, surface and underground mines produced more than forty- six million tons of coal between 1835 and 1952 (Webber and Ehlke. p. 64, 1981). Higher prices for energy fuels, more efficient extraction methods, an increasing demand for coal and lower transportation costs have led potential investors to conclude that coal mining can be pro- fitable in Michigan during the 1980's and 1990's (Roethele and Parrish, p. 37, 1982). In addition, state officials feel surface coal mining will contribute support to the state's faltering ECONOMY by PNVIdl'flSl employment opportunities, attracting industry into the state, and de- creasing the amount of coal imported to meet state energy requirements (Ibid). A significant amount of the state's strippable coal reserves under- lie agricultural land considered to be essential to the future of the Michigan economy. The renewal of surface coal mining in Michigan will cause withdrawals from the supply of land available to meet future de- mand for farmland and agricultural products. In addition, the impending 1 ~Michigan’s Coal Basin. 1 . , . .. CHEBOYGAN 0 Locations uhcn: major mmmg EMMH . operations o] [114: pes! took piece. 'v. _..' PRESOUE ISLE cwuuvolx 1 1 l OTSEGO MM- ALPENA "" —' 1.10115ch ANININI i -—.—.—_—-____-—-—_o lEELANAU GRAND | . RAVERSE . 1 I I , - j___-_______- MANN—12E I VII-56031 fiIs-sTuice‘I'i—oséoim—mi ooemw | Iosco U BENZIE I 'r O u — —. o—o—u—- MASONI LAR— i i CLARE iGLADWI ARENAC . i 1 | 1 HURON .____i_ .:_._.:__.___i._._.'°" OCEANA i NEW mo 1 MECOSTA I ISABELLA 1 MIDLAND; i ‘ ' I l i o- ...: 2:le .__._; ' i ' .. ‘ - . 1 ””5“ i .1— I'IAOWicAI-NT ' “NAN—161' {—— sAcI ‘ . I ' | ' .. l. ... . _. . N ° . 1 - I_ .. “NI 1 - I .__. ' .... urea-1. _.l ' i_ i ; ’ J GENE - ‘___.___ 0mm! . {0.11: ' Team; 159: ”Sui . . ‘ 5* cw“ . 1 . . . .—_ . —— - —- o I I i | | l . KLANO "MACOMal .A-LTEG-AR— ' [—aA'nW “10'— l 33311.3 TLNINGSTON‘ \ ' | i ' l o ' I I ._._-_L-_. ,__.__,__;' __J-___-.——- VAN a HEN KALAMAZOOi CAL N ' JAcx50N ASH‘TENAW ‘ wAvNE ' i o'- I i u—.—-.___.‘ . I.l . - -_—..——‘-'_-‘ aenmN cAss s1. Joserwl BRANCH | HILLSDALE i LENAWEE I MONROE I I ! l I i i ! --—--.L._-—_L.-__—-—--1_--__L___ __-.L_. Source: Roethele and Parrish (1982). Figure 1-1 Michigan Coal Basin actions elicit concern over the impacts surface coal mining will have on the land. the surrounding environment, and the communities in which the mining occurs. In response to these concerns, the state legisla- ture passed the Michigan Surface and Underground Mine Reclamation Act (P.A. 303) on October 12. 1982. This Act, patterned after the Federal Surface Mining Control and Reclamation Act of 1977 (P.L. 95-87). is in- tended to protect agricultural land and the surrounding environment through the implementation of a regulatory framework designed to control the operation of mines within the state of Michigan (see Appendix A). The intent of this research is to analyze surface coal mining on Michigan agricultural lands within an economic framework. Application of the conceptual framework provided by the discipline of economics will help to clarify the issues surrounding surface coal mining in Mich- igan and make more explicit the choices facing state and local policy makers. Exhaustible Natural Resources Overview Randall (1981) defines a resource as "something that is useful and valuable in the condition in which we find it" (p. 13. 1981). In general, natural resources may be classified as either stock, flow or composite resources (Barlowe, pp. 228-9, 1978). The total physical supply of a stock resource is fixed; because new deposits occur only over geologic time periods, withdrawals from the stock may lead to exhaustion of the resource. A flow resource. such as water, is renewable and may either be stored for later consumption or utilized as it becomes available (Randall, p. 14, 1981). Composite resources have characteristics of both stock and flow resources; included in this category are biological resources, soil resources. and man-made improvements (Barlowe. p. 228, 1978). The majority of energy resources used in the United States are stock resources. In 1979 coal supplied 18.6 percent of U.S. energy needs, natural gas 27.3 percent. and petroleum 47.2 percent for a total of 93.1 percent of the total national energy requirements (Schurr et al.. p. 71, 1979). .9931. The analysis presented in this paper involves the surface extrac- tion of coal - a stock resource — for use as an energy fuel. Although the United States is believed to hold more than 208 billion tons of coal in proven reserves, this quantity cannot be increased except through discoveries or the development of new technologies (Perry. p. 378. 1983). Around 1900, coal provided 93.0 percent of the energy needs of the United States but from 1900 to 1970 dependence on coal steadily declined. From a low point in 1972 when coal supplied only 17.3 percent of U.S. energy needs. the last decade has seen legislative and policy incentives bolster this figure to 22.1 percent in 1982 (Ibid, p. 377). The prime uses of coal are electrical generation (64 percent), industrial uses (33 percent) and residential and commercial uses (3 percent) (Seitz et al., p. 23, 1981). Although the supply of coal which exists in the United States makes it an attractive, dependable energy source, there are problems associated with its use. Many environmental problems result from either the produc- tion or burning of coal. These problems may be experienced locally (ex., soil erosion) or at great distances from the mine site (ex., acid rain). As an industry. coal production is also susceptible to capital shortages which result from high interest rates, labor strikes and in- creasing labor costs, and inadequate transportation facilities (Schurr et al., p. 483-9, 1979). Economic Determinants of Land Use Overview The allocation of land between farming and surface coal mining is determined by the relative value of the land in the alternative uses or mix of uses (Huff et al., p. 16, 1982). Through the market pricing mechanism, land resources tend to gravitate to those uses that conmand the highest market prices and offer the highest rates of return (Barlowe, p. 129, 1978). Assuming that the market mechanism is func- tioning perfectly, land that generates high rates of returns to farming relative to the returns from the production of the underlying coal re- source may not be mined. Alternatively, land will be converted from farming to surface mining if the value of the coal resource becomes greater than the overlying surface for farming (Huff et al., p. 16, 1982). The returns to coal mining are dependent upon the price of coal, the price of coal substitutes, transportation costs, costs of extrac— tion and other economic factors (Ibid). The conversion process can be analyzed on the basis of economic efficiency. Under the conditions of a perfectly competitive market system, neoclassical economic theory states that resources will be al- located to their most efficient use through the market pricing system (Solberg, p. 540, 1982). Producers respond to market signals to maximize profits. However, resource allocation nay be less than efficient if a divergence exists between social and private costs. Under these cir— cumstances a "market failure" is said to exist and. although producers are behaving efficiently by private standards. social efficiency is not achieved. A market failure may result when the decisions producers make directly affect other individuals and the producers own production in ways not reflected in cost or benefit calculations. Because they are not accounted for, these costs are said to be external to the mar- ket system and are referred to as "externalities." Air pollution is a common example of an externality; while pollution may inflict signi- ficant costs to society in terms of increased health care. etc.. the polluter is not charged for the right to expell these pollutants into the atmosphere. The economic concepts of efficiency. market failure and externalities will be dealt with more extensively in Chapter 3. Use of an economic framework will help to clarify the issues surrounding the surface mining of coal in Michigan and make more explicit the choices facing state and local policy makers. Coal and Agriculture The United States Department of the Interior estimates that more than ten million acres of land may eventually be surface mined for coal (Seitz et al.. p. 9. 1981). While this figure appears large, surface coal mining actually accounts for a relatively small percentage of the land diverted from agricultural uses each year. However. the highly visible nature of surface mining. uncertainty of land reclamation suc- cess. off-site damages and the (at least) temporary loss of soil produc- tivity have led the Committee on Soil as a Resource in Relation to Surface Mining for Coal of the National Academy of Science (1981) to conclude that. "the relatively small size of these losses...., does not ipso facto mean they are trivial or that the nation can obviously afford them" (Ibid. p. 10. 