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Press Release · May 30, 2012

Address Risks to Ensure Water Scarcity Does Not Dampen Growth

Hazards To Economy Include Quakes, Floods, Depleted Groundwater

SAN FRANCISCO, May 30, 2012—California’s economy can grow and prosper despite droughts and water shortages caused by a changing climate—but only if threats to the water system are addressed now. This is the conclusion of a report released today by the Public Policy Institute of California (PPIC). The report represents a consensus view of a wide-ranging group of experts on the role of water in the state’s economy.

Water is vital to California’s economy, a scarce resource subject to numerous and competing demands—including increasing demand for environmental uses. Yet the state has weathered droughts and supported a growing population, thanks to innovations in water management. These include more efficient use of water, water markets, reuse of highly treated wastewater, and underground storage, or water “banking.” The continued expansion of these tools will allow California to manage future water shortages.

Another reason for the state’s resilience despite the scarcity of water is that its economy has evolved to become less reliant on water-intensive activities.

The authors point to key trends—expected to persist—that shed light on the role of water in the economy:

  • Agricultural water use has declined since the 1980s. Farmers have improved irrigation efficiency and shifted toward crops that generate more value and profits per volume of water used, such as fruits, nuts, vegetables, and plants for horticultural use. Although agriculture is highly dependent on irrigation water—which accounts for about three-quarters of all business and residential use—it is now a small share of the state’s economy. Agriculture and related manufacturing make up just 2 percent of state GDP and 4 percent of all jobs.
  • Urban water use has leveled off since the mid-1990s despite population growth. Appliances such as low-flow showers and toilets have generated much of the savings in water use. There is still considerable room for increased conservation among California households, particularly in landscaping, which accounts for at least half of all urban water use.
  • The manufacturing and service industries account for a small fraction of total water use. These sectors have improved efficiency by using advanced appliances—such as prewash spray nozzles in restaurants—switching to recycled wastewater, and reducing outdoor watering. There is still room for cost-effective conservation in these areas, as well.
  • Demand for environmental water is growing.Societal demand for healthy watersheds is reflected in the passage of environmental laws beginning in the late 1960s and approval of billions of dollars in state general obligation bonds focusing on better water quality and other environmental issues. Although meeting environmental demands for water poses a funding challenge, there are numerous economic benefits. Healthy watersheds help make California a desirable place to live and work, making it possible to attract and retain a highly productive workforce and businesses that create jobs. They also support commercial and recreational fisheries and other forms of recreation, as well as allowing cities to save millions of dollars annually in water treatment costs.

“California’s economy is less dependent on large volumes of water for production,” says Ellen Hanak, PPIC senior policy fellow and one of the report’s 15 authors. “Water use efficiency is increasing in all sectors, and there is considerable opportunity to build on this progress.”

Contrary to conventional wisdom, the primary concerns about water are neither periodic drought nor long-term decline in water availability from climate change. California has the ability to manage water shortages by using surface reservoirs and groundwater basins to “bank” water for dry years, and tools such as drought conservation programs and water markets to voluntarily reallocate water. Of greater concern, the report says, are:

  • Catastrophic disruptions in the water supply. Many parts of the water system—particularly the Sacramento–San Joaquin Delta—are vulnerable to earthquakes. Delta levee failures in late summer, autumn, or any time of drought—when there is little fresh water in the watershed—could draw in salt water from San Francisco Bay, potentially ending water exports for up to two years. Other water supply networks around the state are also at risk. This is a particular concern when urban systems rely heavily on a single source of vulnerable supplies, as in San Francisco, San Mateo, and parts of Alameda, Contra Costa, and Ventura Counties. Steps that can reduce risk include seismic upgrading, diversifying water supply sources, and building connections between utilities so that they can share supplies, if needed.
  • Continuing uncertainty about the reliability of water supplies. Long-term uncertainty discourages business and infrastructure investments. The biggest single source of unreliability is the Delta, given its importance as a supply source for much of the state. To reduce uncertainty, it is essential that the debate be resolved about whether to build new conveyance to route water under or around the Delta or implement an alternative solution.
  • Declining groundwater basins. Groundwater accounts for roughly a third of agricultural and urban water use statewide, but in many parts of rural California it is not managed effectively. As a result, more water is pumped out than is replenished and nitrates from fertilizer seep into the aquifers. This is a particularly acute problem in the Tulare Basin—covering large parts of Fresno, Kern, Tulare, and Kings Counties—and the Salinas Basin in Monterey County. The lack of effective regulation of groundwater threatens the long-term viability of agricultural production and raises the cost of drinking water treatment.
  • Increasing risk of catastrophic floods.Flood protection is chronically and woefully underfunded. Federal and state policies allow new development in floodplains without requiring adequate flood protection. Yet a large flood in the Sacramento area would endanger thousands of people and destroy tens of billions of dollars in property. Climate change is projected to increase flood risk inland because of faster snowmelt and in coastal areas such as the San Francisco Bay Area, as sea levels rise.

“As great as these challenges may seem, they do not need to limit California’s growth if we take actions to manage water wisely,” says co-author Jay Lund, director of the Center for Watershed Sciences at the University of California, Davis, and adjunct policy fellow at PPIC. “Many of the changes needed to secure future prosperity require proactive leadership—from policymakers and from the business community.”

This report, Water and the California Economy, was supported with funding from the S.D. Bechtel, Jr. Foundation.


In addition to Hanak and Lund, the report’s authors are Barton “Buzz” Thompson, Robert E. Paradise Professor in Natural Resources Law at Stanford Law School and Perry L. McCarty Director of the Woods Institute for the Environment at Stanford; W. Bowman Cutter, associate professor of economics at Pomona College; Brian Gray, professor of law at the UC Hastings College of Law; David Houston, managing director and head of the Water Infrastructure Group at Citigroup Global Markets; Richard Howitt, professor of agricultural and resource economics at UC Davis; Katrina Jessoe, assistant professor of agricultural and resource economics at UC Davis; Gary Libecap, distinguished professor of corporate environmental management at the Bren School of Environmental Science and Management and Department of Economics at UC Santa Barbara; Josué Medellín-Azuara, research scientist at the Center for Watershed Sciences at UC Davis; Sheila Olmstead, fellow at Resources for the Future in Washington, D.C.; Daniel Sumner, Frank H. Buck, Jr. Professor of Agricultural and Resource Economics at UC Davis and director of the UC Agricultural Issues Center; David Sunding, Thomas J. Graff Professor of Natural Resource Economics and Policy at UC Berkeley; Brian Thomas, managing director for Public Financial Management; and Robert Wilkinson, adjunct professor at the Bren School of Environmental Science and Management at UC Santa Barbara.


PPIC is dedicated to informing and improving public policy in California through independent, objective, nonpartisan research on major economic, social, and political issues. The institute was established in 1994 with an endowment from William R. Hewlett. As a private operating foundation, PPIC does not take or support positions on any ballot measure or on any local, state, or federal legislation, nor does it endorse, support, or oppose any political parties or candidates for public office.