Economic damages from a worst-case oil spill in the Straits of Mackinac

Journal of Great Lakes Research xxx (xxxx) xxx

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Economic damages from a worst-case oil spill in the Straits of Mackinac Richard T. Melstrom a, Carson Reeling b,⇑, Latika Gupta c, Steven R. Miller d, Yongli Zhang e, Frank Lupi d,f a

Loyola University Chicago, Institute of Environmental Sustainability, 1032 W. Sheridan Road, Chicago, IL 60660, USA Purdue University, Department of Agricultural Economics, 403 W. State Street, West Lafayette, IN 47907, USA c Michigan Technological University, School of Business and Economics, 1400 Townsend Drive, Houghton, MI 49931-1295, USA d Michigan State University, Department of Agricultural, Food, and Resource Economics, 446 W Circle Drive, East Lansing, MI 48824, USA e Wayne State University, Department of Civil and Environmental Engineering, 5050 Anthony Wayne Dr., Detroit, MI 48202, USA f Michigan State University, Department of Fisheries and Wildlife, 480 Wilson Road, East Lansing, MI 48824, USA b

a r t i c l e

i n f o

Article history: Received 6 February 2019 Accepted 10 August 2019 Available online xxxx Communicated by Marc Gaden

Keywords: Benefit transfer Disaster Enbridge line 5 Nonmarket valuation Pipeline

a b s t r a c t This paper presents research on the economic damages from a hypothetical worst-case oil spill at the Straits of Mackinac between Lakes Huron and Michigan. This spill could occur because the Enbridge Line 5 oil pipeline traverses the Straits between Michigan’s Upper and Lower Peninsula. We quantify potential economic damages to outdoor recreation, commercial fishing, shipping, residential properties, and energy and water supplies. Damages are estimated for two spill scenarios occurring at the onset of the summer tourism season with extensive shoreline oiling. Using evidence from past spills, economic damages would last for between one and two years and would affect locations on the periphery of the spill area, depending on the activity. We project the loss from the worst-case scenario would be at least $1.3 billion. Ó 2019 International Association for Great Lakes Research. Published by Elsevier B.V. All rights reserved.

Introduction Oil spills are a significant threat to water quality and aquatic ecosystem services in the United States. Forty-four oil spills of at least 10,000 barrels have affected US waters since 1969, a rate of nearly one major spill per year (NOAA Office of Response and Restoration (NOAA), 2018). Under public trust doctrines and laws such as the Oil Pollution Act (OPA), the party responsible for the spill can be held accountable for economic damages, which includes lost wages and profits, losses to natural resources, and the costs of restoration (33 U.S.C. §2702). Measuring economic damages is essential in recovering public and private losses. Research in economics and through natural resource damage assessments (NRDAs) has found that large spills can cause billions of dollars in damages to public resources (Carson et al., 2003; Deepwater Horizon Natural Resources Trustee, 2016; Garza-Gil et al., 2006). Several oil pipelines cross the Great Lakes region. Of particular concern recently is the Enbridge Line 5 pipeline, which was constructed in 1953 and runs 645 miles from Superior, Wisconsin to Sarnia, Ontario (Fig. 1), carrying 540,000 barrels of natural gas liquids and light crude oil per day (Enbridge, 2017). Most of the ⇑ Corresponding author. E-mail addresses: [email protected] (R.T. Melstrom), [email protected] (C. Reeling).

pipeline traverses land, but a four-mile section with two pipes crosses the Straits of Mackinac, separating Michigan’s Upper and Lower Peninsulas and connecting Lakes Michigan and Huron, which make up about 10% of the world’s freshwater lake volume (US EPA, 2018). Inspections of Line 5 have found multiple spans with irregular and improper distances between support anchors connecting the pipeline to the lakebed, leaving the pipeline bent by up to 8 degrees in places (MLive, 2017). Sections of the pipeline are missing protective coal tar enamel coating meant to guard against corrosion (Dynamic Risk Assessment Systems, Inc., 2017). Additionally, the pipeline is susceptible to equipment failure, incorrect operation, and mechanical damage due to anchor strikes or even terrorism (Dynamic Risk Assessment Systems, Inc., 2017). For instance, on April 1, 2018, a tugboat and barge dragged an anchor across the lakebed in the Straits’ ‘‘no-anchor” zone, severing electric cables and denting the wall of Line 5 in three places (MLive, 2018a). Over 600 gal of toxic dielectric fluid leaked from the severed cables, although no oil leaked from Line 5. Public concern about a Line 5 oil spill at the Straits increased after another Enbridge pipeline, Line 6B, released more than one million gallons of diluted bitumen into the Kalamazoo River near Marshall, Michigan in 2010. The Kalamazoo River spill is the largest inland oil spill in US history to date (US EPA, 2016), and it has contributed to increased public awareness of and resistance to the continued operation of Line 5. Line 5’s location at the Straits

https://doi.org/10.1016/j.jglr.2019.09.003 0380-1330/Ó 2019 International Association for Great Lakes Research. Published by Elsevier B.V. All rights reserved.

Please cite this article as: R. T. Melstrom, C. Reeling, L. Gupta et al., Economic damages from a worst-case oil spill in the Straits of Mackinac, Journal of Great Lakes Research, https://doi.org/10.1016/j.jglr.2019.09.003

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Fig. 1. Enbridge Line 5 and the crossing at the Straits of Mackinac.

is of particular concern because of its proximity to shorelines, navigable waters, and wetlands, and because of the potential threat to drinking water resources, recreational and tourism opportunities, and commercial shipping and fishing afforded by the Great Lakes (MTU, 2018). After the Kalamazoo River spill, the State of Michigan formed a multi-agency group task force (Michigan Petroleum Pipeline Task Force) which commissioned two studies to (i) assess alternative means of transporting oil across the Straits and (ii) estimate the damages from a worst-case spill in the Straits, with the goal of estimating Enbridge’s liability (https://mipetroleumpipelines.com/). Under OPA, an owner or operator responsible for a facility that releases oil in US waters is liable for damages and clean-up costs. Furthermore, the operator of Line 5 is explicitly ‘‘liable for all damages or losses to public or private property” under the terms of the easement agreement with the State of Michigan (Easement, 1953). Liabilities typically include removal costs and losses to real and personal property, profits, subsistence use, public services and utilities, tax revenues, and natural resources. Fig. 2 illustrates these liabilities in the context of a hypothetical oil spill in the Straits of Mackinac. The figure shows that an oil spill will have environmental effects that vary with the magnitude and fate of the spill, which in turn will affect the type and amount of economic damages.