1981). The implications of the conversion of agricultural land to surface mines is the subject of on-going debate (Singer, p. 255. 1977). Approach of Thesis The intent of this research is to analyze the surface coal mining of Michigan agricultural lands within an economic franework. By apply- ing the conceptual framework provided by the discipline of economics to the situational variables existing in Michigan, a perspective can be developed that will be of use in future policy decisions. Another im- portant role of this thesis is to consolidate information on the coal resource of Michigan. The information presented and the conclusions drawn from this analysis are intended to serve as a useful tool for state and local officials and citizens who will be directly involved in the policy formulation and implementation of surface coal mining regula- tions in the state of Michigan. Organization of Thesis To begin the analysis. Chapter 2 presents a discussion of the his- tory. location. quantity and quality of the Michigan coal resource to establish the background for the analysis which follows. The regulatory environment created by the passage of the new state law is also examined. In addition. it is instructive to describe the technique of area surface mining. the characteristics of the state's coal market. and the current status of reclamation procedures. Agriculture represents a vital component of the Michigan economy at the present time; and. it is likely that its importance will increase in the future. Because surface mining and farming are mutually exclu- sive land uses, it is important to consider the role of agriculture in Michigan in order to assess the impact of land conversions from farming to surface mining. With this background. concepts from the neoclassical economic anal- ysis of a stock resource are presented in Chapter 3. The topics which are included are efficiency. resource allocation over time, uncertainty, intertemporal equity. and the macroeconomic issue of resources as a constraint on growth. The regulatory structure established by P.A. 303 (Michigan Surface and Underground Mine Reclamation Act) will then be evaluated in a public choice framework utilizing a situation. structure. performance paradigm. Chapter 4 begins with an analysis of the investment decision facing a Michigan landowner who has the opportunity to sell or lease his land for surface coal mining. The concepts of discounting. choice of discount rate and economics of the allocation of land between farming and surface mining are discussed as well as the investment criterion of net present value. The analysis continues in Chapter 5 with an assessment of local community impacts that result from surface mining operations. Included in this chapter is discussion of the distribution of benefits and costs from surface mining. the effect of coal transportation on local road systems. and the environmental impacts of mining. The chapter concludes with discussion of the local economic impacts of surface mining and the presentation of a framework within which local policy makers can esti- mate the magnitude of these impacts. Chapter 6 summarizes and discusses the conclusions to be drawn from this study. In addition, future research needs are suggested. CHAPTER 2 COAL MINING AND AGRICULTURE IN MICHIGAN Coal Resources of Michigan In order to examine the economics of surface coal mining on Michi- gan agricultural lands. it is necessary to understand the setting in which the mines will operate. This chapter establishes the background for the analysis which follows through a discussion of the history and characteristics of the Michigan coal resource as well as the role of agriculture in the Michigan economy. History of Coal Mining in Michigan. Coal mining in Michigan began in 1835 when workmen digging the foundation fbr a grist mill in Jackson County discovered a small seam of coal (Cohee et al.. p. 4, 1950). Following this discovery small mines opened in Eaton. Jackson and Shiawassee Counties as early as 1839 (Roethele and Parrish. p. 64, 1982). More than forty-six million tons of coal were produced in Michigan between 1835 and 1952 from an estimated 115 mines. A majority of these mines were underground shaft mines which utilized the room and pillar method of mining (Cohee et al.. pp. 4, 48- 51. 56. 1950). In 1860, the first year that records were kept. 2,320 tons of coal were produced in Michigan. With the exception of a period of low pro- duction between 1883 and 1894. production rose steadily until the turn of the century. The opening of two underground mines in Bay and Saginaw 10 11 Counties in 1897 led to a doubling of coal production and resulted in the coal industry playing a significant role in the state's economy during the late 1800's and the early 1900's. (Cohee et al., p. 4, 56, 1950). Production peaked in 1907 when thirty-seven mines produced 2,035,858 tons of coal with a dollar value of $3,660,833 (Webber and Ehlke, p. 63, 1982). After 1907 production declined steadily. By 1946 only the Swan Creek Mine, located northeast of St. Charles in Saginaw County was operating with an average output of eighty tons per day. In 1952 more coal was being produced than sold and, when the coal pile reached 2,500 tons late in 1952, the mine was closed (Arnold, p. 101, 1954). The closing of the Swan Creek mine effectively ended the era of coal production in Michigan (see Table 2-1 and Figure 2-1). As stated earlier, the majority of the mines operating during this time period were underground shaft mines. Located in Bay, Tuscola, Shiawassee, Saginaw, Calhoun, Genesee, Ingham, Eaton and Jackson Counties, these mines ranged in depth from 100 to 300 feet, with an average depth of 110 feet. The average life span of these mines was six to eight years (Roethele and Parrish, p. 31, 1982). The surface mines which operated were located in the southeastern section of the lower peninsula where glacial drift is thin or absent. Due to the limited extent of the coal resources of Michigan, no surface mine covered more than a few acres (Cohee et al.. p. 4, 1950). In all, 570 acres of land have been utilized in Michigan for surface coal mining (Johnson and Paone, p. 12, 1982). In his review of the Michigan coal era, Arnold (1954) stressed that the decline of the coal industry did not result from a lack of effective demand for coal by state consumers. He noted that eight million tons of 12 TABLE 2-1. Michigan Coal Production, 1860-1976 Yoar Short Tons Your Short Tons Year Short Tons 1860 2,320 1895 112,322 1930 661,113 1861 3,000 1896 92,882 1931 359,403 1862 5,000 1897 223,592 1932 446,149 1863 8,000 1898 315,722 1933 406,741 1864 12,000 1899 624,708 1934 621,741 1865 15,000 1900 849,475 1935 628,384 1866 20,000 1901 1,241,241 1936 626,145 1867 25,000 1902 964,718 1937 562,262 1868 28,000 1903 1,367,619 1938 494,481 1869 29,980 1904 1,342,840 1939 456,754 1870 28,150 1905 1,473,211 1940 410,169 1871 32,000 1906 1,346,338 1941 310,775 1872 33,600 1907 2,035,858 1942 231,148 1873 56,000 1908 1,835,019 1943 168,615 1874 58,000 1909 1,784,692 1944 139,938 1875 62,500 1910 1,534,967 1945 125,704 1876 66,000 1911 1,476,074 1946 79,990 1877 69,197 1912 1,164,973 1947 14,013 1878 85,322 1913 1,138,639 1948 13,000 1879 82,015 1914 1,283,030 1949 11,450 1880 100,000 1915 1,156,138 1950 12,000 1881 112,000 1916 1,180,360 1951 12,000 1882 135,339 1917 1,374,805 1952 3,000 1883 71,296 1918 1,464,818 1953- 1884 36,712 1919 996,545 1973 -0- 1885 45,178 1920 1,489,765 1974— 1886 60,434 1921 1,141,715 1976 20,000 1887 71,461 1922 929,390 1979- 1888 81,407 1923 1,172,075 1984 ~0- 1889 67,431 1924 831,020 1890 74,977 1925 808,233 1891 80,307 1926 686,707 1892 77,990 1927 756,763 1893 45,979 1928 617,342 1894 70,022 1929 804,869 Total (no of Hay, 46,332,240 Webber and Ehlke (1981). fl Source: Cohee et a1. (1950), U.S. Bureau of Mines (1971), Ange» ea._pwzv 65mp-oomp .campgurz =3 covpuauoLa paou FIN «Lsmvu .Apma_v axpcm can Lanna: .Arkm_v magma Lo aaaeam .m.= .Aommpv ..a pa magou "magaom who" 00m.— n¢o~ Ono" Dam; 000" 000— Dhmu coma p p A F _ p b . L 13 an - onN. J 00D. J 0mm. 1 000 .3 i ODN o .— 1: com . a .J onhou 1+ ooo.~ 14 coal were being used for residential heating in Michigan as late as 1950. Rather, Arnold cited the thinness of the coal seams, high water table in coal bearing regions, high sulphur content and physical charac- teristics of Michigan coal as major contributions to the high production costs which led to high coal prices and the eventual cessation of indus- try activities (Arnold, pp. 101-2, 1954). Analysts of the era (Cohee et a1. [1950], Arnold [1954], and Dorr and Eschman [1970])agree that the decline can be attributed to three main sources: (1) competition from coal-rich Appalachian states. (2) the high cost and difficulty in- volved in extracting Michigan coal, (3) the relatively poor quality of Michigan coal. In essence. high prices for Michigan coal led consumers to choose lower priced, higher quality substitutes from the Appalachian states. The oil embargo of the early 1970's and subsequent rise in the price of petroleum fuels induced the re-opening of an abandoned surface mine south of Williamston, Michigan, fbr a two year period. 