IMPACT OF FRAC SAND MINING ON AGRICULTURE AND RURAL PROSPERITY

• Sponsoring Institution: National Institute of Food and Agriculture
• Project Status: COMPLETE
• Funding Source: HATCH
• Reporting Frequency: Annual
• Accession No.: 1010353
• Project Start Date: Oct 1, 2016
• Project End Date: Sep 30, 2020
• Program Code: [(N/A)]- (N/A)

Recipient Organization
UNIV OF WISCONSIN
21 N PARK ST STE 6401
MADISON,WI 53715-1218

Performing Department
Agri and Applied Economics

Non Technical Summary
Key inputs for the production and distribution of "frac sand" include land, labor and transportation networks. We study how the recent boom in the Upper Midwest has impacted agriculture and rural prosperity.Emerging evidence suggests there are likely significant negative local externalities from the recent US oil and gas drilling boom, but few studies examine the impacts on agriculture and rural well-being. Anecdotal evidence suggests frac sand mining and transport lead to air pollution, increased road and rail congestion, and transportation fatality risks. The boom has also increased the price of land in the region and increased the demand for labor, both of which affect agriculture directly. Finally, as rail and highway infrastructure are being used to move oil, gas and the related inputs, there is less capacity for shipping agricultural goods, and midwestern farmers have been forced to store grains due to the increase in the cost of shipping commodities. We develop theoretical and empirical models of the externality generating process around mining sites and transportation networks and measure their welfare impacts. Our research allows us to address key questions regarding these impacts: 1) How has thefrac sand boom affected land rents, labor markets, commodity shipping prices, and traffic accidents (i.e. distributed externalities, which work through road and rail networks). 2) To what extent are market actors less able (and inclined) to internalize externalities that arise along transport routes, relative to externalities that arise near the site of extraction?3)Have townships that adopted stricter land use regulation prior to the sand boom been able to better mitigate external effects from mining relative to townships with lax regulation?4) And what are the welfare impacts of each item listed in1-3?

Animal Health Component

50%

Research Effort Categories

Basic

50%

Applied

50%

Developmental

(N/A)

Classification

Knowledge Area (KA)	Subject of Investigation (SOI)	Field of Science (FOS)	Percent
605	0120	3010	50%
131	0120	3010	50%

Knowledge Area
605 - Natural Resource and Environmental Economics; 131 - Alternative Uses of Land;

Subject Of Investigation
0120 - Land;

Field Of Science
3010 - Economics;

Keywords

rural prosperity

land rents

agricultural markets

distributed externalities

rural development

Goals / Objectives
The overarching goal of this research is to understand the impact of frac sand mining (which is of growing concern in rural Wisconsin and Minnesota) on rural prosperity and agriculture. Because the frac sand boom was, to a large extent, unexpected and driven by new technologies in the gas and oil sector, rural communities and the agricultural sector did not have time to prepare for it. Labor markets, transportation costs,land rents, and even pollution levels and tourism have all been impacted.This sharp discontinuity will allow us to disentangle the impacts of the frac sand boom on agriculturethrough labormarkets, land markets, transportation of commodities,and various indicators of rural prosperity.Specifically, the objectives of the research are fourfold:1) To what extent has the market value of frac sand capitalized into agricultural land values and resulted in increased land prices? Sand mining creates an opportunity for higher returns relative to agriculture, and as a result should capitalize into land values in areas where mining is economically feasible. As a result, agricultural land owners may have incentive to forego leasing their land for agricultural production and wait for an opportunity to sell or lease their land for frac sand mining. This also has implications for tax assessment and crop choice. The extent to which returns from frac sand mining are capitalized into agricultural land values will determine how strong of an impact the frac sand industry has on agricultural production and land markets in Western Wisconsin.2) Have townships that adopted stricter land use regulation prior to the sand boom been able to better mitigate external effects from mining relative to townships with lax regulation? There is evidence that frac sand mines disproportionately locate in townships with lax land use regulations. It is unknown however how successful land use regulations are in mitigating external effects of frac sand mining, like traffic congestion, accidents and impacts on property values. Stricter land use regulation via a zoning ordinance for example, can allow for conditional use permitting, which sets specific conditions on individual operations and gives local community more control in regulating location and operation. Increased interest in rural Wisconsin communities in additional regulatory ordinances specific to frac sand mining suggests that there is demand for additional regulation to mitigate external effects of mining (Parker and Phaneuf, 2013).3) Are market actors less able (and inclined) to internalize externalities that arise along transport routes, relative to externalities that arise near the site of extraction? In the case of the sand boom, some concerns about noise, air, and light pollution around mining sites have been articulated. However, our impression is that relatively more complaints have been raised about how the transport of sand via truck and rail has impacted well-being further away from the sites. For example, there is evidence of Coase-style negotiations in which mining companies have compensated landowners near frac sand mining sites for the disturbances, but we are not aware of any voluntary contracts of this sort regarding the transport of sand. On the contrary, many communities are pursuing ordinances to regulate truck transport through towns and villages, rather than negotiating with mining companies (Parker and Phaneuf, 2013).4) Evaluate the welfare impacts of any changes in outcomes for 1-3 above.

