Climate Change Could be Costly for Californians

Two professors from the University of California, Berkeley released a study last month that could spell bad news for those who invest and live in many of California’s …

Two professors from the University of California, Berkeley released a study last month that could spell bad news for those who invest and live in many of California’s most popular areas. According to the “California Climate Risk and Response” report, $2.5 trillion of real estate is at risk from global warming and extreme weather conditions, including wildfires, droughts, heat waves, Pacific storms and a rise in sea level.

Unfortunately, the majority of this damage is expected to hit some of California’s premier tourist destinations, including its ski resorts, beach communities, and state and national parks and forests, which puts an additional $98 billion-worth of assets at risk.

If no measures are taken to combat or prepare for these ever-increasing conditions, they could cost California’s government, insurance industry and property owners anywhere from $300 million to $3.9 billion a year in damages. The tourism and recreation industries could experience $200 million to $7.5 billion a year in damages.

The study was conducted by agricultural and resource economics professors David Roland-Holst and Fredrich Kahrl, and though it emphasizes that the government and private insurance agencies will likely foot much of these bills, property owners and investors will not walk away unscathed. Increased insurance rates, higher premiums, devaluation of property and a mass exodus from some of California’s currently most sought-after destinations are all likely to occur.

The study and its technical supplement suggest that to prevent additional costs to the government and, ultimately, taxpayers, property owners must be held more accountable if they buy in high-risk zones.

“Given the water shortage in Southern California, if people wanted to settle in areas that were facing a dire water crisis, they would need to pay a price for the risk, in terms of the price of water as well as the price of housing,” noted the study’s technical supplement. “The government would need to get rid of subsidies that distort the true cost of living in water scarce areas and encourage residents to live in areas that have more sustainable water sources. Alternatively, in fire-prone areas, residents should have to pay for the price of the fire risk that is borne by the state through provision of fire-fighting services, as well as the water used in protecting their homes during fires.”

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Ski Resorts

The study predicts that as the Earth continues to warm, ski seasons will continue to shorten. The hot summer weather will delay the start of ski season, while the warm spring weather will expedite the closing of ski season. The professors note that the average ski season lasted from late November to late June from 1961 until 1990. However, many California ski resorts now begin in late November or mid-December and end in mid-April. Even if temperatures only increase by 3 to 5.4 degrees ski seasons will continue to shorten, and temperatures could increase by as much 10.4 degrees—a “highest warming” scenario that could bring the collapse of California’s ski industry, according to the study.

If this were to happen, California would lose $500 million in annual revenues and 15,000 jobs. This doesn’t even account for the hit taken by support services, such as dining, shopping, entertainment and lodging, not to mention the extreme drop in the values of timeshares, cabins, lodges and other mountain homes. Even though this is a worst-case scenario, the likely scenario is not much better. In the likely scenario, the ski season is cut in half, resulting in $250 million of lost revenues, which will also increase winter vacancies.

Ski resorts at higher elevations in or near the Sierra Nevadas, such as Heavenly, Donner Ski Ranch, Mammoth Mountain and June Mountain, should be able to maintain their cooler temperatures for longer than those at lower elevations, such as Mt. Baldy, Mt. Shasta, Homewood and Mountain High. This should allow many Northern California resorts to experience longer ski seasons than Southern California.

Coastal Properties

According to the study, “climate change will impact California beaches primarily through inundation as a result of sea level rise and accelerated erosion through an increase in Pacific storm activity and attendant changes in wave patterns.” Structures likely to be impacted by these conditions are homes, rental properties, hotels, boardwalks, piers and aquariums.

The study emphasizes that because these properties and their values are highly tied to the area’s weather conditions, “residents and values in risk-prone areas should, to a significant extent, internalize [these] risks.” For some, this may mean leaving the area entirely. For others, it may simply mean purchasing more insurance, particularly flood insurance, depending on how close the property is to the coastline and how at-risk that coastline is. The professors do note that because California has approximately $900-billion-worth of residential real estate near its shoreline, which accounts for nearly half of its gross state product, “protecting coastal real estate will likely take precedence over other options,” such as abandoning these properties.

Some coastlines are predicted to fare better than others. The professors believe that if the sea level rose by one meter it would be beneficial to Huntington Beach, but detrimental to Laguna Beach. Overall, however, the rise would be negative, resulting in $12 million in lost expenditures to beach cities statewide. In general, the high-risk areas include the bays in San Francisco, Monterey and Humboldt, as well as the coastlines of Los Angeles and San Diego.

In the worst-case scenario, beaches would completely disappear, resulting in a total annual economic loss of $8.3 billion to the state alone, nevermind the loss in assets to owners and investors. This does not include the damage that would result from Pacific storms, which can lead to flooding, mudslides and landslides, and currently causes $200 million to $400 million of damage every year in California. The study notes that residential real estate near the shoreline experienced $2.1 billion of damage from 1985 to 1994. In this coming century, if the frequency of storms increases by less than 50 percent, damages are estimated to increase another $1 billion to $2 billion per decade.

Forests, national parks, inland regions and some coastlines are also subject to wildfires caused by drought. Not only do California’s wildfires contribute to landslides and erosion, but they strike in heavily populated areas, including the San Francisco Bay area, Northeast Sacramento, the Sierra Nevada foothills, Oakland and Southern California’s coastlines. In 2004, approximately 4.9 million California homes were located in a high-risk fire zone, which equals about 38 percent of state’s housing supply, totaling $1.6 trillion of property.

As temperatures increase and evaporation sets in, fires are likely to increase between 12 percent and 53 percent, depending upon how much the temperature increases. This increase could bring about $1.3 billion to $4 billion in additional damages per decade.

Aside from keeping insurance policies current and implementing green strategies that save energy and reduce pollution, there is not a ton that individual investors and owners with properties in these high-risk areas can do at this point. One option would be to sell. Another would be to sit tight, as these findings are the first of their kind, and significant supplemental research is being conducted to determine how we can counter global warming, cut greenhouse gas emissions, plan for the development of new structures, and protect and retrofit current structures.

Shortly after this study was published, Gov. Schwarzenegger called for the creation of the Climate Adaptation Strategy, which should outline some viable strategies that will ease California through the next century. This study should conclude on or before May 30, 2009.

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