1974-1976. The mine, originally owned and operated by the Grand River Coal Company, had ceased production in 1933 and was abandoned in an essentially un- reclaimed stated. From 1974 to 1976 the Michigan Aggregate Corporation, a gravel extractor, used then-idle gravel machinery and labor to surface mine for coal (Brewczak, p. 5, 1982). The operation produced and sold approximately 20,000 tons of coal to a local utility company (Minerals Yearbook, p. 377, 1976). Since 1977, there has been no commercial pro- duction of coal in the state of Michigan. Assuming a forty percent rate of loss during mining. and given a total production of coal equal to 46,332,240 short tons, the total amount of coal mined and lost during mining in Michigan between 1835 and 1976 exceeded 77 million short tons (Cohee et al.. p. 2. 1950). During peak 15 production in 1907, Michigan coal provided one-sixth of all coal used in the state (Roethele and Parrish, p. 30, 1982). Coal Reserves Coal Basin: The geological structure in which the Michigan coal lies is called the Michigan basin. The structure, extending over 11,500 square miles in the central portion of the lower peninsula, is bounded on the north by Houghton Lake, on the south by Jackson, on the east by Bay City and on the west by Big Rapids (see Figure 1-1). On a national level the basin lies within the Northern Interior Province of the United States Bureau of Mines coalfield classification scheme (U.S. Bureau of Mines, Staff, pp. 8-9, 1971). The rocks in the basin are of Pennsylvania age. being formed of sand, silt and mud that accumulated in swamps approximately 280 million years ago. The formation is supported by a layer of Parma sandstone which ranges in thickness from 15 to 150 feet. No coal exists in this layer. The layer which lies above the Parma sandstone. called the Saginaw formation, ranges in depth from 200 to 650 feet and contains all of the coal found in the basin (Cohee et al.. p. 2—3, 1950). On top of the Saginaw formation lies the Grand River group. The sandstones of this group occur sporadically over the basin and are absent in some lo- cations (Dorr and Eschman, p. 130, 1970). The uppermost layer of the basin consists of glacial drift. The drift located in the central and western portions of the basin ranges in thickness from three to eight hundred feet, but is thin or absent and rarely exceeds two hundred feet in areas of past surface mine operations (Cohee et al.. p. 3, 1950). At the present time, officials at the Michigan Department of Natural 16 Resources (DNR) consider 150 feet to be the maximum amount of over- burden that can be economically removed during a surface mining opera- tion. The coal beds are essentially flat, dipping toward the center of the basin at an average rate of twenty to fifty feet per mile and vary- ing in thickness from several inches to several feet (Bureau of Mines. Staff, pp. 41, 1971). While some drill hole tests have recorded coal as thick as seven feet, some doubt exists over the accuracy of these measurements (Cohee et al.. p. 4, 1950). Only a few of the coal beds mined in Michigan have averaged more than three feet in thickness. The irregularity of the coal beds is described as "varying in thickness from thirty to fifty feet or more in a quarter of a mile; thicken, thin or pinch out entirely in a few hundred feet; or split into two or more distinct beds" (Cohee et al.. p. 4, 1950). These irregularities cause coal beds mined in one location to have different characteristics than beds mined a short distance away. Furthermore, the size of any one bed is relatively limited; most areas of proven coal reserves cover less than 150 acres (Cohee et al.. p. 4, 1950). Kalliokoski and Welch (1977) found the distribution of past coal production to be a goOd in- dicator of the geographic distribution of the Michigan coal beds (see map. Appendix B). Another important characteristic of the Michigan coal basin is the proximity of the coal beds to the water table. This factor contributed to higher coal prices and complicated past mining operations by forcing miners to pump water from the mines. A recent study completed by McDonald and Stark (1980) concluded that the nearness of the water table 17 will not be a significant factor for future mine operations and should, therefore, not discourage potential investors (p. 31). Quality of Michigan Coal: The poor quality of Michigan coal, fre- quently described as "flaky," is attributed to insufficient pressure present at the shallow depths where the coal was formed (Arnold, p. 101-2, 1954). Michigan coal is high volatile B and C bituminous, with an ash content of 3-9 percent, volatile material of 31-41 percent. and sulphur content of 1-3 percent (Cohee et al., p. 4, 1950). Coal con- taining less than one percent sulphur is considered low sulphur coal, greater than two percent is considered high sulphur coal. The BTU value per pound of Michigan coal ranges from 10,500 to 12,300. Michigan coal is suitable for residential heating,e1ectrical generation, and industrial processes; it is not suitable for the production of coke used in making steel. Quantity of Michigan Coal: Estimates of the amount of recoverable Michigan coal vary widely. These discrepancies can be attributed to different definitions of "physical stock" and recovery rates between studies. For example, Kalliokoski and Welch (1976) based reserve esti- mates on coal seams 28 inches thick or greater while the Michigan DNR's estimate includes all coal seams. Cohee et al. (1950) based an estimate of 110 million tons on a fifty percent rate of recovery. A more recent study, completed by Kalliokoski and Welch (1976), calculated a total state reserve of 126.50 million short tons, 1.3 million of this total recoverable by surface mining methods. This estimate is based on seams 28 inches thick and an overburden of 100 feet or less. A 1981 report released by the U.S. Department of Energy updates the Kalliokoski report and lists a demonstrated reserve base of coal at 127.70 million tons, fl‘ 1'; 18 4.58 recoverable by surface mining methods. Seitz et al. (1981) report surface mining recovery rates as high as eighty percent. Officials of the Geological Survey Division of the Michigan DNR report that past estimates are too low; they conclude that higher coal prices and improve- ments in mining technology will allow much higher recovery figures in Michigan. The DNR estimates that approximately 250 million tons of coal are potentially recoverable in Michigan. This estimate is based on an overburden depth of less than 150 feet and significantly lower losses during mining than have been reported in literature (Roethele and Parrish, p. 37, 1982). Legislation The legislation that is adopted to control actions relating to a particular activity is important because it "set(s) the legal boundaries within which accepted individual and group behavior takes place " (Barlowe, p. 383-4, 1978). The set of rules implemented to carry out the intentions of a piece of legislation allocates property rights and obligations and guides program performance.1 Rosenbaum (1978) notes that, historically, environmental policy in the United States has been carried out through the use of a "standards and enforcement" regulatory approach. As explained by Rosenbaum, the "programs create statutory standards for environmental quality, ordain what technical procedures must be utilized by polluters to conform with standards (or what cri- teria must be used for procedures), empower specific regulatory agencies to elaborate and enforce both standards and control procedures, and 1See Chapter 3 for a more extensive discussion of public choice economics. 19 attach penalties for non-compliance" (Rosenbaum, p. 51, 1978). The wisdom of using such a system has been questioned by many economists:I These concerns notwithstanding, this is the approach taken to control surface coal mining and reclamation at both the state and federal level in the United States. Prior to 1977 mining in Michigan was controlled by a relatively weak regulatory statute, Public Act 92 of 1977. The intent of this act was to "provide for reclamation of land subject to the mining of minerals; to control possible adverse effects of mining, to preserve the natural resources; to encourage the planning of future use and to promote the orderly development of mining, the encouragement of good mining prac- tices and the recognition and identification of the beneficial aspects of mining" (Public Act 92 of 1970, p. 1). As a whole, the act and the adninistrative rules set up to implement the act did little more than list general guidelines for the reclamation of abandoned mine sites, require that notice be given to the DNR upon the commencement of mining, and that an "environment plan” and a report of reclamation activities be filed with the agency. No provisions were made for the protection of a particular class of land. The act required the DNR to consider the economic impact of the regulations on the miners (Institute of Planners, p. 252, 1976). In 1977, in an attempt to standardize surface mining rules across states while still allowing for individual state differences, the federal 1Briefly, this is the standards v incentives debate. Many economists feel that the use of regulatory standards slows technological innovation, disregards economic efficiency, and requires the regulating agency to possess the expertise to render fine technical judgements (see Anderson [1977] and Kneese and Schultze [1975] for a more extensive discussion). 