The Future Impact of Climate Change on the California Wine Industry and Actions the State of California Should Take to Address It

Transcription

1 The Future Impact of Climate Change on the California Wine Industry and Actions the State of California Should Take to Address It Jonathan Gatto Byung-oh Kim Paasha Mahdavi Hirochika Namekawa Hung Tran International Policy Studies Program, Stanford University March 6, 2009 This report was prepared for California State Assembly Member Noreen Evans, Chair of the Assembly Select Committee on Wine, with research support from the International Policy Studies Program at Stanford University. 1 1 This report will also be submitted in partial fulfillment of the requirements for the IPS/PUBPOL 209: Practicum ( ).

2 Acknowledgements We owe special thanks to our faculty advisers, Kimberly N. Cahill, Ph.D. and Michael D. Mastrandrea, Ph.D. for their useful comments and suggestions in this report. In addition, we would like to thank the instructors of IPS/PUBPOL 209 (Practicum), Kirsten Oleson, Ph.D., Mary Sprague, Ph.D., Brent Durbin, Ph.D., and Marcos Rosales, for their contributions and assistance in the preparation of this report. We also thank all of our interviewees, whose permission was received to cite their comments in this report. Lastly, we thank the Public Policy Program and the Ford Dorsey Program in International Policy Studies at Stanford University for their support. Authors contact information Jonathan A. Gatto: Byung-oh Kim: Paasha Mahdavi: Hirochika Namekawa: Hung Tran Mail inquiries may be sent to: The Ford Dorsey Program in International Policy Studies Stanford University Encina Hall West, Second Floor Stanford, CA

3 EXECUTIVE SUMMARY There is little doubt anymore that the climate is in fact changing. Countless studies and media reports have estimated the potential impact of climate change on California in the years to come. Regardless of what assumptions one makes about future emissions, current trends indicate that temperature and water levels are changing in a way that jeopardizes many of California s climate-sensitive industries, in particular the wine industry. The wine industry plays a significant role in California s economy, and as such the future sustainability of the California wine industry is a significant priority of the state government. The industry is fundamentally dependent on California s unique climate system that until recently has provided farmers with ideal conditions for growing premium grapes. However, it is unclear whether future climate change will strengthen, weaken or disrupt these ideal conditions currently present in premium California wine growing regions. While the wine industry has been pursuing a range of adaptation options to address the ongoing impacts of climate change on wine, the State has pursued a strategy of broad climate change mitigation as well as pest prevention and water management. However, the wine industry is beginning to signal that the State can and must play a greater role in helping the industry prepare for and adapt to the long-term impact of future climate change. In light of these conditions, there are two crucial unanswered questions that we will address in this report: (1) What will be the future impact of climate change on wine? and (2) What can the State do to help the wine industry in light of this impact? To accurately answer these questions, we first restricted the scope of our study to the main premium grape growing regions of California (Lake, Mendocino, Sonoma, and Napa counties) and the seven most produced premium grape varieties in these regions (Cabernet Sauvignon, Chardonnay, Merlot, Pinot Noir, Sauvignon Blanc, Syrah, Zinfandel). In answering the first question on climate change effects, we conducted background research of previous academic and industry studies, interviewed industry stakeholders and used an original quantitative model to confirm that temperature, precipitation and cultural variability are the main sources of uncertainty regarding the future impact of climate change on wine. Next, to determine the magnitude of this impact, we used our model to project the future price and productivity (per acre) of the aforementioned set of grapes. We then accounted for the fact that adaptive behavior will mitigate some of the impact

4 of climate change by analyzing four likely future scenarios given different assumptions about future climatic and cultural conditions. To answer the second question on state policy responses, we developed and evaluated a list of five policy options based on our background research and interviews. Given the uncertainties in future climatic and cultural conditions, we determined which options would be best responses to handle impacts arising in any of the four scenarios and should therefore be implemented in the short term, and which options would be best suited to individual scenarios and should therefore be implemented in the long-term depending on which scenario plays out. Based on our answers to these two questions, we recommend that the State adopt an adaptation management strategy that directly addresses, and aims to reduce, uncertainty regarding the future impact of climate change on the wine industry. As part of this strategy, we recommend that in the short term the State take the following measures: The State should increase funding for research on adaptation issues, including, in order of importance, water management, variety shifts, new clones/rootstocks, canopy management and trellising techniques. The State should establish a Grape and Wine Adaptation Program to discuss, evaluate, and share information on adaptation research and techniques through a variety of workshops and initiatives. In the long term, the State should monitor both the changing climate and the changing wine industry, determine roughly which scenario the Northern California Coast is following, and update the analysis in light of any further developments. Based on this analysis, we recommend that the State implement a specific subset of the following three policy options that will be appropriate for each scenario: Approving the expansion of water storage facilities Creating tax incentives to encourage winemakers to shift to varietals better suited to new climate conditions or to encourage winemakers to plant additional vineyards in cooler areas of California Maintaining the status quo Our two short-term recommendations will reinforce any of these long-term options. This report thereby provides the State with a comprehensive strategy to deal with both the short-term and long-term potential impact of climate change in California on the wine industry.