Published research on the economic damages of oil spills largely focuses on several prominent maritime spills (Chang et al., 2014), most often in terms of losses to business income and profits (e.g., Cohen, 1995; Grigalunas et al., 1986), and the value of natural resources to tourists (e.g., Garza-Gil et al., 2006; Grigalunas et al., 1986; Sumaila et al., 2012). Furthermore, all of these published damage estimates are after the occurrence of the pollution. This leaves a critical need for predictive assessments of liability in general, and in freshwater systems in particular, to provide decision makers with a tool to weigh pre-spill interventions (Chang et al., 2014). This paper presents estimates of key economic damages for the states of Michigan and Wisconsin, including public and private losses, which would result from a hypothetical worst-case spill in the Straits of Mackinac. It must be emphasized that this analysis does not include damages for the province of Ontario Lake Huron shoreline. Specifically, we combine data on economic activity in Michigan and Wisconsin with observed changes in activity after actual spills in other coastal areas to estimate the economic losses for recreational uses, coastal properties, commercial fishing and shipping, tourism- and recreation-related business income, and changes in energy and water supplies from the spill. Our predictive assessment therefore includes economic damages rarely presented

Please cite this article as: R. T. Melstrom, C. Reeling, L. Gupta et al., Economic damages from a worst-case oil spill in the Straits of Mackinac, Journal of Great Lakes Research, https://doi.org/10.1016/j.jglr.2019.09.003

R.T. Melstrom et al. / Journal of Great Lakes Research xxx (xxxx) xxx

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Fig. 2. Elements that determine the economic loss or damages from an oil spill, with examples in italics. Bolded text indicates a loss category for which we estimated damages in part or in whole in the Line 5 worst-case spill study (MTU, 2018), with damages in the other loss categories estimated separately in that study.

in the literature. As illustrated in Fig. 2, though, our damage estimates are limited to a subset of potential losses, and thus a portion of Enbridge’s liability. Some economic damages that we do not estimate, including the cost of removing beached oil and lost tax revenues, have been quantified by others (MTU, 2018). Nevertheless, our assessment provides a partial measure on the economic losses from a potential worst-case spill, which we estimate would be at least $1.3 billion. Methods We begin by identifying the extent of a ‘‘worst-case” oil spill from the Enbridge Line 5 pipeline across the Straits of Mackinac, and the specific categories of losses that would arise from such a spill. We then describe how we estimate the magnitudes of these losses. Defining a worst-case oil spill in the Straits of Mackinac The goal of this study is to measure a part of Enbridge’s liability from a worst-case spill scenario. Because the extent of Enbridge’s liability is determined by the economic loss or damages from a rupture of Line 5, we define the worst case as the largest foreseeable amount of economic damages from a spill. We realize that this is one of several possible definitions of a worst-case spill; alternatives include the amount of oil released, lake surface area or shoreline oiled, affected habitats, and harm to human health. Our definition is based on the accumulation of several worst-case assumptions and does not assign any probability that the worstcase spill will occur. As illustrated in Fig. 2, the first task is to establish the physical scenario or event that will give rise to this worstcase outcome. The second task is to establish the magnitude and fate of the oil. We expect damages will correlate closely with the amount of oiled shoreline because of the extensiveness of economic activity along parts of the Great Lakes. Thus, our definition assumed ‘‘the largest foreseeable discharge of oil, including a

discharge from fire or explosion, in adverse weather conditions” (USGPO, 2011) and a large extent of shoreline oiling. MTU (2018) estimated that the largest foreseeable discharge of oil from Line 5 would release 58,000 bbl (9.2 million liters). The authors extended the modeling work of Schwab (2014, 2016) to determine the fate of this volume of oil release. The authors conduct 4380 simulations of a 58,000 bbl release at various points on Line 5 in the Straits under various meteorological conditions. From those simulations, we identified the simulation resulting in the greatest distance of oiled shoreline under spring weather conditions as the worst-case spill, shown as the yellow line in Fig. 3a. This spill, which we refer to as the ‘‘worst-case scenario,” originates from the middle of the Straits and beaches oil along 704 km of shoreline on Lakes Michigan and Huron, spanning 15 counties in Michigan and Wisconsin. Moreover, we estimate damages for an additional scenario that results in the greatest distance of affected shoreline further east in Lake Huron (412 km), shown in Fig. 3b. We do this to present a distribution of damages that accounts for heterogeneous spatial effects of an oil spill. The timing of a spill will affect the amount of economic damages. The economic impacts of a spill are likely to be greatest during the summer months, when recreation- and tourism-related users of the Great Lakes are most active. We therefore assume a spill date of April 1 as a worst-case. The oil spills modeled in Fig. 3 would reach their greatest extent just before the peak of tourist season in northern Michigan, affecting myriad recreational and commercial uses of the Great Lakes. Furthermore, the effects of a spill on tourism and recreation may last over multiple seasons. For example, Tourangeau et al. (2017) report that visitor numbers along the Gulf of Mexico shorelines did not return to normal until 18 months after the Deepwater Horizon spill. The economic effects of oil spills depend critically on individuals’ behavioral responses to the spill and thus are not necessarily restricted to the location and time in which oil is present. Researchers estimating the damages from the 2010 Deepwater Horizon spill found that visits to many beaches along the Gulf of Mexico decreased for months after the spill even where no oil

Please cite this article as: R. T. Melstrom, C. Reeling, L. Gupta et al., Economic damages from a worst-case oil spill in the Straits of Mackinac, Journal of Great Lakes Research, https://doi.org/10.1016/j.jglr.2019.09.003

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Fig. 3. Extent of a simulated a) worst-case spill and b) alternative spill from the Enbridge Line 5 pipeline in the Straits of Mackinac.

washed ashore (Tourangeau et al., 2017). We therefore divide the affected region into two areas: the ‘‘core” and ‘‘periphery.” The core comprises any Michigan and Wisconsin counties in which oil washes ashore (the red crosshatched counties in Fig. 3). The periphery comprises counties adjacent to the core and extends from an oiled county as far as the oiled county’s distance to the Straits (the orange dotted counties in Fig. 3). The analogue to our ‘‘periphery” area would be the Florida peninsula, where oil did not wash ashore (Nixon et al., 2016) and recreation losses were smaller and did not last as long (Tourangeau et al., 2017). Hence, we assume the farthest periphery county is approximately double the spill’s greatest distance from the Straits. This is consistent with the spatial extent of losses after the Deepwater Horizon accident, which featured zones of higher and lower losses. The analogue to our ‘‘core” area for the Deepwater Horizon spill would be the north shore of the Gulf of Mexico from Louisiana through the Florida panhandle, where many areas were oiled (Nixon et al., 2016) and recreation losses were largest and lasted up to 18 months (Tourangeau et al., 2017). Damages in the core will exceed the damages in the periphery, and the difference will vary by damage category; we describe our damage calculations in detail in the Calculation section below.