20 government passed the Surface Mining Control and Reclamation Act of 1977 (P.L. 95-87). P.L. 95-87 provides federal jurisdiction in any state that cannot or does not choose to develop its own plan for reclaiming abandoned mine sites or does not wish to assume exclusive control over state-owned resources (P.L. 95-87, sec 503). The states were given eighteen months after the passage of the law on August 3, 1977 to sub- mit a state management plan to the federal Office of Surface Mining Reclamation and Enforcement (OSM) for approval. To be approved, the state program proposals had to contain regulations that were at least as strict as those developed to implement P.L. 95-87. If a state did not meet this deadline, the OSM was to develop and implement a plan for the state within thirty months of the bill's passage date (P.L. 95-87, sec 504). Due to a lack of interest in developing the Michigan coal resource, neither the state DNR nor the OSM attempted to formulate a state plan until 1978. At that time the DNR informed the governor's office that it was receiving inquiries from potential mine operators and that it was able to develop a state management plan. The governor in turn notified the OSM which granted an extension of the deadlines speci- fied in P.L. 95-87 (Michigan Senate Analysis Section, p. 1, 1982). The rationale offered by state officials for developing and implementing a state rather than federal program included the arguments that: (1) state land could be better protected through more stringent state regu- lations; and (2) that the Reagan administration's emphasis on reducing government regulations might hamper federally-controlled surface mine reclamation programs. In addition, states which elected to develop programs were entitled to federal matching funds to help defray the costs of implementation (Ibid). 21 On October 12, 1982, the state legislature passed the Michigan Surface and Underground Mine Reclamation Act (P.A. 303). (See Appen- dix A). The protection of agricultural lands was one of the primary objectives of this comprehensive statute. In addition, the act set up specific environmental perfbrmance standards, abandoned mine reclama- tion requirements, permit rules, bonding requirements, underground mine rules, an inspection and monitoring system and levied fines and penalties. The following are the highlights of the articles contained within P.A. 303: Article 1: General Provision: This article begins by asserting that the state of Michigan wants to assume exclusive control over state resources. It names the DNR as the regulatory agency in charge and de- fines the role which the DNR will assume. Article 2: Abandoned Mine Reclamation: The DNR will establish procedures whereby a state abandoned mine reclamation fund will be ad- ministered by the state's Department of Treasury. Monies which go into the fund include: (1) mine operation application fees (100.00 each per- mit); (2) inspection and reclamation fees ($.25 per ton); (3) civil fines; (4) funds made available by Title IV of P.L. 95-87; and (5) dona- tions. The act lists, in order of priority, the uses to which this fund will be applied. In addition, Article 2 gives the DNR the power to enter onto private property in the exercise of their prescribed duties. Article 3: Permits: Each surface mine operator must obtain a per- mit from the DNR which is valid for a period of three years. The article specifies the information to be included in each permit. The requirement most relevant to this study dictates that an agricultural impact state- ment and soil survey must be included to confirm the location of 22 agricultural land and the location of any land enrolled under the Michigan Farmland and Open Space Preservation Act (P.A. 116).1 Section 311 of Article 3 states that, "if the area proposed to be mined contains agricultural land, the Department (DNR) shall consult with the Director of the Department of Agriculture and the Secretary of the United States Department of Agriculture and shall not grant a permit to mine on agricultural land unless the Department finds in writing that the operator has the technological capability to restore the mined area and any other areas impacted by the surface coal mine operation within a reasonable time period to equivalent or higher levels of yield as non-mined agricultural land in the surrounding area under equivalent levels of managenent, and also finds that the applicant can meet the soil reconstruction standards of this Act." Article 4: Environmental Performance Standards: The issuance of a permit to an operator requires that environmental performance standards be met. The operator is obligated to see that reclamation occurs as contemporaneously as possible with mining and that these activities re- sult in the land being restored to the approximate original contour. Agricultural lands require the separation and special handling of soil horizons. It is the operator's responsibility to establish a "diverse. effective and permanent vegetative cover..." and to see that successful revegetation occurs for five years following mining. Article 5: Bonding: Each permit application must include a certi- ficate stating that the applicant has public liability insurance for the 1See pp. 52-56 for a discussion of P.A. 116 and its relevance to this study. 23 mining operation. After an application has been approved, but before a permit is granted, the applicant must file with the DNR a "bond for performance payable to the state of Michigan and conditioned on faith- ful performance...". No part of the bond may be released until soil productivity of agricultural land has been returned to equivalent or higher levels as non-mined land of the same soil type. Article 8: Fines and Penalties: The DNR is given the power to levy fines and penalties against operators who do not comply with state surface coal mining regulations. Article 9: Inspection and Reclamation Fee: Each operator is assessed a reclamation fee of not more than $.25 per ton of coal mined. All fees are collected by the DNR and are to be deposited into the state's abandoned mine reclamation fund. Article 10: Miscellaneous Provision: The DNR is directed to for- mulate the rules through which the act will be implemented. They are also given the power to declare an area unsuitable for mining; an area may be unsuitable if mining results in lower agricultural productivity or adversely affects an agricultural operation. As noted earlier, the legislation enacted to control actions re- lating to an activity is important because it allocates property rights and guides policy performance. Currently, the DNR is developing the specific rules and regulations necessary to implement the provisions of P.A. 303. Until these rules are developed and approved by the federal OSM, the state program cannot operate. The use of this regulatory framework will significantly influence the impacts of surface coal mining in Michigan and will be discussed more extensively in Chapter 3. 24 Surface Mining Technigue Throughout the Midwest, a surface mining technique known as "area mining" is used. Mines of this type experience significant economies of scale with increasing size; it is therefore to the operator's advan- tage to mine a relatively large area (Tourbier and Westmacott, p. 20, 1980). "A Handbook for Small Surface Coal Mine Operator" stresses that in order to these mines to be economical, double handling of over- burden must be minimized. Area mining consists of four major steps (Carter et al., p. 11-20, 1974) (see Figure 2-2). 1. site preparation: this step entails the removal of vegetation and other obstructions from the area to be mined. Access roads, haulage roads and waste disposal sites are constructed at this time. 2. removal and disposal of overburden: in this step an initial trench or "boxcut" is made through the over- burden to expose the coal. The length of the cut is generally extended from one end of the area to be mined to the other; the width is determined by the size and type of equipment being used. After removal the overburden is placed on unmined land near the cut. 3. excavation and loading of ore: the coal is removed and is then loaded into trucks or some other form of transportation for delivery. 25 \1 . a a . . : . .. . . 1 .. ..v . s. .. ... . . . , . .g‘. s G. .. .. . ._$ wzavcsumh mcvcrz oomwcsm 66L< mo Eagmmro mum wgsmwu .AFmaFV 66:; "ougsom lb 1 r.w I I.r II- .1111. 11-11 .1 I .1 1.1 . I. 1....In...I .- - ILJVIIII .I - III- (Hi III ..... .M. 1.66....3 . .... .. w... . i I .13 [Hunts—3 ._¢.z_u._=.|| 0.15.. 4 a: o . Ir. J11 ~11... . .1... I I» i u .i x» s. . . .. ..... ~ 7. 