5 TABLE OF CONTENTS INTRODUCTION...1 Our approach...1 Main findings...2 Overview of our report...3 THE EFFECTS OF CLIMATE CHANGE ON CALIFORNIA S WINE INDUSTRY...3 How climate affects grapes...3 How California s climate affects grapes...4 Concerns regarding the effects of climate change on the California wine industry...5 Mitigating effects on adaptation strategies adopted by grape growers and wine makers...7 Quantitative modeling results...8 Overview of our scenario matrix...9 Climate axis Culture axis STATE POLICY OPTIONS TO ADDRESS THESE EFFECTS The importance of the California wine industry Recent responses to climate change: the State of California Recent responses to climate change: Australia Policy options Criteria for evaluating policy options Evaluation of policy options Policy options Increase funding for research Establish new information sharing network or program Approve the expansion of water storage facilities Create new tax incentives to encourage long-term adaptive behaviors Maintain the status quo i

6 POLICY RECOMMENDATIONS Scenarios Consolidate to Survive (high climate change, rigid culture) New Look (high climate change, flexible culture) It s All About Water (low climate change, rigid culture) Things Aren t So Bad (low climate change, flexible culture) Short-term and long-term policy strategies Short-term recommendations Long-term recommendations REFERENCES APPENDICES Appendix A: List of Interviewees Appendix B: Map of California and the West Coast: Wine-Growing Regions Appendix C.I: Methodology and Findings of Quantitative Models Appendix C.II: Quantitative Model Appendix C.III: Descriptive Statistics Appendix D.I: Productivity, Price, and Revenue Forecast Appendix D.II: Projected Revenue Changes per Year, by District, for Appendix E: Scenario Analysis Appendix F: California Policies regarding Climate Change Appendix G: Policy Options: Pros and Cons Table Appendix H: Before and After the New Information Sharing Program ii

7 ILLUSTRATIONS Figures Figure 1: Estimated optimal temperature span for ripening by grape variety...4 Figure 2: Sensitivity of the grape quality to temperature variability...6 Figure 3: Vineyard-scale adaptation options...7 Figure 4: Future scenarios Figure 5: Future scenarios and policy options Table Table 1: Evaluation of policy options...17 iii

8 INTRODUCTION There is little doubt these days that the climate is in fact changing. Countless studies have estimated the potential impacts of climate change in the years to come. While several key uncertainties remain, the severity of the challenges presented by climate change nevertheless demand the attention of policy makers, both on a global scale and also on a local scale. A number of projections undertaken by the Intergovernmental Panel on Climate Change predict that even within the next twenty-five years, temperatures and precipitation levels will change dramatically (IPCC 2007). Here in California, climate scientists from the Scripps Institute of Oceanography at the University of California, San Diego, have forecasted climate scenarios for Northern and Southern California based on current trends of greenhouse gas emissions. Their analysis shows a trend of warmer summer and winter temperatures ranging from an increase of 0.5 C to 2.1 C over twenty-five years with modestly increasing annual precipitation levels in the short-term and generally decreasing rainfall in the long-term (Cayan et al. 2008). Regardless of what assumptions one makes regarding future emissions, temperature and water levels are changing in a manner that may jeopardize many of climate-sensitive industries, including the fruit, nut, vegetable and grain industries that are vital to the health of the State (Kuminoff, Sumner and Goldman 2000). This study focuses on how future climate change will affect the production of wine grapes and what the State can do to help the wine industry adapt to this impact. Our approach In light of the conditions described above, there are two crucial unanswered questions that we address in this report: (1) What will be the future impact of climate change on wine? And (2) What can the State do to help the wine industry in light of this impact? To accurately answer these questions, we first restricted the scope of our study to the main premium grape growing regions of California (Lake, Mendocino, Sonoma, and Napa counties) and the seven most produced premium grape varieties in these regions (Cabernet Sauvignon, Chardonnay, Merlot, Pinot Noir, Sauvignon Blanc, Syrah, Zinfandel). To answer the first question on climate change effects, we reviewed previous academic and industry studies, conducted interviews with industry stakeholders and used an original quantitative model to confirm that temperature, precipitation and cultural variability are the main sources of uncertainty regarding the future impact of climate 1