Estimating economic damages from a worst-case spill We measure economic damages from each simulated spill for several outcomes, including losses to recreational opportunities, losses to commercial shipping and fishing, lost energy products, decreased amenity values for coastal properties, increased costs of drinking water supply, and lost incomes from tourism-related spending (Table 1). The damages to each outcome take the form of lost value to consumers, lost profits to producers, and changes in individual incomes resulting from a spill. Note that we do not estimate natural resource losses that are not associated with resource use, such as non-use values for habitat and wildlife, nor do we estimate the cost of habitat restoration, although these are important measures. It should be noted also that for many spills, studies suggest non-use losses are much larger than recreational use losses. This can be seen by comparing oil spill studies of total economic losses that include non-use values to lost recreation values, such as Bishop et al. (2017) and English et al. (2018) for the Deepwater Horizon and Carson et al. (2003) and Hausman et al. (1995) for the Exxon Valdez. In practice, many NRDAs assess compensation required for nonrecreational losses using resource equivalency analysis for wildlife population losses and the ecological approach of habitat equivalence for habitat impairments (Desvousges et al., 2018), which is outside the scope of our analysis. Because our study does not

Table 1 Summary of damage categories assessed and general approach to measuring losses. Category

What’s being measured

Summary of measurement approacha

Recreation

Lost value of trips

Energy products

Increased costs to producers and consumers Lost profits from fishing Lost profits from shipping Lost amenity value of coastal housing Costs of testing and substitute supplies Lost incomes

WTP times reduction in trips by activity, region and season (1) Price change times quantity of fuel purchased (3)

Commercial fishing Commercial shipping Residential properties Municipal and residential water Tourism and recreationrelated businesses a

Price times change in harvest (2) Cost per day times days spent waiting at port (4) Flow of housing services times decline from the spill (3) Well testing costs for groundwater and cost of supply replacement for municipal intakes (4) Lost visits times spending per visit translated to lost incomes using regional economy model

Numbers in parentheses refer to equation used in calculation, if applicable.

account for non-use losses nor any costs of habitat restoration and habitat compensation, we are able to provide only a partial estimate of the economic damages from a worst-case spill. Our approach to measuring economic damages is consistent with approaches for measuring economic values specified for benefit-cost analysis per federal guidelines (OMB, 2003) and used in oil spill NRDAs (c.f. Chapman and Hanemann, 2001 or English et al., 2018). The goal of measuring economic damages is to convert changes in people’s well-being into dollar values (Bockstael et al., 2000). For some outcomes, a spill might affect the enjoyment a person derives from the use of a good or service. In this case, we measure value to consumers as the difference between consumers’ total willingness to pay (WTP) for a good and their expenditure, or the actual amount paid for the good. Fig. 4a illustrates the actual amount paid when the good in question is trips to an outdoor recreation site (say, a beach on Lake Michigan). The line is a demand curve for trips, which shows the relationship between the price of trips (vertical axis) and the quantity of trips taken (horizontal axis). The price of a trip is simply the cost of gasoline, vehicle depreciation and maintenance related to the trip, and the value of travelers’ time. Any point on the demand curve shows the maximum WTP for an additional trip. The shaded area of Fig. 4a illustrates the net value to consumers. The spill will reduce total WTP for any number of trips by shifting the demand curve inward as shown in Fig. 4b. The loss in value the users receive from the recreation site equals the shaded area.

Please cite this article as: R. T. Melstrom, C. Reeling, L. Gupta et al., Economic damages from a worst-case oil spill in the Straits of Mackinac, Journal of Great Lakes Research, https://doi.org/10.1016/j.jglr.2019.09.003

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Fig. 4. Illustration of calculation method for value of damages to recreation trips from an oil spill.

It is important to note that measuring the economic damages from a spill is not the same as measuring the changes in spending induced by a spill. A spill may affect demand, which in turn would affect spending. Changes in spending may tell us something about individuals’ costs, but they generally are not a valid measure of economic loss. That said, some of this spending will affect producer incomes, and those changes in income are relevant to measuring private losses due to a spill. This distinction between theoretically-appropriate measures of economic value and economic measures of spending is relevant for anyone seeking to compare our results to literature on economic spending and economic activities that might be affected by a spill; these will not be the same because the latter do not measure compensable economic values. If we have a measure of WTP from other studies, we can approximate the economic loss to consumers of good i in location j and period t following an oil spill as.

Lossijt ¼ WTP ijt  Dqijt

ð1Þ

where WTPijt is a consumer’s willingness to pay for the good and Dqijt is the change in quantity demanded after the spill. We use this approach to calculate the losses to consumers from foregone recreational opportunities, including camping, boating, and fishing trips as well as beach and state park visits (Table 1). For other outcomes, a spill may reduce a producer’s profits, measured as the difference between the producer’s revenues and costs. If the good is supplied by competitive markets such that its price does not change much for small quantity changes, and if supplier costs do not change much for this quantity change, then economic loss can be approximated by the good’s price, pijt, times the change in the quantity of the good supplied by the producer, or

Lossijt ¼ pijt  Dqijt

ð2Þ

We use Eq. (2) to calculate the lost producer surplus from commercial fishing from a worst-case spill (Table 1). A spill might also directly affect the value of a good or economic asset whose quantity does not change much or at all. For example, disruptions to energy supplies may increase the cost of electricity or heating fuel to consumers, whose ability to switch among energy sources is limited in the short-run. The economic losses

to consumers in this case are estimated as the change in price times the quantity demanded,

Lossijt ¼ Dpijt  qijt

ð3Þ

where Dpijt is the change in the good’s price after the spill. We use Eq. (3) to calculate the lost consumer surplus for gasoline consumers and lakefront homeowners from a worst-case spill (Table 1). Finally, a spill may change a person’s income or a firm’s profit because they incur a cost they otherwise would not have. In these cases, we can directly measure the change in income or profit and use it as a measure of lost economic surplus (because, for example, the maximum individual WTP to avoid a loss of income equals the amount of the loss). Examples of these damages include defensive expenditures, or costs incurred to avoid harm following a spill. Because these costs would not otherwise be incurred, these expenses directly reduce income or profit. One specific concern following a worst-case spill is contamination of drinking water sourced from the Great Lakes. Individuals whose drinking water supply is threatened may purchase bottled water until their drinking water is deemed safe, yet may use their water for other purposes such as laundry or watering vegetation. In this case, individuals face essentially the same cost for their water supply, but must now incur a defensive expenditure for drinking water. We measure this loss in income as the quantity of the defensive good purchased, qijt, times its price, pijt:

Lossijt ¼ pijt qijt

ð4Þ

Likewise, reductions in spending by tourists following a spill lead to lost profits for tourism-related business and, hence, reductions in regional income. We use IMPLAN Pro 3.1 economic modeling software with statewide data for Michigan and Wisconsin to estimate lost gross domestic product by state (GDPS) from a worst-case spill. GDPS is an aggregate measure of income earned by place, comprising employee and proprietor compensation and taxes on production and imports minus public subsidies to businesses (Broda and Coakley, 2015). GDPS estimates measure the direct effects of a change in spending and do not include multiplier effects. We caution that spending measures can overstate income losses; from a general equilibrium perspective, individuals and businesses adjust behaviors in response to an economic shock, partially mitigating the resulting loss in welfare.