1“ \ . .... » ... . i. (1 ~ . .. .4... 1.. ....» .... .1 a. . 1.4;! 2 m... . ______ . .....s.‘ .2“: .. 6 #2:. ...; 511;..151 111-4181 26 4. transportation: the coal may be transported to a plant for further processing or shipped directly to the utility for use. Market Characteristics Between 1960 and 1980 coal consumption in Michigan grew twenty percent, rising from twenty-five to thirty million tons per year (Webber and Ehlke, p. 8, 1982). In 1980 nearly three-quarters of the thirty million tons of coal consumed in Michigan were used to generate electricity; a substantial amount of the remaining coal was used in the production of coke. Residential and commercial uses of coal in recent years have been negligible (Ibid. p. 59). In 1981 coal supplied 26 percent of Michigan's energy needs. Sources of petroleum (37 percent), natural gas (31 percent), nuclear power (5.5 percent) and hydroelectric power and imported electricity (0.5 percent) contributed remaining requirements (Webber and Ehlke. p. 19, 1982). By 1982 dependence on imported sources of fuel in Michigan was ex- pected to reach 90 percent of the state's energy requirements; the dollar value of these imports was estimated to be 8.9 billion dollars (Webber and Ehlke, p. 6, 1982). With no mines currently operating in the state, all coal used in Michigan is imported (see Table 2-2). The more than thirty-one million tons of coal imported to the state in 1980 had a delivery price between $60 and $80 per ton compared with a price of $40 or more at the mine site (Roethele and Parrish, p. 35, 37, 1982). By 1985 state coal requirements are expected to exceed 44 million tons per year (The President's Commission on Coal, p. 35, 1980). 11.... EUNHMSP. 27 TABLE 2-2. 1980 Sources of Michigan Bituminous and Lignite Coal Imports Amount Location (1,000 tons) Z of Total E. Kentucky 16,294 52.2 Ohio 2,572 8.2 Northern W. Va. 4,023 12.9 Montana 4,049 13.0 W. Kentucky 459 1.5 Southern W. Va. 1,515 4.9 Pennsylvania 1,477 4.7 Other 818 2.6 Total 31,206 100.0 Source: Nebber and Ehlke, Michigan Energy Data Book, Michigan Energy Administration, p. 65, 1982 . 28 Although coal is imported to meet state energy needs of the 1980's this fact does not necessarily imply that it would be inherently better for Michigan to produce coal within its borders for sale to state con- sumers. The principle of comparative advantage states that, "a region specializes in the production of that commodity for which it has a comparative production advantage. The relative advantage is the result of different factor endowments among regions. A region will export those commodities which can be produced with relatively abundant factors of production, and it will import those commodities which are produced by a relatively scarce factor" (Siebert, p. 91, 1969). Factor endowments include natural advantages such as a well-endowed resource base and favorable climatic conditions and such factors as favorable location and transportation costs. Barlowe (1978) states that "comparative advantage is measured by the economic ability of an area to compete with other areas in the production of particular goods and services" (p. 271). Additionally, comparative advantage is a func- tion of the alternative uses of a particular site. Coincidentally, the Michigan coal resource is located near the major population and in- dustrial areas of the state making transportation costs relatively low, thereby giving state producers a significant advantage. Historically, coal mined in Michigan has been sold either to local citizens for residential heating or nearby utilities for electrical generation (U.S. Bureau of Mines, p. 377, 1976 and Arnold, p. 101, 1954). Based on this experience, it seems reasonable to assume that coal mined 29 in the future will also be sold to nearby consumers who want to take advantage of the lower delivered price of Michigan coal. However. this will depend on a large number of factors, including the availability and price of alternative sources of energy, air quality standards, and the price of Michigan coal. Reclamation Seitz et a1. (1981) define reclamation as the "return of the land to a form and level of productivity that will sustain the prior or future planned use or uses in an ecologically stable state, a state that will not contribute substantially to environmental deterioration and that is compatible with surrounding aesthetic values" (p. 153). Previously, reclamation procedures have been aimed at the return of the land to some productive use, not necessarily to the level of productivity which existed before mining (Ibid, p. 173). The success of any reclamation procedure varies with the physical characteristics of the land, the climate of the region, and the water 1 The and nutritional requirements of the proposed end use of the site. determination of end use dictates the amount of grading to be done and the type of vegetation required; both of which represent the major costs of a surface mine reclamation project as well as the major source of cost variation (Carter et al., p. 111-73, 1974). The length of time required to reestablish soil productivity levels varies from site to site. Huff et a1. (1982) report that recovery time 15ee Seitz et al. (1981) for a discussion of the success of recla- mation procedures (pp. 173-178). 30 may range from five to one hundred years. However, surface mines in Ohio and Pennsylvania have taken fannland out of production for as few as two years (Seitz et al., p. 173, 1981). Reclamation in Michigan will be regulated by the performance standards developed by the DNR. These standards will be based on the following requirements specified in Michigan P.A. 303: 1. Restoration to the original contour. 2. Disturbed land areas must be restored such that they are able to support pre-mining levels of usage. 3. Topsoil not used immediately must be segregated into a pile separated from other spoils. 4. The operator must assume responsibility for revegetation for a period of five years. 4 Agricultural land requires the following special standards: 1. Soil horizons A and 8 must be segregated and piled separately unless it can be shown that other available materials can pro- duce a more productive topsoil. 2. Replacement and regrading of root zone is required. 3. Land must be returned within a reasonable time period to levels of yield higher than or equal to non-mined agricultural land in the surrounding area. The enforcement and effectiveness of reclamation procedures promulgated by the DNR will have a significant effect on the magnitude of the im- pacts surface coal mining has on Michigan residents. Michigan Agriculture In order to analyze the impacts of the surface coal mining of Michi- gan agricultural lands, it is necessary to understand the role of 31 agriculture in the Michigan economy. An examination of data relating the physical, economic and institutional characteristics of Michigan agriculture will provide a foundation on which to evaluate the conse- quences of actions which affect this industry. Role of Agriculture in the Michigan Economy Agriculture is an important component in the economy of the state of Michigan. In 1982, as the state's second largest industry based on total value, agriculture in Michigan produced more than fifty commercial food crops with a cash value of more than three billion dollars.1 As an employer and producer of goods and services, agriculture also pro- vides stability for the Michigan economy. Unlike the automobile and tourism industries, agricultural income is not closely correlated with the general economy; in times of economic recession, agriculture lends support to the state economy (Wright and Ferris, p. l, 1981). Estimates show that between 35 and 40 percent of Michigan citizens receive some portion of their income from agricultural industry (Michigan Department of Conmerce, p. l, 1980). It is important to note that farming com- prises a relatively small portion of the total agricultural industry in Michigan. Farming, manufacturing, distribution, and provision of fanm inputs combine to form the total fanm and food system. A disruption in any single area is felt throughout the system making it reasonable to assume that the surface mining of Michigan fanms will affect the entire state agricultural system to some extent. 1Un1ess otherwise noted, facts appearing in this section are taken from "Michigan Agricultural Statistics, August 1982," Michigan Depart- ment of Agriculture. Ag. Reporting Service. 