How will climate change affect the economic value of water in California?

by Lorie Srivastava

Climate change is affecting natural resources in California, with water being one of the most important in the state. Water is critical for municipalities, agriculture, industry, and habitat/environmental purposes. Will future supply meet future demand? How will the economic value of water change over this century?

The economic value of raw – or untreated water – will fluctuate over time, depending on prevailing supply and demand factors. Over the decades from 2030 to 2090, the average economic value of water on federal public lands – specifically on national forests – will range from about $4 per hundred cubic feet (HCF) to about $53 per HCF, depending on what future climate will be realized (all values are in 2018 dollars). The value of raw water will on average be highest when supply is scarcest at $53 per HCF, under a hot-dry future, and lowest over the decades when all possible climate scenarios are averaged (known as the ensemble mean), at $4 per HCF. If the future will be wet and warm, the average economic value of water will be $20 per HCF

Fig. 1. Average Economic Value of Raw Water from Public Forests, by Climate Scenario.

Calculating the Economic Value of Water from Public Forests

The economic value of water from San Bernardino National Forest is calculated in terms of how better off or worse off urban residents are when supply and demand changes occur over the years. We focus on urban residents who get water from water retailers who in turn get their water from San Bernardino National Forest. On the supply side, water from national forests managed by the United States Forest Service (USFS) are subject to drought conditions, wildfires, and changing temperatures associated with climate change. We use a dynamic vegetation model, MC2, to generate the supply of water from San Bernardino National Forest. Having endured droughts and wildfires for decades, Californians have devised policies and institutions to adapt and reduce their exposure to such dynamic environmental stressors that affect watersheds and water supply. On the demand side, a variety of policies throughout California have been developed and implemented to reduce water use, including:

technological mandates such as low flow toilets,

tiered water pricing, and

mandated per capita daily limits since the last drought.

Since supply and demand conditions will vary over time, we estimate the value of raw water – regardless of the end use – by decade until the end of the 21st century. To account for uncertainty with respect to what climate conditions will be realized in the future, we evaluate water supply from the San Bernardino National Forest under 28 different possible climates. We then forecast water demand in each decade accounting for population, water rate changes, and we assume per capita limits will be enforced as mandated under AB 1668 and SB 606.

Fig. 2. Trajectory of Economic Value of Untreated Water, Warm-Wet Climate 2030-2090.

Fig. 3. Trajectory of Economic Value of Untreated Water, Ensemble Mean of Climates 2030-2090.

Fig. 4. Trajectory of Economic Value of Untreated Water, Hot-Dry Climate 2030-2090.

Once we know supply and demand for water from this public forest, we can then calculate whether there is a water shortage – when supply does not meet demand – or a water surplus – when supply exceeds demand. If the former circumstances prevails, intended recipients of the water are made worse off – they experience a decrease in economic welfare; conversely, if the there is a surplus of water, then the recipients of the water enjoy an improvement in their economic welfare since they are made better off by having water available that exceeds their demand.

We estimate the economic values by examining water rates for municipal households served by four water retailers that receive all their water from San Bernardino National Forest, located in Riverside, San Jacinto, Redlands, and Colton. Though we start the estimation process by using their water rates for single family households, we then remove the retailers’ costs for treating and distributing the water; next we forecast how demand for water by these households will change as water rates change, populations change – that is, the number of single family households – while also accounting for per capita consumption limits. The initial starting point for the water rates is taken from the 2015 urban water management plan for each of the four retailers; we also use their forecasted demand changes, and the proportion of their water deliveries that go to single family households relative to their other customers.

The averages presented in Figure 1 are based on the economic values in each decade for each climate scenario. The trajectories of the forecasted values for each climate scenario are illustrated in Figures 2-4. Each reported climate scenario, or general circulation model (GCM), simulates representative pathway 4.5 (RCP 4.5), which is an overall framework that assumes globally high population growth, limited climate policy initiatives, and limited technological advances. We chose RCP 4.5 since it reflects the current limited state of global action with respect to climate change.

These economic values reflect changes in economic welfare, and their trajectories vary widely, largely due to changes in the supply of water from San Bernardino National Forest, which in turn is determined by temperature, precipitation, and wildfires. The value reaches a peak under the warm-wet GCM (Figure 2) in 2040, at about $98/HCF, but declines thereafter. Under the hot-dry GCM (Figure 4), however, the economic value initially reaches $50/HCF in 2030, but then dramatically declines; it increases through the middle of the century, and is forecasted to be highest in 2080 at $204/HCF. Interestingly, the lowest value is $8/HCF in 2040, the decade with the highest value under a warm-wet GCM.

We derive the ensemble mean by averaging the values across all 28 GCMs. As shown in Figure 3, the economic value of raw water initially drops from $2/HCF to $0.01/HCF, then jumps up to about $8/HCF, but then decreases and by the end of the century, to about $2/HCF; again, keep in mind this is the value of raw, untreated water, regardless of how it is used – either for habitat purposes, municipal, industrial, or agricultural.

Policy Implications

As Californians and the rest of the nation adapt to climate challenges over the course of the 21st century, a better understanding of the economic value of water may help planners and policy makers by informing them of the value of scarce resources and public preferences via demand. Multiple uses of raw water from public lands – whether by municipal residents, agricultural and industrial purposes, ecological needs such as fish habitat, or recreation – coupled with the projected effects of climate change – will likely exacerbate water shortages in the future, especially in arid and semiarid Mediterranean-type areas such as southern California.

The most recent drought in California – from 2011 to 2017 – continues to linger in the public memory, with climate-related precipitation issues continuing to be an ongoing concern for policy makers. Given these stressors to the supply of water in southern California and challenges associated with climate change, understanding the welfare impacts of changes in the supply of water for downstream users may help public forest managers weigh actions that affect water supply and inform water retail agencies’ future investments.

For example, suppose land managers plan to pursue vegetation restoration projects over the next decade that, due to increased vegetation cover and evapotranspiration, are expected to decrease expected surface water flows by 250,000 HCF per year over the 2030–2039 decade (just under 15 percent of the projected surplus from the ensemble mean in that decade). Given the effect on welfare of the supply shortage ($2/HCF based on the ensemble mean), managers could conclude that the benefits of the restoration project must exceed about $500,000, plus the cost of the restoration, to offset welfare losses due to reduced water supply ($2/HCF x 250,000 HCF).

Water and its related services are among the most tangible benefits supplied by national forests in southern California, and its value will vary over the coming decades. Policy makers, industries, agriculture, residents, and consumers will better adapt, manage, and comprehensively weigh trade-offs of the associated price risks if they are armed with key information such as the long-term trend of the economic value of water.

Acknowledgements

The results presented in this blog are from Srivastava et al., How Will Climate Change Affect the Provision and Value of Water from Public Lands in Southern California Through the 21^st Century? Agricultural and Resource Economics Review 49 (1) 117-149 (2020). I would like to acknowledge and thank the invaluable and indispensable contributions and all her co-authors with this research, funded by US Forest Service Western Wildland Environmental Threat Assessment Center (Agreement number: 14-JV-11221636-133).

Lorie Srivastava is a Research Associate in the Department of Environmental Science and Policy at the University of California, Davis.