Please cite this article as: R. T. Melstrom, C. Reeling, L. Gupta et al., Economic damages from a worst-case oil spill in the Straits of Mackinac, Journal of Great Lakes Research, https://doi.org/10.1016/j.jglr.2019.09.003

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In cases where goods and services at risk of an oil spill are traded in markets, price and quantity data can be observed and used directly in Eqs. (2) through (4). However, many of the goods and services at risk of an oil spill (e.g., recreational opportunities, environmental quality) are not traded in markets and hence have no price. In this case, WTPijt in Eq. (1) must be estimated using nonmarket valuation methods. Economists possess a suite of nonmarket valuation methods (c.f. Champ et al., 2017) which have been widely applied for assessing the damage from environmental catastrophes like oil spills (e.g., Alvarez et al., 2014; English et al., 2018; Whitehead et al., 2018). We use the benefit transfer method to measure WTPijt for activities in the Great Lakes. Benefit transfer identifies empirical studies that estimate WTP for a good, and then applies that estimate to a similar good in one’s own research setting. Benefit transfer is widely used for policy analysis in cases where time and budget constraints limit the application of more elaborate (and costly) nonmarket valuation methods (Rosenberger and Loomis, 2017). We expect that some of the effects of an oil spill last more than one year. Hence, we calculate Lossijt for each good or service for each period t over which the effects of the spill persist, then calculate the present value of losses as Rt Lossijt(1 + r)–t, where r is a discount rate assumed equal to 0.025. This discount rate is lower than the 0.03 value per federal guidelines (OMB, 2003), and is therefore closer to the real rate of return in recent decades on riskless assets (i.e., 10-year US Treasury notes). Calculation We calculate damages from the simulated spills pictured in Fig. 3 for seven broad categories of outcomes, including recreational losses, higher energy prices, losses to commercial fishing and navigation, lost amenity values to coastal properties, costs from switching to alternative drinking water supplies, and losses to tourism- and recreation-related businesses. We briefly summarize the calculations in each category in the following subsections. Readers interested in the detailed calculations are referred to the final report (MTU, 2018). We focus for now on the worst-case spill shown in Fig. 3a; we repeat the calculations and describe results for the other simulated spill in Fig. 3b below. Recreation We use benefit transfer and Eq. (1) to estimate damages to five recreational uses of the Great Lakes from a worst-case spill, including (i) beach use; (ii) visits to state parks; (iii) state park camping; (iv) recreational boating; and (v) recreational fishing. In each case, we estimate the quantity demanded without a spill as the baseline number of day trips for each use, times a scalar representing the reduction in trips caused by the spill, to calculate Dqijt as in Eq. (1). The reduction in trips varies by use and is estimated from Tourangeau et al. (2017), who estimate the decline in similar recreational activities in the Gulf of Mexico following the Deepwater Horizon spill. In addition, we expect the duration of the spill effects will vary by use (Tourangeau et al., 2017). We take estimates of WTP to avoid a lost day trip for each use from prior literature, as described below. Table 2 summarizes our calculations. First, consider the damage from lost beach visits. Cheng (2016) reports annual visitation levels for each publicly-accessible beach in Michigan’s Lower Peninsula. We identify the beaches affected by a worst-case spill and assume visits decline (i) 53% for core counties in the first beach visit season after the spill (Memorial Day through Sept. 30); (ii) 10% for core counties in the second beach visit season after the spill; and (iii) 23% in periphery counties in the first season only. Our assumptions yield a decrease in trips to

core Lower Peninsula beaches of 4,141,989 trips in the first year following the spill and 781,507 in the second season following the spill. Trips to periphery beaches decrease by 908,147 the year following the spill only. These reductions in beach visits are consistent with those observed following the Deepwater Horizon spill (Tourangeau et al., 2017). Cheng (2016) also estimates WTP to avoid beach closure for different regions of Michigan’s Lower Peninsula. We use Cheng’s estimates to calculate mean WTP of $30.98/trip to avoid lost beach trips in the spill area. We have no data for estimating the loss in trips to beaches in Michigan’s Upper Peninsula or Wisconsin. However, we can infer the loss in trips from estimates of the foregone surplus from a worst-case spill. Specifically, we assume the WTP to avoid closure of an Upper Peninsula beach due to a worst-case spill equals the average WTP to avoid closure of a Northern Lake Huron beach (where Northern Lake Huron comprises Alpena, Cheboygan, and Presque Isle Counties). This quantity is equal to the total WTP for all Northern Lake Huron beaches as estimated by Cheng (2016)— equal to the mean WTP per beach visit, $24.76, times the estimated number of visits—divided by the total number of beaches. We then multiply the average WTP by the number of affected Upper Peninsula beaches to measure total WTP for access to these beaches. Assuming surplus declines proportionally to visits and visits decrease by the same percentages following the spill as in the Lower Peninsula, we calculate the total yearly loss in surplus from Upper Peninsula beach visits resulting from a worst-case spill as the total WTP times the percentage decline in visits each year. The decline in core beach visits in the Upper Peninsula is 0.67 million and 0.13 million in years 1 and 2, respectively. The decline in periphery visits is 0.06 million in year 1. We use an analogous procedure to calculate the lost value for Wisconsin beaches except that we assume the mean WTP to avoid closure of these beaches equals $24.74 per visit—the average total WTP to avoid closure of a Northern Lake Michigan beach (where Northern Lake Michigan comprises Antrim, Benzie, Charlevoix, Emmet, Grand Traverse, Leelanau, Manistee, Mason, and Oceana Counties). We calculate the decrease in core beach visits to be 2.9 million and 0.55 million in years 1 and 2, respectively, and the decrease in periphery beach visits to be 0.65 million in year 1 only. Next, consider changes in day trips to state and federal parks for recreational purposes, including hiking, sightseeing, wildlife watching, and picnicking. Using publicly-available Michigan state and federal park (including federal forestlands and national parks) visitor statistics, we estimate the reduction in day visits to parks in Michigan counties with affected Lake Huron or Lake Michigan shoreline equal to 28.4% of the baseline, or 346,283 visits, for the first year after the spill. This percent reduction is based on the lowest percentage loss measured by Tourangeau et al. (2017) for recreational activity in the northern Gulf of Mexico following the Deepwater Horizon oil spill, although the Tourangeau et al. (2017) study did not explicitly measure reductions in state and federal park day visits. Note that the losses we estimate scale linearly with this percentage reduction in visits, which could be higher or lower. The duration of this estimated reduction is consistent with other spills, which indicates declines in general tourism lasting one season. For example, the Amoco Cadiz oil spill in 1978 reduced tourism visits by approximately 11% for one year (Grigalunas et al., 1986; Restrepo et al., 1980). This reduction represents day visits for purposes other than fishing, boating, and beach use, which are valued separately as described above and below. Furthermore, this estimated reduction does not include visits to Wisconsin state parks, for which data are unavailable. We estimate WTP to avoid lost day visits of $58.73/day following Rosenberger et al. (2017). Likewise, we estimate the loss from camping trips to state parks. We again assume that a worst-case spill reduces overnight camping trips by 28.4%, following Tourangeau et al. (2017). Using

Please cite this article as: R. T. Melstrom, C. Reeling, L. Gupta et al., Economic damages from a worst-case oil spill in the Straits of Mackinac, Journal of Great Lakes Research, https://doi.org/10.1016/j.jglr.2019.09.003