32 Michigan agriculture is considered a growth industry, increasing at a real rate of just over two percent annually (Wright and Ferris, p. 1, 1981). Although imports presently account for more than one-half of the food consumed in Michigan, increasing fuel costs could give Michigan farmers an advantage over more distant producers; the close proximity of farmers to markets in Michigan may yield significant transportation cost savings which allow Michigan farmers to deliver their products at a lower price than more distant producers. While this may result in a lower level of food imports and food prices. it does not necessarily follow that any degree of self-sufficiency should be a goal fbr Michigan agriculture. Michigan agriculture plays an important role in the national econ- omy as well. Michigan farmers lead the nation in the production of five crops - blueberries, tart cherries, cucumbers (processing), dry beans and navy beans - and rank fifth or higher in the production of fifteen others. (See Table 2-3). In addition, Michigan ranked fifteenth among all states in agricultural exports in 1981 with shipments totaling $943.6 million. Growing demand for agricultural exports in the United States is likely to lead to further increases in these figures; the National Interregional-Agricultural Projection Study (NIRAP) cites corn, wheat and soybean export markets as having the greatest potential for expansion between 1985 and 2000 (Wright and Ferris, p. 25, 1981). Be- cause all three crops are grown in Michigan it is likely state producers will increase production of these commodities to take advantage of ex- panding export markets. 33 Table 2-3. Michigan's Rank in the Nation's Agriculture, 1981 Corn, Sweet, Fresh COMMODITY Rank Production 2 U.S. Among States 1,000 Production Crops Blueberries 1 52,000 lbs. 44.9 Tart Cherries 1 88,000 lbs. 65.4 Cucumbers, Processing 1 100.8 Tons 17.5 Dry Beans 1 7,198 Cut. 22.6 Navy Beans 1 4,070 Cut. 75.3 Bedding Plants 2 6,428 Flats 15.2 Prunes & Plums 2 16 Tons 23.5 Apples 3 640,000 lbs. .4 Asparagus 3 171 Cut. 1 .0 Celery 3 1,440 Cut. .9 Red Clover Seed 3 1,520 lbs. .9 Tomatoes, Processing 3 118.3 Tons .1 Snap Beans Processing 4 36.2 Tons .4 Sweet Cherries 4 46,000 lbs. 1 .0 Strawberries 4 176 Cut. .4 Carrots 5 1,316 Cut. .3 Floriculture 5 54,464 001. .4 Grapes 5 53 Tons .2 Pears 5 9 Tons .0 Sugarbeets 5 2,030 Tons .4 Cauliflower 6 62 Cut. .3 Cantaloups 6 184 Cut. .4 Maple Syrup 6 91 Gal. .5 Oats 6 21,080 Bu. .1 Spearmint 6 118 lbs. .5 Green Peppers 7 135 Cut. .3 Onions 7 2,446 Cut. .9 Corn for Silage 8 4,160 Tons .6 Corn for Brain 8 273,600 Bu. .3 8 8 8 8 9 9 FNNNF‘N (A “NHNU UHO‘NUvfiO‘D‘O-‘VHF‘LIO‘NULINOVOO Market 702 Cut. .1 Peaches 35,000 lbs. .2 Popcorn 24,150 lbs. .1 Rye 532 Bu. .9 Cucumbers, Fresh Market 238 Cut. .9 Lettece 258 Cut. .4 Alfalfa Hay 10 3,300 Tons .9 Snap Beans, Fresh Market 10 83 Cut. .8 Tomatoes,Fresh Market 10 391 Cut. .5 Cabbage, Fresh Market 11 464 Cut. .3 Potatoes 11 8,503 Cut. .5 Minter Wheat 17 41,500 Bu. .0 Soybeans 18 29,100 Bu. .4 Livestock Products Non-Fat Dry Milk 5 75,769 lbs. 5.8 Creamed Cottage Cheese 6 38,308 lbs. 5.0 Milk Production 6 5,103 1,0001bs. '3.8 Butter 6 43,790 lbs. 3.6 Ice Cream 10 32,046 Gal. 3.9 Mink 10 129 Pelts 3.7 Honey 11 4,900 lbs. 2.6 Source: ”Michigan Agricultural Statistics, August, 1982," MDA. 34 Description of Michigan Agriculture In 1984, there are 65,000 farms1 averaging 17 acres in size and covering 11.5 million acres in Michigan. Although a change in the Michigan Department of Agriculture's (MDA) definition of a "farm" in 1977 makes citing exact numbers difficult, the overall trend has been toward fewer farms. This rate of decline has, however, slowed in re- cent years (Wright and Ferris, p. 6, 1981). From 1959 to 1978 the per- centage of farms of less than fifty acres rose from 24 percent to 29.6 percent, farms of 50-179 acres fell from 52.7 percent to 41.3 percent, farms of 180-499 acres rose slightly from 21.6 to 22.7 percent, and farms of 500 to 1,000 acres and over rose from 1.7 to 6.4 percent (Ibid, p. 6, 1981). In 1984, 5.7 million acres of the agricultural cropland in Michigan has been designated as prime farmland (Huff, et al., p. 74, 1982). Ninety percent of all farms in Michigan were family-owned in 1978. The remaining ten percent were divided between partnerships (9 percent) and corporation-owned farms (1 percent). Full owners accounted for 63 percent of all farm operators in 1978, with 30 percent being part-owners and the remaining 7 percent tenants (Wright and Ferris. p. 8, 1981). The average value of an acre of farm real estate in Michigan in 1982 was $1,192, down 3 percent from 1981. Property taxes levied against farms accounted for 5 percent of state property tax levy; in 1977 farm property taxes in Michigan were levied at 1.6 percent of current market 1The Michigan Department of Agriculture defines a farm as a "place with annual sales of agricultural products of $1,000.00 or more." 35 value compared with an average of 0.7 percent nationwide (Ibid., pp. 1, 26). Milk, corn and cattle are the most valuable commodities produced in Michigan; together this group accounts for over one billion dollars in cash receipts annually. Ranked next in value are soybeans, dry beans, wheat, fruit and vegetables and hogs. (See Table 2-4). Leading production, by county, is listed for the four most valuable commodities in Table 2-5. Note the [*1 symbol which designates those counties which also hold a significant percentage of the state's coal deposits. Between 1979 and 1980 production expenses on Michigan farms rose 17 percent to a record 26 billion dollars. These expenses are broken down into two categories, operating expenses and total annual expenses (Huff et al., p. 84, 1981). Operating expenses comprised 48 percent of total production expenses while total annual expenses (depreciation and consumption of farm capital and taxes and interest) account for 34 per- cent. The remaining expenses fall into a miscellaneous category. In 1980, Michigan farmers paid 212 million dollars for feed, 256.6 million dollars on fertilizer and lime, 396 million dollars on repairs and equipment, and 557.1 million dollars on depreciation and consumption of farm capital. The largest increases in expenditures from 1979 to 1980 included interest on farm mortgage debt, hired labor (31 percent higher), fertilizer, repairs, and equipment operation costs (see Table 2-6). Due primarily to these sharply rising production costs, net farm income in Michigan declined in 1980 for the first time in four years (12 percent decrease). Net farm income in Michigan averaged $7,190 36 TABLE 2-4. Cash Receipts from Marketings, Michigan Product 1980 1979 1,000 Dollars Livestock & Products Total 1,118,819 1,003,837 Dariy 647,602 571,725 Cattle & Calves 237,075 208,564 Hogs 135,148 124,490 Eggs 57,760 61,376 Sheep & Lambs 5,438 4,114 All Chickens 4,786 5,438 Hool 703 682 Other 30,307 27,448 Crops Total 1,574,749 1,357,686 Field Crops: Corn 477,773 318,552 Dry Edible Beans 155,957 111,234 Soybeans 208,684 194,586 Sugarbeets 73,599 60,295 Wheat 120,212 102,468 Potatoes 50,127 67,729 Hay 21,369 23,267 Oats 19,258 16,635 Mint 1,498 1,475 Red Clover Seed 580 745 Rye 864 984 Barley 1,330 1,315 Vegetables 130,364 136,813 Other 23,543 13,341 Fruit: Apples 73,386 75,314 Blueberries 14,104 16,164 Cherries 40,181 59,194 Grapes 12,443 12,810 Peaches 7,622 6,732 Strawberries 8,358 10,041 Pears 2,405 2,606 Plums & Prunes 2,575 2,873 Other 1,030 971 Other Products: Forest & Maple 17,720 16,475 Greenhouse, Nursery 109,767 105,067 All Commodities 2,693,568 2,361,523 Government Payments 10,666 15,593 Total 2,704,234 2,377,116 "Source: "Michigan Agriculture Statistics, August, 1982. MDA. Huron Saizla Alleg. Uttam Lent Xenia Clint: llazke Laiee' Isabel COUfitI Huron lTuscI LEfiawg 56011; Brancl St. J: Hills: Bram uicks CalhOL .‘Q--. chhh TABLE 2-5. 1981 Michigan Counties Leading in Agricultural Production Cattle and Calves County Huron Sanilac Allegan Ottawa Kent lonia Clinton tJackson Lapeer Isabella County Huron tTuscola Lenawee Sanilac Branch St. Joseph Hillsdale Gratiot tJackson Calhoun Dairy 4 County milk production (1,000 lbs) 78,800 Sanilac 427,200 75,000 Huron 257,500 49,000 Allegan 196,800 41,000 Clinton 190,500 40,700 Ottawa 185,000 39.800 Kent 180,000 39,300 Ionia 171,000 37,700 Lapeer 146,000 35,500 Hillsdale 140,800 35,000 *Ingham 135,800 Corn Soybeans Bushels County Bushels (million) (million) 14.2 tSaginaw 3.8 13.1 Lenawee 2.9 12.9 Monroe 2.4 11.8 tShiawasee 2.0 11.6 Gratiot 1.6 11.2 Clinton 1.3 9.5 St. Joseph 1.1 9.1 St. Clair 1.08 8.8 *Genesee 1.03 8.7 Branch 1.02 Source: ”Michigan Agricultural Statistics, August, 1982,” Michigan Department of Agriculture. 