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Risk & Reward: 5 California Industries Being Reshaped by Climate Change

Scott Anderson
Chief Economist

Californians are feeling the effects of climate change: wildfires, record heat waves, and even atmospheric rivers have begun to wreaked havoc on the Golden State.

It’s increasingly clear that certain sectors of the world’s fifth largest economy are emerging as ground zero for the costs of climate change – and the potential costs are staggering.

This year alone, nearly half a million homes in California face high or very high wildfire risk, at a potential cost of $268 billion.

But at the same time, there are industries — new and existing — that may flourish in this changing landscape. With that contrast in mind, here’s a look at five sectors being reshaped by climate change:

AT RISK Food & Wine | Agriculture Faces Water Challenges

The changing climate will likely increase the need for fresh water, but reduce the supply. California is the top food producer in the U.S., so this is a serious concern for its agriculture industry.

With nearly 90% of California’s crops grown on farms that are entirely irrigated, climate change may force farmers to reduce cultivated acreage or shift from water-intensive crops. For example, over the next 75 years, the land capable of consistently growing high-quality wine grapes is likely to shrink by more than 50%.

My colleague Adam Beak has experience on both sides of the wine business. Based in Napa, he’s helped lead wineries as a CFO and owner himself and brings this unique perspective to his work as managing director of our wine & beverage group.

“Water access and water supply is a top concern for California’s wine industry and the impact of global warming on rainfall and water availability is a serious concern for the long term.”

Adapting to climate change by growing different varietals is an option for California’s farmers, including those in the wine industry. However, there may be fewer ways to adapt crops such as almonds, which was valued at $5.6 billion in 2017, because a gallon of water is required to grow a single nut.

Tourism: Snowfall is an Achilles’ Heel for Winter Sports

Tourism revenues for California in 2018 were $140.6 billion, representing about 4.7% of the state’s annual GDP and supporting an estimated 1.2 million jobs.

Snow sports are one of the state’s biggest draws. An average snow year in California represents $1.6 billion in economic value from millions of skier visits.

But higher temperatures result in more rain and less snow. As the climate warms, California’s snowpack will diminish, shortening the ski season, reducing both in-state and out-of-state visitors and severely affecting the range of businesses that service the snow sports industry and provide jobs.

Real Estate: Fire and Water are a Risky Combination

Some studies say climate change is already impacting real estate markets, with U.S. properties exposed to sea-level rise selling at a 7% discount compared with those with less exposure.

By the end of the century, rising sea levels, combined with more serious storms and erosion, will put an estimated $150 billion worth of California’s iconic coastal real estate at risk of flooding. Wildfire is another risk. California’s Camp Fire was the single largest insurance event of 2018.

If the risk becomes high enough, insurers may be pushed out of certain California regions, affecting the market for moderately priced homes.

In fact, insurance actuaries named climate change the top emerging risk for 2019 and real estate investment companies for are now factoring climate risk into their decisions.

GROWTH OPPORTUNITY Renewable Energy: Electricity Looks Golden

California is the top state in the nation for generating electricity from renewable resources.

These industries are well-positioned for growth in part because the state’s renewable portfolio standard requires 33% of retail electricity to come from renewables by 2020, 60% by 2030, and 100% by 2045.

In addition, in 2018, traditional energy jobs in the U.S. – those related to non-renewables – declined while those related to energy efficiency grew. Energy efficiency-related jobs involve work on buildings, appliances, and transportation to reduce energy use or to improve “smart grid” technology. They remain the highest source of employment within the energy sector and show the highest growth rate nationally. The state with the most energy efficiency jobs? California.

Cleantech: State’s Zero-Emissions Goals Shoot for the Moon

A low-carbon economy will be fueled by the clean energy, bio-engineering, and electric vehicle industries among others.

California’s largest source of GHG emissions comes from the transportation sector. With the policy support of a plan to put 1.5 million zero-emission vehicles on the road by 2025, car manufacturers are incentivized to build better and cheaper electric vehicles that appeal to more buyers.

Possibly the biggest opportunity for would-be climate disruptors are so called “moonshot” technologies. Many of these focus on removing CO2 from the atmosphere and either transforming it into a useful raw material or simply storing it.

California companies – whether in Silicon Valley, Los Angeles, or other regional innovation hubs – that can leverage technology innovation to address climate change, will be able to capitalize on the carbon-free economy of the future.

The potential annual cost of climate change to the U.S. economy has been placed at $224 billion by the end of this century. As with almost all upheavals, there will be winners and there will be losers.

Will California’s climate economics impact your industry in the future?

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