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California agriculture is driven by the interactions between technology, resources, and market demands. Future production is a balance between the rates of change in these variables and environmental factors including climate change. With tight statewide water supplies and agriculture being an important part of the California economy, quantifying the economic consequences of changes in these variables is important for addressing related policy questions. We estimate the economic effects of climate change on California crop farming by year 2050 using the Statewide Agricultural Production Model (SWAP). With climate warming, crop yields are expected to decline, production costs to increase, and water supplies to fall. These negative effects may be partially offset by higher crop prices and technological improvements. Results indicate that gross agricultural revenues across all regions are reduced under climate change, as is water usage. However, given the climate-induced reductions in water supply and crop yields, reductions in revenue are proportionally less due to shifting crop demands, technological change, and a shift to higher value less water intensive crops. Given the long time horizon required in this study, the results should not be considered a projection or forecast, but as a probable outcome of the interaction of several uncertain driving forces.

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In 2014, California passed legislation requiring the sustainable management of critically overdrafted groundwater basins, located primarily in the Central Valley agricultural region. Hydroeconomic modeling of the agricultural economy, groundwater, and surface water systems is critically important to simulate potential transition paths to sustainable management of the basins. The requirement for sustainable groundwater use by 2040 is mandated for many overdrafted groundwater basins that are decoupled from environmental and river flow effects. We argue that, for such cases, a modeling approach that integrates a biophysical response function from a hydrologic model into an economic model of groundwater use is preferable to embedding an economic response function in a complex hydrologic model as is more commonly done. Using this preferred approach, we develop a dynamic hydroeconomic model for the Kings and Tulare Lake subbasins of California and evaluate three groundwater management institutions—open access, perfect foresight, and managed pumping. We quantify the costs and benefits of sustainable groundwater management, including energy pumping savings, drought reserve values, and avoided capital costs. Our analysis finds that, for basins that are severely depleted, losses in crop net revenue are offset by the benefits of energy savings, drought reserve value, and avoided capital costs. This finding provides an empirical counterexample to the Gisser and Sanchez Effect.

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