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R.T. Melstrom et al. / Journal of Great Lakes Research xxx (xxxx) xxx Table 2 Calculated damages to recreational uses of great lakes from the worst-case spill. Recreational use

Reduction in visits after spilla Core

Great lakes beach visits Lower Peninsula Michigan Upper Peninsula Michigan Wisconsin State park visits State park camping trips Recreational boating (user days) Motorized Non-motorized Recreational fishing a b

WTP/trip

Present value WTP (million)b

Periphery

Year 1

Year 2

Year 1

Year 2

4,141,989 (53%) 666,964 (53%) 2,925,623 (53%) 346,283 (28.4%) 88,791 (28.4%)

781,507 (10%) 125,842 (10%) 552,004 (10%) – –

908,147 (23%) 56,877 (23%) 647,846 (23%) – –

– – – – –

$30.98 $24.76 $24.74 $58.73 $24.75

$180.1 $21.0 $101.7 $20.3 $2.2

532,754 (28.4%) 65,145 (28.4%) 61,115 (32.8%)

– – –

– – –

– – –

$48.65 $101.72 $101.51

$25.9 $6.6 $6.2

Figure in parentheses represents percentage change in trips from baseline. Assumes an annual discount rate of 2.5%.

the same data sources for park visits described above, we calculate a reduction of 88,791 nights spent camping in the core for the first season. These losses scale linearly with the assumed percentage reduction in visits. We assume campers have a WTP to avoid lost camping days of $24.75/day (Rosenberger et al., 2017). Next, we estimate the damage from lost boating trips, including both motorized and non-motorized boating. We calculate the baseline number of boating user days by multiplying the estimated number of boating days in Michigan and Wisconsin (USACE, 2008) by the number of users per boat (USCG, 2016). We calculate user days in each county by multiplying total user days by the share of public harbor and private marina slips in each county. We assume the number of user days declines by 28.4% only in the core in the first year after the spill. This is again consistent with Tourangeau et al. (2017). Rosenberger et al. (2017) estimate motorized and non-motorized boating is worth $48.65 and $101.72 per user day, respectively, in the US Great Lakes region, and we use these WTP estimates to calculate losses. Finally, we estimate the damage to recreational fishing. We use creel survey data collected by the Michigan and Wisconsin Departments of Natural Resources to estimate the baseline number of fishing day trips to each county. We assume a spill would cause the number of trips to decline by 32.8% in the core in the first season after the spill only; the spill would have no effect on the number of trips in the periphery area. Recovery in recreational fishing trips after one year is consistent with the effects observed after other spills, including the Deepwater Horizon (Tourangeau et al., 2017), Burmah Agate, and the Exxon Valdez (ARI, 1993; Restrepo et al., 1980). We use the model developed in Klatt (2014) to estimate an average WTP of $101.51/trip, which is an upper-bound on the true average because the model does not include an alternative to not go fishing.

Energy products A spill in the Straits would shut down Line 5, suspending transport of crude oil to refineries in southeastern Michigan and Ontario and natural gas liquids sold for propane in Michigan (Dynamic Risk Assessment Systems, Inc., 2017). We assume propane consumers are not responsive to propane price changes given its necessity as a heating fuel. We are unable to find rigorous estimates of the price elasticity of demand for propane in the Upper Peninsula. However, Considine (2000) finds energy consumers have highly inelastic demand for other fuel sources, including natural gas and heating oil. This supports our assumption that propane consumption will be largely insensitive to changes in fuel price. Furthermore, the effects of a worst-case spill will likely be felt over a

Table 3 Economic losses from disruptions in energy markets due to a worst-case spill. Losses from propane supply disruption Average annual propane use (gal/household) Households affected Upper Peninsula Lower Peninsula Change in price post-spill ($/gal) Upper Peninsula Lower Peninsula Total loss from propane supply disruption

1141 22,050 297,000 0.35 0.13 $52,859,678

Losses from oil supply disruption Change in regional gasoline price ($/gal) Quantity of gasoline demanded (gal) Total loss to consumers from oil supply disruption Change in crude oil supply costs to producers ($/bbl) Quantity of crude oil demanded by producers (bbl) Total loss to producers from oil supply disruption

0.02 6,000,000,000 $120,000,000 2.40 3,426,902 $8,224,565

relatively short time horizon. Residential and commercial energy equipment tends to have a lifespan of decades and typically must use a specific fuel source. These features of energy equipment limit the ability of consumers to respond to energy price changes over the short-run (Bhattacharyya, 2011; Ryan and Plourde, 2011). Hence, we assume a shutdown of Line 5 will increase the price of propane while quantity demanded remains fixed. The economic loss to propane users can be calculated from Eq. (3) given estimates of the quantity of propane consumed and the price change resulting from a worst-case spill (see Table 3). We estimate that 22,050 and 297,000 households use propane as a primary heat source in the Upper and Lower Peninsulas, respectively (MAE, 2018). Average annual usage is 1141 gal (4319 L) per household (MAE, 2018), which implies a total of 25 million gallons (94.6 million L) per year in the Upper Peninsula and 339 million gallons (1.3 billion L) in the Lower Peninsula. We assume the price of propane increases by 35 cents per gallon for customers in the Upper Peninsula and 13 cents per gallon in the Lower Peninsula due to increased transportation costs in the absence of a functioning pipeline (Dynamic Risk Assessment Systems, Inc., 2017). We approximate the loss to consumers and producers in the oil market by multiplying the change in fuel prices by the quantity of consumed fuel. Our estimates are shown in Table 3. Dynamic Risk Assessment Systems, Inc. (2017) estimates that the disruption of supply to refineries would increase gasoline and oil prices by 2 cents per gallon. Michiganders consumed approximately 6 billion gallons of gasoline and diesel in 2018 (MAE, 2018). In 2016, Line 5 sent 3,426,902 barrels of crude oil produced in Michigan to

Please cite this article as: R. T. Melstrom, C. Reeling, L. Gupta et al., Economic damages from a worst-case oil spill in the Straits of Mackinac, Journal of Great Lakes Research, https://doi.org/10.1016/j.jglr.2019.09.003

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refineries (MAE, 2018). We expect the cost of transportation would increase by $2.40 per barrel if producers had to switch to trucks to transport the oil (Dynamic Risk Assessment Systems, Inc., 2017).