Project Methods
We plan to use a spatially-explicit econometric model to address the research questions at hand. Our empirical design will utilize a spatially explicit fixed effects panel model, which holds constant any location-specific and time-specific unobserved characteristics.There is substantial spatial variation in the zoning regulations that were in place prior to the energy boom. Our econometric framework will allow us to test whether zoning plays a role in how the externalities associated with frac sand mining are distributed.This framework, common in environmental economics, allows the researcher to isolate the impact of changes in some observed variable (here, a mine opening or increases in local traffic). Due to concerns about spatial correlation, standard errors will be adjusted to allow for arbitrary clustering on a fine spatial scale.We will also develop a theoretical and empirical modelof the externality generating process (and mitigation) around mining sites and transportation networks. We will work with the proprietary real estate data, Census data, data from theWisconsin Department of Transportation and the Association of American Railroad. With respect to theory, a key difference between truck transport and mineral extraction is that trucks employ a common pool input (public roads), whereas extraction employs a private good (land). This is an important distinction because we expect land prices to provide signals about where in the landscape external impacts of frac sand mining will be relatively high. For example, land will command a higher price where populations are dense and natural amenities are high. To the extent that sand deposits are uniformly distributed in space, irrespective of population density and amenities, we expect the land pricing mechanism to discourage frac sand mining from emerging in these areas. By contrast, a direct pricing mechanism is absent on public roads, so frac sand companies are not incentivized to follow routes that minimize their impacts on third parties.

Progress 10/01/16 to 09/30/20

Outputs
Target Audience:The target audience for this research was academics, policymakers at the federal, state and local levels, and stakeholders. The research is meant to expand our understanding of the impacts of land use change and externalities in a rural landscape. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? A graduate student was employed and trained for his PhD. He worked closely with faculty involved in this project and was mentored through the research process. The student has successfully defended his dissertation and has accepted a postdoctoral researcher position at Harvard. How have the results been disseminated to communities of interest? Results of the research were presented at several locations in the state, including nonacademic settings similar to "Science on Tap." which is an event at UW- Madison. The resulting study has been disseminated and presented, and it is being prepared for publication. What do you plan to do during the next reporting period to accomplish the goals? Nothing Reported

