Climate Change Puts California Economy at Risk of Collapse

California faces one more year of water supply. The state is in the grip of a record drought tied to climate change. This water crisis holds the potential to collapse California’s economy if the state truly runs out of water. What an irony that the state most focused on global warming may be its first catastrophic economic collapse victim.

California anchors U.S. economy

This is not an article about California. It is about you, in whatever state you live. California's economy is so large and impacts so many other businesses that its potential collapse due to a water crisis will impact the pocketbooks of most Americans.

California has a $2.2 trillion annual economy. That makes California the seventh largest economy in the world. For all the greatness of Texas, the California economy is approximately twice the size.

California’s companies are the world’s technology leaders. Google, Apple, Facebook, Twitter, Cisco, Disney, Hewlett Packard, Tesla and Solar City all have their corporate headquarters in California. Little know Atomic General located in San Diego is a world leader in military drones. San Francisco and San Diego rank No. 1 and No. 3 among the top 10 biopharma clusters in the U.S.

California is also a global breadbasket: It is the world’s fifth largest supplier of food. The California agriculture industry is highly efficient, and the state is the largest food producer in the U.S., with only four percent of U.S. farms. California’s crop diversity is world class, with the state growing over 450 different crops. Crops exclusively grown by California in the U.S. include almonds, artichokes, dates, olives, raisins, pistachios and clover. The state also produces more than 86 percent of all lemons and 94 percent of all processed tomatoes in the U.S. You might want to drink to California’s agricultural success by having a glass of California wine, as the state is the world’s fourth largest wine producer.

Whether you are a Democrat or Republican, the state anchors your government spending plan as California is the largest federal tax payer among U.S. states. The state also pays more in federal taxes than it receives in federal spending.

Climate change driving California’s drought

Research by Stanford University points to climate change as a key driver in California’s historic drought level. It is not a question of whether California has ever before had droughts. The question of this research was how climate change impacts the severity of weather events like droughts. The findings were that “... extreme atmospheric high pressure in this region – which is strongly linked to unusually low precipitation in California – is much more likely to occur today than prior to the human emission of greenhouse gases that began during the Industrial Revolution in the 1800s.”

This research can be yet another climate change deniers’ example of science getting in the way of their personal beliefs or economic incentives, except this time the consequences of denial will impact Americans who eat tomato-based products, use a lemon or search Google.

No water, no economy

Imagine the ramifications for your state if it were to run out of water. That is the immediate challenge facing California. January 2015 was the driest in California since record-keeping began in 1895. This is not a recent weather event: NASA data shows that California’s water storage capacity -- in the form of its lakes, snow levels, water table etc. -- has been in decline since 2002. There is no contingency plan for this level of climate change for the world’s seventh largest economy.

The economic ramification will range from measurable to catastrophic. Two-thirds of the state’s water losses are tied to the agricultural community's pumping the aquifer dry. A point of diminishing return is being reached with increased reports of dry wells. California’s agricultural industry is on the precipice of economic decline and may be heading toward collapse due to a lack of water.

Rationing is now a topic of discussion in California. Water conservation has been as much of California’s culture as energy conservation and renewable energy. But conservation cannot overcome this scale of drought and water shortage. Rationing appears the last option available, and it holds the potential of dramatically curtailing economic activity.

Rationing means that people and businesses will have to reduce their economic activities due to a lack of water. One obvious impact will be a lack of water to serve the approximately 227 million domestic person trips annually to California that generates over $100 billion in visitor spending. It has the potential to impact the operations of California's tech companies that the rest of the U.S., and the world, depend on to run their economies. It will certainly mean less food sourced from California with higher prices at grocery stores across America.

The cost of climate change denial

California is unfortunately positioned to become the first case study on the cost of climate change denial. If California’s water crisis reduces its economic activity by 20 percent, that would equate to a $500 billion decline in our nation’s gross domestic production. This scale of economic decline would represent significant national job loss. It would represent significant food inflation from lost production. It would increase the national deficit from lost tax revenues from California. It would circumvent all the work by the Federal Reserve, Congress and the president to restore economic growth following the Great Recession.

My guess is that California will address this crisis through technology. Over the long term, the state will accelerate its adoption of zero net buildings. Creating economies of scale through state-wide adoption will drive the cost of smart water technology to affordability. New companies will be born, and California will become a global supplier of smart water technologies. But that is the future, after much economic pain tied to the consequences of climate change. The storm cloud on the immediate horizon is the potential first national economic crisis tied to global warming. The forecast is for a very hot political season over whether our country can deny climate change any longer.

Image credit: Flickr/docentjoyce

Bill Roth is an economist and the Founder of Earth 2017. He coaches business owners and leaders on proven best practices in pricing, marketing and operations that make money and create a positive difference. His book, The Secret Green Sauce, profiles business case studies of pioneering best practices that are proven to win customers and grow product revenues. Follow him on Twitter: @earth2017