Water supplies Several coastal communities rely on Great Lakes surface water to meet their water needs. A worst-case spill would affect some municipal water intake systems so that residents would have to use alternative sources for drinking water (e.g., bottled water) but would incur essentially the same costs of water supply because most water is used for purposes other than drinking. We calculate the economic loss from having to find alternative drinking water supplies using Eq. (4). Table 4 summarizes our calculations. The worst-case spill would affect lake water intakes supplying the Michigan communities of Mackinac Island and St. Ignace and the Wisconsin cities of Sheboygan, Green Bay, and Manitowoc. These latter two Wisconsin cities have access to standby backup water supplies. Hence, we calculate the cost of alternative water supply to Mackinac Island, St. Ignace, and Sheboygan by multiplying the total affected population of drinking water users by average daily water use of 11.2 gal/day/person (Water Footprint Calculator, 2018) to estimate the total quantity of water demanded per day. Note that this water use figure includes water for consumption and certain cleaning activities (e.g., dishwashing). It excludes other uses (e.g., watering plants, washing clothes) that would not affect human health. Because Sheboygan is a relatively large city far from the spill site (so that most oil will have evaporated by the time the spill reaches the region), we assume Sheboygan would experience drinking water impacts over two days, similar to the duration experienced in other locales during algal blooms (The Blade, 2014). In contrast, Mackinac Island and St. Ignace are very close to the spill location, and water intakes in these two areas would be heavily impacted. Hence, we assume an alternative drinking water supply would be required for 60 days for these communities, which is the time when over 95% of oil is predicted to be evaporated or beached (MTU, 2018). We multiply daily water demand by the number of days affected and the cost of bottled water of $9.55/person/day supplied during the Flint water crisis (MLive, 2018b) to estimate total defensive expenditure on alternative drinking water supplies. We note that, while expenditures on alternate water sources and testing (described later) are a reasonable proxy for welfare losses in our case, there are many situations where expenditure measures such as these may over- or understate true welfare impacts; see Dickie (2003) for a thorough discussion. In addition, to the extent that state or federal governments may fund testing and alternative water supplies, expenditure would likely underestimate the true welfare loss given the opportunity costs of funds spent on water. Other residents rely on groundwater wells for drinking water. The groundwater gradient to the Great Lakes is strong enough that experts do not anticipate groundwater well contamination from a worst-case spill (MTU, 2018). However, it is likely that coastal wells will be monitored for volatile organic compounds, semivolatile aromatic compounds, and metals based on the recommendation of MDEQ and the water quality assessment during the Kalamazoo River Spill. We calculate the loss as the cost per test times the number of tests. We use GIS to identify the groundwater wells that would be affected by the worst-case spill. We assume each well test costs $346/sample (MDEQ, 2016). Further, we assume each well is tested twice in the first month, once per month in the following three months, and then quarterly over the remainder of the cleanup period for a total of 13 tests per affected well (MDCH, 2013).

Table 4 Costs of groundwater testing and alternative water supply. Groundwater testing Cost per test Number of tests per well Number of wells tested Michigan Wisconsin Total testing costs

$346 13 93 5 $440,804

Alternative water supply Alternative supply cost/day Population affected Michigan - Mackinac Island, St. Ignace Wisconsin - Sheboygan Days affected Michigan - Mackinac Island, St. Ignace Wisconsin - Sheboygan Total supply costs

$9.55 3369 62,000 60 2 $3,114,637

Commercial fishing An oil spill will affect commercial fishing through the closure of fishing grounds to contain and remove oil, and to protect consumers if fish are contaminated. We approximate the loss in producer surplus to commercial and tribal fishermen using Eq. (2).1 We expect declines in harvests (the term Dqijt in Eq. (2)) equal to 90% of baseline in the core area in the first and second seasons following the spill, consistent with the reduction in pelagic fish harvests in 2009 and 2010 after the Deepwater Horizon spill (Carroll et al., 2016). The commercial fishing data was too coarse spatially to differentiate a periphery in the worst-case scenario. Michigan’s Great Lakes fishery had landings valued at $8 million in 2016, with Lake Michigan and Lake Huron contributing $1 million and $4.8 million, respectively. Lake whitefish is the most valuable fish in the potential spill area, with 1,540,993 pounds harvested in 2014 and a dockside price of $1.91/lb. Lake trout is the next most valuable fish, with 773,077 pounds harvested in 2014 and a dockside price of $0.82/per pound. Table 5 shows the losses for these and other species. We assume the loss to consumers is zero; losses would only occur if the demand curve for fish was downward-sloping and consumers placed a premium on Great Lakes fish products over nonGreat Lakes fish products. Historically a premium may have existed (Frick, 1965), but more recently the price for Great Lakes fish has not responded to changes in harvest, which suggests no significant premium in the market as a whole. Commercial shipping The Great Lakes is home to substantial waterborne commerce and is a key component of North America’s economic health. After a spill, the Coast Guard would halt shipping in areas of the lake 1 A model of fish harvesting that generates welfare losses matching condition (2) follows from the classic Gordon-Shaefer specification (Gordon, 1954). Index the state of the world as i = 0,1, where 0 and 1 denote the ‘‘pre-spill” and ‘‘post-spill” worlds, respectively. Harvests in state i are qi = kEiSi, where k is a catchability coefficient, Ei is harvest effort, and Si is the fish stock. Let p be the (fixed) unit price of fish, and let the cost of effort be C(Ei) = cEi, where c is a parameter. We can rewrite the cost function as C(Ei/(qikSi)) = C(hi) = cqi/kSi. Eq. (2) is a valid welfare measure if the change in fisher profits after the spill, p(q1 – q0) – [C(q1) – C(q0)], equals p(q1 – q0). This condition is satisfied if costs do not change or if q1/q0 = S1/S0. From our definition of qi, we can rewrite this condition as (kE1S1)/(kE0S0) = S1/S0, implying E1 = E0 such that harvest effort is constant before and after the spill. Harvest effort will necessarily be constant assuming (i) the unit cost of effort is fixed, (ii) the amount of effort is capped at some finite amount (say, due to fishing quotas), and (iii) pkSi > c such that the marginal benefit from harvesting effort is greater than its marginal cost in each state of the world.

Please cite this article as: R. T. Melstrom, C. Reeling, L. Gupta et al., Economic damages from a worst-case oil spill in the Straits of Mackinac, Journal of Great Lakes Research, https://doi.org/10.1016/j.jglr.2019.09.003

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R.T. Melstrom et al. / Journal of Great Lakes Research xxx (xxxx) xxx Table 5 Economic losses to commercial fishers. There are 2.2 lbs. (pounds) in a kilogram. Price ($/lb)

