California’s Water Conservation Regulations and the Law of Unintended Consequences Part 2—Economic Impacts

What are the unintended economic impacts of California’s water conservation regulations?

One must only watch the evening news to surmise that unintended consequences are frequently economic in nature. The prices of oil (and therefore, gasoline), coffee or any other tradeable commodity rises and falls according to policy implementation and political decisions.[1] The water industry recently saw this affect when the Cadiz Inc. stock price plunged following a controversial decision by the Bureau of Land Management declaring that the proposed use of a railroad right-of-way for the Cadiz Water Project “does not derive from or further a railroad purpose.”

When it comes to California’s state-imposed conservation, the unintended economic impacts are those things that affect the pocketbooks of residents and businesses and the viability and vibrancy of communities.

Penalties
Because penalties are intentional, they are not the first thing that comes to mind when thinking about unintended economic impacts. But the purpose of penalties is to provide teeth to the conservation regulations, not create a catch-22 between two regulations.

In a recent article in The Wall Street Journal, a barber in Clovis, California discusses his plight. To meet the state’s conservation mandate, the city imposed a 36% water use reduction requirement on all water users. With no outdoor landscaping to take the brunt of the cutback, the barber’s only option is to reduce indoor water use—but he must wash his hands and his utensils between clients, leaving nowhere to cut his indoor use. Yet, he must reduce his use or face fines for noncompliance.

A similar dilemma also impacts those in communities that have not suspended their beautification ordinance to allow for the withering of outdoor landscapes. This issue seems to have settled down, either because of cities catching up and putting their beautification ordinances on hold or because of the seasonal change in landscaping. Nevertheless, while this is less of bread-and-butter scenario than the barber faces, citizens have been tasked with choosing between paying fines imposed by the water supplier for excess use or by the city for violation of the beautification ordinance.

Landscape Replacement Costs
For those that overcome the beautification dilemma with an alternative landscape, there are landscape replacement costs. There is a handful of landscaping options that use less water than the traditional green lawn—and, according to an analysis done by the Journal of Water, the costs vary according to the option chosen and the availability of rebates. Rebates help offset the cost of converting to a more water-efficient landscape, and in some cases new landscaping can be installed at no net cost to the homeowner. But with funding for rebates drying up, the full cost of replacement must be considered. Costs range from $0.72/sq.ft. for buffalo grass, a specially-developed low-water use grass that looks like traditional turf, to $0.83/sq.ft. for lawn painting—and up to $7/sq.ft. for artificial grass or drought-tolerant landscaping.

Business Operations
Businesses trying to comply with orders to reduce water use face the costs of lost productivity or significant capital expenditures. An Associated Press article demonstrates this dynamic in California’s craft beer industry.  Craft breweries are a growing industry that, according to the California Craft Brewers Association, supported 44,000 jobs and contributed $4.7 billion to the state’s economy in 2012. In 2014, the industry’s contribution to the economy rose to $6.5 billion.

The article notes that these small industrial businesses are being asked to comply with the 25% water use reduction, despite many of them already reducing water use from 7 gallons of water to 5 gallons of water for each gallon of beer produced. To meet conservation regulations and avoid fines, a brewer in Fallbrook has installed a tank to capture water from the brewing process so it can be reused for cleaning, and he has installed a new, more water-efficient chiller. A brewer in Northern California has reduced production and drilled wells. None of these capital expenditures come cheaply.

The possibility of relocation was also addressed. Moves to neighboring communities with lower conservation targets seem to be in the realm of possibility. But when it comes to wholescale relocation, the owners of these independent businesses don’t want to devastate their employees and communities—though at least one mentioned the possibility of opening an additional plant in a more water rich area. One could easily envision a scenario in which larger operations—where decisions are made by individuals or committees that often are located elsewhere—could see relocation as a viable option.

Agriculture
As noted in Part 1 of this series, while agriculture was not subject to the draconian water conservation mandate, the sector still faced radical reductions in water supplies, especially in the Central Valley, where agricultural water users received zero percent allocations from the Central Valley Project. In addition, the region saw both junior and senior water rights curtailed this year, and even Exchange Contractors and Settlement Contractors received reduced water allocations. According to the UC Davis Center for Watershed Sciences, California agriculture was short 8.7 million acre-feet of surface water. This shortage was partially offset by pumping 6 million acre-feet of groundwater—leaving a 2.7 million acre-foot deficit, which led to the idling of 542,000 acres.

The Center for Watershed Sciences estimates the total economic impact on agriculture at $2.7 billion, which includes crop revenue loss, dairy and livestock revenue loss, cost of additional pumping, and direct costs. In addition, they estimate that about 21,000 jobs were lost—with about half of them being farm jobs and half being from the farm services sector. This could become a permanent condition. An article in Ag Professional notes that extensive retirement of agricultural lands will come in order to comply with the Sustainable Groundwater Management Act. However, the UC Davis researchers argue that the agriculture sector is resilient—meaning it continues to survive despite the losses. In addition to increased use of groundwater, they credit the global demand for California produce, shifts in growing locations, and water transfers for that resiliency. The question remains: will those other factors be enough to maintain the industry when increased use of groundwater is no longer an option?
Read Part 1—Management Impacts

[1] There are other factors that affect prices—e.g. weather patterns, crop yields, and even supply and demand—but they are not “purposeful actions,” so their impacts are not unintended consequences.

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About Marta L. Weismann

Marta L. Weismann, Director of Research of Stratecon Inc.—an economics and strategic planning consulting firm—provides research support for all aspects of Stratecon’s services and is the Managing Editor for the Journal of Water, a quarterly publication providing in-depth analysis of water market activity and selected water policy developments in the Colorado River Basin, Texas and elsewhere in the Southwest. She also participates on teams dedicated to developing new ways to address water supply issues in the American Southwest. For more, go to www.stratwater.com.

1 thought on “California’s Water Conservation Regulations and the Law of Unintended Consequences Part 2—Economic Impacts

  1. Pingback: Blog round-up: Urban water conservation regs, environmental water budgets, damn dams, retiring farm acreage, water storage, and more …MAVEN'S NOTEBOOK | MAVEN'S NOTEBOOK

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