Impacts
What was accomplished under these goals? Each of the four objectives outlined above were studied. The results are best summarized as follows: The environmental federalism literature describes local regulatory control as a double-edged sword. It empowers jurisdictionsto solve their local problems, but to discount spillover impacts on neighboring jurisdictions. We study this tradeoff in the context of a regional 'frac sand' mining boom in Wisconsin, which began around 2010 and was induced by the hydraulic fracturing surge across the U.S. We exploit a 2012 state Supreme Court ruling, permitting township-level mining ordinances, to study the effects of local regulation on mining activity, resident exposure to disamenities, and property values. We find that mine openings boost local economies but also generate negative externalities. Local authority over mines reduces local negative impacts of mines but allows jurisdictions to shift costs of mining on to neighbors. The results, although preliminary, suggest the net value of local regulatory authority may be negative once spillover impacts are considered. 1) To what extent has the market value of frac sand capitalized into agricultural land values and resulted in increased land prices? There is evidence that rural land prices withmining potential increased in response to the frac sand boom.Estimates based on hedonic models suggest that net effects ofmine openings on township-level property values are positive, with estimates ranging from 3 to 5% per mine. 2) Have townships that adopted stricter land use regulation prior to the sand boom been able to better mitigateexternal effects from mining relative to townships with lax regulation? We find that the sand boom generates economic benefits but also creates local disamenities. Local regulation, which consists of ordinances, successfully reduces disamenities and increases economic gains from the boom without generating negative externalities for neighboring jurisdictions. The findings suggest that local regulation can be an effective tool for managing the sand mining boom and that the costs and benefits of sand mining are internalized at the local level. 3) Are market actors less able (and inclined) to internalize externalities that arise along transport routes, relative toexternalities that arise near the site of extraction? Local regulatory control empowers jurisdictions to solve their local problems, but to discount spillover impacts on neighboring jurisdictions. Thestudy exploits a 2012 state Supreme Court ruling, permitting township-level mining ordinances, to study the effects of local regulation on mining activity, resident exposure to disamenities, and property values.Consistent with complaints of heightened traffic congestion and roadway risks, we find large effects of mine openings on accidents involving industrial trucks ranging from 9 to 13% per mine.Township ordinances significantly reduce the accident effects of mine openings, but in a way that is only neutral with respect to town-level property values. Mine openings under ordinances increase truck accidents and decrease property values in neighboring jurisdictions. The results suggest the net value of local regulatory authority may be negative once spillover impacts are considered.

Publications

• Type: Theses/Dissertations Status: Published Year Published: 2019 Citation: Kalinin, Alexey. 2019. "Challenges and Opportunities of Decentralized Regulation and Resource Management." Dissertation, University of Wisconsin - Madison.
• Type: Journal Articles Status: Submitted Year Published: 2020 Citation: Kalinin A, DP Parker, and D Phaneuf. Effects of Local Regulation on Neighboring Jurisdictions: Evidence from Mining Ordinances Working Paper, University of Wisconsin - Madison.

Progress 10/01/18 to 09/30/19

Outputs
Target Audience:The target audience has been academics and practitioners. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided?A graduate student was employed and trained for his PhD. He worked closely with faculty involved in this project and was mentored through the research process. How have the results been disseminated to communities of interest?Results of the research were presented at several locations in the state, including nonacademic settings similar to "Science on Tap." which is an event at UW- Madison. The resulting study has been disseminated and presented, and it is being prepared for publication. What do you plan to do during the next reporting period to accomplish the goals?The paper will be revised and submitted to an academic journal and related exploratory results will be used in the preparation of other grants.

Impacts
What was accomplished under these goals? Each of the four objectives outlined above were studied. The results are best summarized as follows: The environmental federalism literature describes local regulatory control as a double-edged sword. It empowers jurisdictions to solve their local problems, but to discount spillover impacts on neighboring jurisdictions. We study this tradeoff in the context of a regional 'frac sand' mining boom in Wisconsin, which began around 2010 and was induced by the hydraulic fracturing surge across the U.S. We exploit a 2012 state Supreme Court ruling, permitting township-level mining ordinances, to study the effects of local regulation on mining activity, resident exposure to disamenities, and property values. We find that mine openings boost local economies but also generate negative externalities. Local authority over mines reduces local negative impacts of mines but allows jurisdictions to shift costs of mining on to neighbors. The results, although preliminary, suggest the net value of local regulatory authority may be negative once spillover impacts are considered.