Lake whitefish Lake trout Walleye Yellow perch Chinook salmon

1.91 0.82 2.79 2.82 1.71

Reduction in harvests from spill (lbs) Year 1

Year 2

893,957 448,475 16,475 4963 39,004

893,957 54,814 16,475 4963 39,004

with a visible oil sheen. Depending on water flows and weather conditions, simulations of hourly surface flows suggest that an impassable sheen would be present in the Straits for five to ten days (MTU, 2018). Daily costs of Great Lakes freighters average about $1 million per day, including navigation and fuel costs, labor and capital and other associated freight operational costs (Martin Associates, 2011; Jerome Popiel, US Coast Guard, Mackinaw County Emergency Response Team, 2018). Our operating cost data do not distinguish between freighters and tugs. They also do not take into account the costs of delays on the shipper or the recipient of the commodities shipped. Vessel operators with sufficient lead time may partially mitigate these operating costs by leaving vessels dormant in port or through other mitigating actions that reduce the operational costs of idled freighters. The additional cost to shipping firms from closing the Straits is an economic loss that we calculate with Eq. (2). We assume daily operational costs of $1 million per ship. We expect shipments more than five days out to be deferred at the port to avoid the lost operating costs of being anchored in the lakes. However, those within a five-day window may not have the option of mitigating actions. Rather, they will likely be compelled to anchor outside the impacted region in wait. The Straits average 2.8 commercial shipping vessel passages per day based on vessel tracking through the Great Lakes (Boatnerd.com, 2018). Hence, on the day of the release, 2.8 vessels will be moored for five days. An additional 2.8 vessels arriving on the second day of stoppage will be moored for four days. By the fifth date, 14 vessels will be in waiting for passage through the Straits. The cumulative effect of the stoppage will result in 42 lost shipping days. Note that the spill scenarios we examine do not affect shipping through the Soo Locks and traffic between Lake Superior and Lake Huron. Some have suggested that prolonged spills affecting these shipping routes would cause massive nation-wide effects on US steel production and other industries (Richardson and Brugnone, 2018). These effects require that the shipping lanes be closed to any traffic and no mitigating actions be taken to avoid losses. However, in previous oil spills, exceptions have been made that allow vessels to pass through spill areas. For example, cruise ships have been allowed through (Bacon, 2014), booms have been used to provide passage (Nossiter, 2008), and cleaning stations have been set up to decontaminate ships passing through a spill (Guarino, 2010; UDSG, 2004). It seems likely that similar responses would apply to a spill with prolonged effects on any vital shipping lanes. Because the spills we examine would not lead to a closure of the Soo Locks, costs of any mitigation needed to keep these shipping lanes open were not assessed. Residential properties Beached oil will reduce the amenity values homeowners receive from lakefront property (e.g., due to the loss of scenic vistas or smells from the oil). The welfare loss to property i’s owners from the oil spill equals the difference in the property’s sale price before and after the spill, or Dpijt in Eq. (3) (Rosen, 1974). Most prior work measures effects of oil spills on properties from the waterfront

Present value of lost surplus

$3,375,035 $411,099 $90,909 $27,697 $131,881

(e.g., Epley, 2012; Simons et al., 2001; Winkler and Gordon, 2013) up to 1.5 miles from shore (Hellman and Walsh, 2017). Siegel et al. (2013) and Winkler and Gordon (2013) both examined the effect of the Deepwater Horizon spill on coastal property values. These studies collectively found that the spill decreased sales prices by 1–16%, with effects lasting 3.5–5 months after the spill (beyond which we assume a property’s market price returns to its pre-spill value). Siegel et al. (2013), which measured the largest percentage reduction of property values, focused on properties within one mile of shore. Given our focus on a worst-case outcome, we assume the change in price is 16% for homes within one mile of the coast and the duration of spill effects is 5 months. Prior work in economics (e.g., McCluskey and Rausser, 2003) finds that, for some types of environmental harms, property values may not fully return to their pre-event values after remediation due to ‘‘stigma” effects (i.e., individuals place a lower value on property upon realizing the possibility of environmental damage). We are not aware of any literature that demonstrates long-term stigma effects on property values due to oil spills. Estimating welfare losses as price differences also abstracts from features of real estate markets that may affect the final sales price of a home (e.g., moving costs or decisions about whether or not to list a home for sale during an event [Guignet, 2014]). These features could mean that the true amount of welfare loss from an oil spill is larger or smaller than the difference in sales price; we do not consider these features here. We assume the sales price of a given property equals the present value of an annuity, or stream of benefits from owning the home over a fixed period of time—here, 50 years. We use parcellevel and—where unavailable—US Census block-level data to identify all residential property within 1 mile (1.6 km) of affected shoreline. We find the oil spills in Fig. 3 may affect up to $2.8 billion in coastal property. We calculate the monthly annuity value of each affected property. Losses from the oil spill are assumed to equal 16% of this annuity value. We then calculate the present value of these losses over a five-month period assuming a discount rate of 2.5%. Adding the present value of losses over all affected properties yields total economic losses from reduced amenity value to lakefront homeowners. Tourism and recreation-related business income The oil spill will affect income by shifting tourism and recreation activities away from the core and periphery areas. We estimate the change in incomes to business owners and labor by calculating the expected loss in total tourism expenditures at the county level, and we then convert these expenditure changes to losses in state income using IMPLAN 3.0, an input-output (IO) model widely used for regional economic analysis. A detailed description of IMPLAN and IO models in general is available in MTU (2018) and its technical appendix GI-1 (available at https://mipetroleumpipelines.com/document/risk-analysis-straitspipelines). For the damage simulations, Michigan and Wisconsin counties were assigned to the core region, the periphery, or the

Please cite this article as: R. T. Melstrom, C. Reeling, L. Gupta et al., Economic damages from a worst-case oil spill in the Straits of Mackinac, Journal of Great Lakes Research, https://doi.org/10.1016/j.jglr.2019.09.003

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Table 6 Economic losses in regional incomes from lost tourism spending from a worst-case spill. Expenditure category

Lodging Restaurant food and beverage Retail purchases Recreation, sightseeing, and entertainment Transportation at destination Total

Lost direct sales ($000s)

Adjusted GDP factors

Lost GDPS ($000s)

Michigan

Wisconsin

Michigan

Wisconsin

Michigan

Wisconsin

$194,780 $133,271 $75,178 $61,510 $58,092 $522,831

$366,385 $250,685 $141,412 $115,701 $109,273 $983,456

0.5582 0.4150 0.5865 0.4648 0.3772 –––

0.4114 0.3813 0.5348 0.4849 0.5354 –––

$108,726 $55,307 $44,092 $28,590 $21,912 $258,628

$150,731 $95,586 $75,627 $56,103 $58,505 $436,552

Results

Table 7 Summary of damages from simulated worst-case spills ($ millions). Activity Total recreation Recreational fishing Recreational boating—motorized Recreational boating—non-motorized Park day visits Park camping days Recreational beach use Lost amenity value to coastal property Commercial fishing Commercial shipping Michigan energy supply effects Water supply effects Lost incomes for tourism and recreation-related businesses Total economic damages

Worstcase spill

Alternative spill

363.9 6.2 25.9 6.6 20.3 2.2 302.7 6.4 4 43 181 3.6 695.2

63.4 0.4 3.1 0.6 7.3 1.0 51.0 6.1 2.4 43 181 3.6 99.1

1297.1

398.6

not-impacted region. Consistent with Tourangeau et al. (2017), we assume core and periphery counties experience 45 and 22% decreases in tourism visits the year of the spill, respectively, and that in the following year the core area only experiences a 10% decrease in visits. We also assume tourism expenditures scale linearly with visits. Annual state-level total expenditures are allocated by county based on official state estimates of tourism visits and expenditures for Michigan (Longwoods International, 2016) and Wisconsin (Wisconsin Department of Tourism, 2017). Annual tourism activities are broken out by month, based on the share of annual Mackinac Bridge crossings. Expenditure breakouts by type of purchase, such as lodging, food, and retail spending, are based on estimated tourism expenditure profiles (Longwoods International, 2016). The IMPLAN model transforms the expenditures for each county by category to annual GDPS contributions using ratios provided by the Bureau of Economic Analysis. We net out federal and state taxes on production and imports to derive estimated income losses. Taxes were equal to 6.6% of gross domestic product, based on national statistics (BEA, 2018). Table 6 shows estimates of the corresponding losses in tourism expenditures. Changes in direct sales are distributed by aggregate sectors as indicated in the ‘‘Expenditure Categories” column. We multiply these losses in transactions by the corresponding adjusted GDP factors to estimate net changes in GDPS. These estimates assume that losses are not recovered through second-best redeployment to non-tourism activities. This assumption may overstate the impact to the extent that tourism-related businesses can be redeployed to mitigate losses, or to the extent that the impacted region can realign tourism attractions to tourism sectors not affected by the spill. In addition, spending that may shift to other regions outside the spill areas would result in gains for those other regions, but we do not net those out to reflect the damages within the spill counties.