38 TABLE 2-6. Farm Production Expenses, Michigan Item 1980 1979 Million Dollars Current Farm Operating Expenses: Feed 212.0 186.6 Livestock 66.9 54.0 Seed 107.0 93.0 Fertilizer & Lime 256.6 210.7 Repair & Equipment Operation 396.0 335.6 Hired Labor 215.2 163.8 Miscellaneous 452.4 401.3 Total Current Expenses 1,705.9 1,445.0 Depreciation & Consumption of Farm Capital 557.1 480.7 Taxes on Farm Property 161.9 148.7 Interest on Farm Mortgage Debt 170.5 141.7 Net Rent to Non-Farm Landlords 16.4 9.5 Total Production Expenses 2,611.9 2,225.4 Source: "Michigan Agriculture Statistics, August 1982" MDA. 39 compared with a nationwide average of $8,180. Gross income rose 14 percent to a record 3.1 billion dollars (see Tables 2-7 and 2-8). Michigan farms depend primarily on family workers as a source of labor. In 1981, 77,000 persons worked on Michigan farms; of this number 57,000 were family workers. Wage rates averaging $4.25 per hour repre- sented one of the highest rates in the nation. Throughout Michigan agriculture and agribusiness employ 200,000 persons year around, approx- imately 5 percent of the total state workforce. Additional summer—only employment totals 40,000 workers (Wright and Ferris, p. l, 1981). Institutional Framework Numerous institutional measures control land use in Michigan. Taken together, these measures establish the rights and duties of par- ticipants and provide a framework within which land use allocation functions in the state (Barlowe, p. 562, 1978). Institutional measures may be public or private and range from fee simple ownership to govern- ment regulations and incentive-oriented methods to influence the choice of land use. It is within this framework that choices of land use be- tween surface mining and farming will take place. A brief discussion of these measures is presented below (see Barlowe [1978] for a more exten- sive discussion). The chapter concludes with a discussion of an incen- tive-oriented method relevant to this study, the Michigan Farmland and Open Space Preservation Act. Private Institutional Framework: A basic private institutional measure controlling land allocation is fee-simple ownership. As defined by Barlowe (1978), a fee simple owner has the "right to possess, use and within reason to exploit, abuse and even destroy his land resource." 40 TABLE 2-7. Gross and Net Income, Michigan Item 1980 1979 Million Dollars Realized Gross Farm Income Cash receipts from farm marketings 2,693.6 2,361.5 Government payments 10.7 15.6 Non money income 339.9 296.8 Other farm income 42.3 40.6 Total gross farm income 3,086.5 2,714.6 Farm production expenses 2,611.9 2,225.4 Realized net farm income 474.6 489.2 Total net farm income 515.4 587.6 Net change in farm inventories 40.9 98.4 Source: "Michigan Agriculture Statistics, August, 1982," MDA. EOCwEU.z .ELUL LOL UEOUCH .QIN NJC nouaum usage: _ camazuaz . . essence: .Ecom can «soqu .mIN u5m > Utility A Any point on the grand utility frontier is Pareto-optimum; at these positions all opportunities for voluntary trade have been exhausted. To summarize, there are three necessary conditions for Pareto- efficiency: [1] [MRTS(L,N)] X = [MRTS(L,N)] Y = [P(L)]/[P(N)] [2] [MRS(X.Y)] A = [MRS(X.Y)] B = [P(X)]/[P(Y)] [3] [MRPT(X,Y)] l = [MRPT(X,Y)] 2 = [P(X)]/[P(Y)] Summary Condition: [MRS(X,Y)] A =...= [MRPT(X,Y)] A = [P(X)]/[P(Y)] The only sufficient condition is that the isoquants be convex in shape. 57 Maximum Social Well-Being By assuming that a social welfare function exists, another cri- terion of efficiency can be developed. The existence of a social wel- fare function assumes that society can reach a consensus over how in— come should be distributed and that this function can express such a consensus. The validity of this assumption has been questioned and re- ] but it is nevertheless the underlying futed by a number of economists basis of the maximum soCial well-being criterion. A social welfare function may be defined as: W[S] = f(Ul, U2) By finding a point of tangency between the social indifference curves (similar to individual consumer indifference curves) and the grand util- ity frontier the point of maximum social well-being is found. The point of maximum social well-being is referred to as the "bliss point" and is located where the grand utility frontier is tangent to the highest social indifference curve. Under this criterion, a movement from 'a' toward the grand utility frontier is a movement toward efficiency. Note that such moves may leave consumer l with a lower level of utility than s/he started with. The criterion of maximum social well-being does not account for economic injury suffered by some members of the society because it ignores distributional results. 1Most notably, Kenneth Arrow (1967). 58 Utility B Bliss Point / S.I.C. 2 - S.I.C. 1 \ Utility A l The necessary conditions for maximum social well-being are: l. Parety-efficiency; and 2. a point of tangency between the grand utility frontier and a social indifference curve. The sufficient condition is that a unique, true tangency between the grand utility function and a social indifference curve exist. Constant Proportional Shares Unlike the two preceding examples, the criterion of constant pro- portional shares does address the issue of distribution. By allowing only those moves which preserve original income proportions (a to a', b to b', etc.), the status quo is maintained: Utility B Utility.A 59 In essence, the constant proportional shares criterion defines an im- provement as a move which increases the income of one consumer while increasing all other consumers' incomes by the same proportion. In this way, no economic injury can occur. Parety-Safety A more restricted form of the Pareto-efficiency criterion, the Pareto-safety criterion, permits no real economic injury. It is de- fined as a move that would improve the utility of at least one person while making no one else worse off. Movements from point 'a' toward the shaded area are considered moves toward efficiency. Note that re- lative redistributions of income between persons are permitted. K Utility B 1_‘-\\\‘ 1r Utility.A Maximum Value of Social Product The maximum value of social product criterion is a special case of the maximum social well-being criterion. In this case, the slope of the social indifference curves is equal to negative one, signifying that every one dollar of income is weighted equally regardless of the re- cipient. Those policies which result in a larger value of social pro- duct are preferred. 60 Utility B S.I.C. 2 S.I.C. 1 x I Utility A Under the maximum value of social product criterion, economic in- jury is permitted as long as the gains outweigh the losses. Essential— ly, this criterion is identical to the benefit/cost criterion. Potential Pareto Improvement This criterion, proposed independently by Kaldor (1939) and Hicks (1939), states that a policy should be accepted if those who gain as a result of the policy could fully compensate those who lose. Note that this "compensation principle" does not require that the losers be com- pensated, only that they could be. However, the resulting program would be optimal only if the compensation is actually carried out. The cri- terion is satisfied when the sum of the changes in individual welfare is greater than zero (Freeman, p. 55, 1979). Under this criterion, a unit of benefit is weighted equally regardless of to whom it accrues. The application of efficiency criteria to the choice of land use between farming and surface coal mining illuminates important aspects of the market allocation process. Efficiency criteria are used to judge performance in the economy and to evaluate alternative courses of action. The criteria presented in this section are used to understand more clearly the efficiency and distributive consequences of actions 6] relating to surface coal mining on Michigan farmland. These concepts are used throughout the remainder of the study to illustrate the land allocation process and evaluate the role of the regulatory structure implemented by the Michigan Surface and Underground Mine Reclamation Act (P.A. 303). Sources of Inefficiency An externality is defined as an "inefficiency which arise(s) when some of the benefits or costs of an action are external to the decision maker's calculus" (Randall, p. 157, 1981). As is pointed out by Schmid (1978), under a definition as general as this one nearly every action may involve an externality. To make the concept of an externality more useful, Randall (1981) distinguishes between a "relevant externality" and a "Pareto-relevant externality.” A relevant externality exists whenever the affected party is not indifferent to the effects resulting from an action; i.e., s/he wants more or less of the externality to be produced. A Pareto-relevant externality exists whenever it is possible to change the activity in such a way as to make the affected party better-off without making the acting party worse-off. Pareto-relevant externalities may produce either costs or benefits for the affected party and can only exist when the economy is not operating at a point of efficiency. An external economy exists whenever it is possible to increase the level of.an activity and increase the utility of one per- son without decreasing the utility of another while an external disecon- omy exists when the level of an activity can be decreased to increase the utility of one person without decreasing the utility of another. 