Publications

• Type: Journal Articles Status: Under Review Year Published: 2020 Citation: Effects of Local Regulation on Neighboring Jurisdictions: Evidence from Mining Ordinances

Progress 10/01/17 to 09/30/18

Outputs
Target Audience:The target audience has been researchers and local governmentalagencies, as well as local communities. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided?A PhD student has been employed and working on this project, and it will lead to multiple essays in a doctoral disseration. How have the results been disseminated to communities of interest?Preliminary results have been presented around the state, in academic as well as community-based presentations. What do you plan to do during the next reporting period to accomplish the goals?We plan to continue moving forward with the work. The results are being written up for a dissertation, and we anticipate the data being used in further related projects by students and faculty at our institution (and beyond).

Impacts
What was accomplished under these goals? We have been studying the benefits and costs of mining for "frac sand" in rural Wisconsin. Frac sand is used in hydraulic fracking, the most recent innovation in drilling for gas and oil. Mining has been a boom to land owners and some rural communities, but the costs are more diffuse. The use of heavy machinery and trucks on rural roads has imposed costs on local communities, and there is a concern about the impact of frac sand mining on air pollution and general environmental degradation in these regions. At the same time, there have been jobs introduced and an infusion of economic activity in some areas where the land was not being used very productively. The results are shaping up to show a complex distributional story, where the winners and losers of this mining boom are often from different groups. In the first goal, we have the universe of residential property transactions from Zillow, which has required extensive cleaning. We are also working with Census of Agriculture data to look at agricultural land values. This part of the project is still ongoing. For the second goal, we find that the land use regulation matters, but that externalities are still pervasive. We are working to quantify the effects of the differences based on pre-existing regulations. For the third goal, we find that externalities along transport routes are significant, and because they are diffuse and affect a large, heterogeneous population, market actors are less likely to internalize those costs. We are in the process of quantifying welfare effects for each of the three main goals of the project.

Publications

• Type: Theses/Dissertations Status: Under Review Year Published: 2019 Citation: Effects of Local Regulation on Neighboring Jurisdictions: Evidence from Mining Ordinances.

Progress 10/01/16 to 09/30/17

Outputs
Target Audience:The target audience includes policymakers, state- and federal regulators, and rural (predominantly agricultural)communities that are potentially impacted by natural resource booms. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided?A graduate research assistant and hourly researcher were employed under this project, who worked closely with the PI. The researchers gained valuable experience and expertise in data management, merging and compiling large longitudinal and spatial datasets, and preliminary analysis. Special attention was paid to ensuring that the data will be made available for future researchers and that our empirical analysis will be clearly documented and replicable. How have the results been disseminated to communities of interest?We are working with communities of interest in some cases to gather the data, but there are not yet results to disseminate. What do you plan to do during the next reporting period to accomplish the goals?We will continue working with the data to test the hypotheses, build the necessary models, write up the results, and ultimately disseminate the findings to the stakeholders and the target audience.

Impacts
What was accomplished under these goals? The main accomplishments for this reporting period include collecting and merging several large, spatially-delineated data sets. The data come from a variety of sources and required extensive cleaning and quality control checks prior to the analysis. Empirical models have been designed to test the hypotheses related to each of the major goals. There were three main data sets that needed to be gathered.The first detailed the locations of frac sand mines, the dates of operations, and information on transport routes (both road and rail) from the mine to the processing facilities, and eventually toward the fracking locations. In addition, traffic counts and accident reports were compiled for the study region.Second, zoning data were compiled from archives and local government sources. These were brought into GIS to match with the other data.Third, to study the property price impacts, we started an agreement with Zillow, and we now have access to all property purchase data, including addresses, characteristics, prices and dates. This is extremely useful, not only for this project, but for future endeavors within the department, as environmental and resource economists routinely use property price values in their empirical work. We expect the data gathered for this project to be used in future projects, so the grant was extremely useful in helping with "capacity building". Each individual data set needed substantial work and cleaning before merging the various sources by their geographic identifiers. After the data were merged, we began developing the empirical specifications. This included looking for variation in zoning laws, changes in zoning, and being careful to develop specifications that allow us to obtain "causal" estimates of the parameters of interest. We are still in the process of working out the empirical specifications.

Publications