The worst-case scenario causes $1.3 billion in damages for the impacts we quantified. Table 7 presents the damages in each category. Losses to tourism and recreation visitors are approximately $364 million, and income losses to workers and owners of tourism-related businesses are estimated at $695 million. In addition, we estimate the damages to drinking water, fuel prices, coastal properties, commercial fisheries, and commercial navigation to be $238 million. In the worst-case scenario we analyze, the oil spill spreads primarily westward along the northern Lower Peninsula shore of Lake Michigan and across Wisconsin. This simulated spill features the greatest shoreline distance oiled (over 700 km) of all spring spill scenarios. However, the damages from a spill will vary across space. As a sensitivity analysis, we use the approach described above to estimate the damages from an alternative spill scenario (Fig. 3b) that spreads along 412 km of Lake Huron shoreline. We estimate that this spill causes considerably less damage ($399 million). The smaller damage estimate arises mostly from a smaller reduction in income from lost out-of-state tourism expenditures. The losses to recreational beach visits are also much smaller under the alternative spill scenario. This is because WTP for visits to Northern Lake Huron is smaller than WTP for visits to Northern Lake Michigan, and there are fewer annual visits to these beaches. However, damages in these categories are likely underestimated because this simulated spill would also affect shoreline in Ontario, Canada as well; we do not estimate losses for this region due to a lack of data. However, this region of Canada is remote, and we expect the recreational and commercial losses from a possible spill to be comparatively small. Discussion and conclusions Based on an unmitigated release of 58,000 bbl, the largest damages occur when the oil spill affects shoreline on both sides of the Straits but principally along the shores of northern Lake Michigan. We assumed that an oil spill would have a core impact area (where oil washes ashore) and a periphery area (adjacent to the core) with lower losses. Additionally, we assumed that recreation for most activities recovers within one year and that there are no longterm residual injuries to recreational uses of the affected natural resources beyond these periods. Both assumptions are consistent with the pattern of economic impact, restoration, and recovery after the Deepwater Horizon oil spill, as well as several coastal tanker spills. A crucial caveat is that our analysis does not encompass every category of economic loss. Specifically, we did not estimate losses to recreational hunting because we do not expect a worst-case spill to have a large effect on waterfowl hunting trips; only 5% of waterfowl hunting trips are on the Great Lakes, and there are many substitute sites available in the event of a worst-case spill (Austin et al., 2007). Nor did we estimate damages to human health, irreversible damage to resources for which estimates are unavailable,

Please cite this article as: R. T. Melstrom, C. Reeling, L. Gupta et al., Economic damages from a worst-case oil spill in the Straits of Mackinac, Journal of Great Lakes Research, https://doi.org/10.1016/j.jglr.2019.09.003

R.T. Melstrom et al. / Journal of Great Lakes Research xxx (xxxx) xxx

subsistence fisheries, value-added commercial fish products, compensatory habitat costs, and cultural goods and services supported by the Great Lakes, which are challenging to quantify and measure. In addition, lost producer surplus for liquid propane producers was not estimated due to the variety of providers that serve the region and the proprietary company data required for computation (MAE, 2018). Limited data also precluded estimating the effects on industrial and agricultural water users. Moreover, these costs do not include the costs of repairing the pipeline itself. Finally, we did not estimate the damages to non-use valued habitat and wildlife because we lacked comparable studies for benefit transfer. We therefore caution that our final estimate is only a partial estimate of the total economic damages that would occur in the event of a worst case-spill. In fact, the loss to non-use values may be several times larger than the losses to tourism and recreation, based on evidence from other spills. For example, in the Deepwater Horizon oil spill, estimated public damages for total use and non-use losses of $17.2 billion (Bishop et al., 2017) far exceed the estimated $661 million in recreation losses (English et al., 2018). Estimated losses of $1.3 billion in measurable categories includes $364 million in losses to shoreline recreation in the Great Lakes. This figure is substantially greater than recovered losses for other oil spills with the exceptions of the Exxon Valdez and Deepwater Horizon spills (Dunford et al., 2019); it is less than the $661 million in estimated recreation losses for the Deepwater Horizon oil spill (English et al., 2018). On the other hand, since our estimates apply to a worst-case spill, most spills would result in losses smaller than the total losses quantified here. Double-counting of losses could have occurred across recreation categories. We excluded specific subcategories of activities (i.e., fishing and boating in parks) to avoid double-counting with other categories, although this was not possible in all cases. For example, there may be double-counting between income and property value losses, and between recreational visits and property value losses (e.g., McConnell, 1990) because property values are affected by incomes and recreation demand. We expect the amount of double-counting in our estimates is minimal. The properties most affected by the spill will be in closest proximity to the lake (i.e., waterfront properties), which we expect sell at a premium principally for viewing and recreational activities at private beaches whose value is not included in the other categories. Our assessment is important because it provides decision makers with part of the information they need to weigh the benefits and costs of policies to protect the Great Lakes from oil spills. For Line 5, one alternative considered by the State of Michigan to avoid a worst-case oil spill is to place the pipeline in a tunnel under the Straits of Mackinac. In fact, Enbridge recently agreed to construct such a tunnel as well as ensure $1.8 billion to cover its liability, although Michigan’s Attorney General subsequently filed a lawsuit to decommission the line. Our methods and results may also be useful in assessing threats to other aquatic ecosystems in the Great Lakes and other freshwater systems. For example, Wisconsin alone has over 300 miles of oil and gas pipelines that transport nearly 20% of all US crude oil imports (Milwaukee Journal Sentinel, 2017). These pipelines cross more than 240 rivers and streams, many of which are located within the Great Lakes Basin. In any case, a valuable aspect of our assessment is that it provides the public, in general, and analysts, in particular, with a transparent methodology to estimate the damages from oil spills in freshwater aquatic systems. Acknowledgements We would like to thank the Principal Investigator Dr. Guy Meadows, Project Coordinator Amanda Grimm, and the project team of the Independent Risk Analysis report. This research is based on the

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Please cite this article as: R. T. Melstrom, C. Reeling, L. Gupta et al., Economic damages from a worst-case oil spill in the Straits of Mackinac, Journal of Great Lakes Research, https://doi.org/10.1016/j.jglr.2019.09.003