62 The existence of Pareto-relevant externalities causes inefficien- cies which are manifested in both the pricing and level of output of a good. A Pareto—relevant diseconomy causes the price of the good to be too low and the quantity produced too high; the cost of the externality (air pollution, for example) is not a part of the producer's cost ac- counts and, therefore, the supply curve which the producer see is too low (51). Taking account of the externality causes the supply curve to move up and to the left (52) resulting in a higher price and lower level of output. /k Price P2 ' Pl'” To eliminate the inefficiencies impOSed by the presence of exter- nalities, the producer must be induced to account for them. Stated another way, the externalities must be "internalized." This may be ac- complished through either the implementation of a system of regulations or use of an incentive-oriented method such as taxing policies or pollu- tion certificates. Both solutions, regulations and incentive-oriented methods, attack the root cause of externalities: an attenuation of property rights. In essense, an externality occurs because there are no clearly defined property rights to the good in question. Air pollu- tion, for example, occurs because no one l'owns" the right to clean air 63 and polluters can, therefore, dirty the air without fear of reprisal or cost to their firm. Barriers to the Internalization of Externalities Basically, there are three barriers to the internalization of a relevant externality: joint-impact, high exclusion cost, and super economies of scale. These barriers involve either characteristics in- herent in the nature of the good itself or the production of the good. An attenuation of property rights results in goods having high exclusion costs which prevent producers from extracting revenues. These goods, through either characteristics inherent in the good itself or by law or institution, are available to all consumers whether or not they contribute to the production costs of the good. Even those consumers who would otherwise contribute are tempted to become "free riders" and not contribute since the good will be provided regardless of their ac- tions. Typically, high exclusion cost goods are underproduced. A good is considered a "joint-impact" good if, after production, it is available to all consumers without rivalry: consumer 'a' can use the good without diminishing the amount available to consumer 'b' (Schmid, p. 70, 1978). Over some range of output, the marginal cost of an additional user of a joint-impact good is equal to zero. Joint-im- pact goods cause market inefficiencies because there is no mechanism whereby producers can extract revenues to cover total production costs. Frequently, joint-impact goods are referred to as "public goods," al- though this is misleading because it implies that these goods are or should be publicly provided. 64 A particular joint-impact good may exhibit either high or low ex- clusion costs: scenery has a high exclusion cost because anyone driving or walking by can enjoy the view while cable t.v. that requires a sub- scription fee to unscramble the signal has low exclusion costs. Goods with high exclusion costs are also called non-exclusive because it is very costly to exclude individuals whether or not they contribute to the cost of provision. For example, when surface mine reclamation re- gulations are enforced, everyone living in the area benefits from a cleaner environment. While reaping the majority of the benefits of the economic activity, the mine operator also bears the majority of the costs involved in reclamation procedures. Continuously declining long run average costs lead to another barrier to the internalization of externalities. This is the case of monopoly production: due to declining costs the lowest cost per unit of the good is achieved by having only one firm produce the good. Mono- poly production leads to higher prices per unit of good and a lower level of consumer welfare. The nature of the surface coal mining process causes use of an acre of land to display joint-impact and high exclusion cost character- istics. The concepts presented in this section are applied to surface coal mining on Michigan farmland in the public choice economics discus- sion appearing at the end of this chapter. Optimal Allocation of a Stock Resource Over Time The question to be explored in this section is: "what is the opti- mal allocation of a stock resource over time?" Concern over the rate of resource extraction have been voiced frequently in the 1970's: 65 opposing sides claim that present rates of extraction are either too fast or too slow (See Robinson [1975], Surrey and Page [1975] and Common [1975]). By taking account of the properties peculiar to stock re- sources, this section will identify the important conclusions which can be drawn about the optimal allocation of a stock resource over time. The concepts presented in this section are applied to the extraction of Michigan coal in Chapter 4. The first comprehensive work in this field was completed by Gray (1914). Following this, Hotelling (1931) published his classic article describing optimal extraction paths for a stock resource under various conditions. Works by Scott (1967), Gordon (1967), Cummings and Burt (1969), and Solow (1974) further modified and expanded upon this founda- tion. Exhaustible Natural Resources As discussed in Chapter 1, an exhaustible resource is a resource that cannot be reproduced and for which the total physical supply is fixed. Additions to the stock occur only over geologic time periods or through discoveries or the development of new technologies. In essence, this implies that the extraction and consumption of a unit of an exhaustible resource involves an opportunity cost: the value of the resource in its next highest alternative use (Fisher, p. 13, 1981). The importance of this concept is made clear in the discussion which follows. It is important to recognize that, in an economic sense, "exhaus- tion" does not refer to the complete depletion of physical supply. Rather, it refers to a gradual rise in the cost of exploitation which 66 leads to higher resource prices (Herfindahl and Kneese, p. 115, 1974). The resource itself is not necessarily limited but the quantity avail- able at a relatively low cost is limited (Fisher, p. 24, 1981). Exhaus- tion occurs when price rises to such a level that quantity demanded falls to zero. To illustrate this point, consider the following: it is unrealistic to assume that the United States will someday "run out" of domestic sources of oil. Before the last drop is pumped, the price of oil will have risen prohibitively high and consumers will replace oil with other energy resources called "backstops" (see Nordhaus, 1973). A backstop sets an upper limit on the price of a resource. Solar energy, for example, is a backstop capable of providing for some uses the same services of oil and coal, albeit at a higher price, without risking exhaustion within any meaningful time period (Fisher, p. 18, 1981). Optimal Allocation Over Time As given by Fisher (1981), the first condition of the optimal de- pletion of a stock resource is that: price = marginal production cost + opportunity cost The properties of stock resources resultin the addition of opportunity cost to this condition and imply that less of the resource will be extracted today than would have been if the resource were reproducible. Net price is found by subtracting extraction cost from the market price: Net price = market price - marginal extraction cost In the literature, net price is also referred to as royalty, rent, and user cost. For the purposes of this paper, the term "net price" will be used. 67 An exhaustible resource deposit in the ground represents a capital asset to its owner and derives its market value from its potential ex- traction and sale (Solow, p. 2, 1974). Left in the ground, resource deposits can only earn a current rate of return by appreciating in value, and, in equilibrium, the value of the resource deposit must be growing at a rate equal to the rate of interest. The value of a resource deposit is also found by taking the present value of future sales minus extrac- tion costs: pv= aEnucuuuo ~uom ozuaoa\ucovuuu< uneducoauu uaeuc< soda uauu=o< auauuo>uo nouuoam vou0u~< nuance: X Air ocean wcuuuuan ..oa. .ucsaoazc ..gbo onuoz unaa 2c:_z¢.lu .z:=;xu xxxx XXXX Hater omvs~m cucuauucm ~e~cumavc~ cognac.5euccu cou=Jcczcuu couccucszm o«x¢h aucoeavom couuuuoun< muons: maneuuu nouuau< XXXX X ilX‘ Land and Soil a___am "ecu aaaoam _«o aoaaa Hacam navaauucaa aaaooaaum.~som coaaua>c~ ~dcm cucuum ouxCF woufiaosm couuapuo>o commOcm _«:m X XX Surface Mining Unit Operations Exploration 1. Area Deuatering 2. Diversion, Etc. Drilling 3. Blasting 4. Stripping (Over- 5. burden Removal) HJulagp b. Top Soil or Other 7. 5011 Storage: Maintenance 8. Beurficiatinn 9. ._ —-..—-—- ..-—--- ....-- ”-_a muavsaocaau men omega unassmmm .mmxuu Axm.ev macaw new Axmpv Pocono; men an Psuouaam coaumm muo>rcg one, emcee «comma touaumc memo? amoeba ¢¢.mml eum.o¢ em¢.¢ 00.0 0M.h« eho.hN 0N. 00.0 MN.«~ ¢M.0 BN.«N l 00¢u «¢.nhl *N¢.m0 wom.0 M0.DN ¢&.0 e¢«.NM ¢M. NO.¢ £0.aa 0n .0 «O.«N n00¢Vu Etmu cwmtw cmmu cmmucuMZ emotm>¢ .aeocoum p666; noom ND.NN«. hm.0«« J¢h0km3m kame wh¢>nmm mm.mml e0h.Nm e¢m.h «0.?N 0N.h« e¢h.0¢ Nm.ma m0.mu M«.O~ ON.0N 1 00¢u Nm.nol kzmzwwczqt *hm.om ummLmucH *No.e "Hmong: ocm mucijmcH om.mN mmxmh oo.ms mucosa new; eun.um Lonmu ON. mmmcmaxm xuoumm>mu mh.h uoLU ocm comm mN.mu cowumuagflutmu "wow mo.s >otaeH ucm acousssm oo.mN vcmansom ucm Lmzoa umOU nooevU ELmu unto cmmu >u-m> Imcammm m~_m 6:6 maze seem an mcu< can use on mcczuom use mumou umpmeepmm .mnm u4m