9 change on wine (See Appendix A for a list of interviewees). To determine the magnitude of this impact, we first use our model to project the future price and productivity (per acre) of the aforementioned set of grapes. Second, we account for the fact that adaptive behavior will mitigate the impact of climate change by analyzing four likely future scenarios given different assumptions about future climatic and cultural conditions. To answer the second question on state responses, we develop and evaluate a list of five policy options based on our background research and interviews. Given the uncertainties in future climatic and cultural conditions, we determine which options will be best responses to any of the four scenarios and should therefore be implemented in the short term, and which options will be best suited to individual future scenarios and should therefore be implemented in the long-term depending on which scenario plays out. Main findings With regard to our first question, what will be the future impact of climate change on wine, our background research and regression results confirmed that temperature and precipitation variability are the most important climate factors that will affect grapes and wine in the future. Specifically, our regression results confirm that these two factors will be crucial determinants of future grape price and productivity. Further, our interviews with the representatives of the wine industry indicated three things: (1) in the short term, water supply will be the most pressing challenge; (2) in the long term, temperature variability will be the greatest concern; (3) there is significant demand for the State to play a greater role in helping the industry adapt to potential climate change. With regard to our second question, what the State can do to help the wine industry in light of this impact, we first developed five policy options based on our background research and interviews. Next, based on our scenario analysis, we concluded that the State should adopt an adaptation management strategy that directly addresses and aims to reduce uncertainty regarding the future impact of climate change on the wine industry. As part of this strategy, we recommend that the State take the following short-term measures: (1) increase funding for research on adaptation issues, including water management, variety shifts, new clones/rootstocks, canopy management and trellising techniques; (2) establish a Grape and Wine Adaptation Program to discuss, evaluate and share information on adaptation research and techniques through a variety 2

10 of workshops and initiatives. In the long term, we recommend that the State implement a specific subset of the following three policy options that will be appropriate for each future scenario: (3) approve the expansion of water storage facilities; (4) create tax incentives to encourage winemakers to shift to varietals better suited to new climate conditions or to encourage winemakers to plant additional vineyards in cooler areas of California; (5) maintain the status quo. This set of policy recommendations will provide the State with a comprehensive and effective strategy for helping the wine industry adapt to the impact of climate change Overview of our report The rest of the report is organized into three sub-sections: first, an analysis of climate change s effects on the wine industry; second, policy options the State can use to address these effects; third, our final policy recommendations. THE EFFECTS OF CLIMATE CHANGE ON CALIFORNIA S WINE INDUSTRY In this section, we present our answers to the first question: What will be the future impacts of climate change on the California wine industry? First, we discuss background information about climate effects on grapes, climate effects on California s grapes in particular, and concerns regarding the effects of climate change on the California wine industry. Second, we describe the mitigating effects of adaptive strategies adopted by winemakers. Third, we present the results of our quantitative modeling. Finally, we present an overview of our future scenario matrix, with a discussion of how our background information and our model contribute to the development of the axes of this matrix. How climate affects grapes The elements of climate the weather conditions prevailing in an area in general or over a long time that are most relevant to viticulture are temperature, variability of day and night temperatures, the difference between winter and summer temperatures, sunlight, rainfall, humidity, and wind (Clark 2002, 12). Each of these climate elements is essential to grape, and 3

11 therefore wine, production. For example, specific grape varieties 2 (especially those that are used for premium wines) can only thrive within limited, distinct temperature ranges. Figure 1 below illustrates this property of grapes. Figure 1: Estimated optimal temperature span for ripening by grape variety Source: Jones Roughly speaking, grapes can be labeled as either cool or warm varieties based on their respective temperature thresholds. While these thresholds can be slightly extended through the use of innovative management techniques or genetically engineered clones of existing varieties, the implication is that regardless of wine tastes and demands, grape growers are fundamentally constrained by the climate of their growing regions. How California s climate affects grapes The California wine industry is fundamentally dependent on California s unique climate for its survival. Much of the California coast is too cold to ripen grapes, and the Central Valley is too hot and sunny to grow anything but bulk wines for the most part. However, the Northern 2 Throughout this report, we refer to the different types of grapes as grape varieties and the different types of wines as wine varietals. 4

12 California coast experiences a cooling effect that creates favorable conditions for agriculture, particularly for premium grape growing in Napa, Sonoma, Lake and Mendocino counties (see Appendix B for a full map of grape growing regions on the West coast). 3 Up until recently, this system has provided farmers with ideal conditions for growing premium grapes. However, it is unclear whether or not future climate change will strengthen, weaken or even disrupt this unique cooling effect. Concerns regarding the effects of climate change on the California wine industry Given grapes fundamental sensitivity to climate, a significant amount of research has been conducted to determine the potential impact of climate change on the California wine industry. The primary conclusion that previous studies have reached is that temperature and precipitation variability are the most important climate factors that affect wine and grape price, quantity and quality. Several studies have confirmed the various effects of temperature variability on wine: higher temperatures reduce the competitiveness of grape varieties that are better suited to cooler temperatures (Berger 2007); rising temperatures increase the number of grape diseases and other pests (Nemanil et al. 2001); fewer cool nights decrease grape quality (Elkjer 2008); and more extreme hot days (temperature above 35 C) decrease grape productivity (Diffenbaugh 2006). Our interviews with grape growers confirm these effects on premium grapes in California. Higher temperatures have forced growers to pick grapes sooner when sugar levels are too high; this causes a higher alcohol content in wines, which negatively affects taste and quality. 4 Figure 2 below illustrates the impact of temperature variability on grape quality. 3 This cooling effect originates in an extremely cold ocean current from Alaska that runs down the California coast every summer (Clarke 2002, 236). Being F colder than the surface water it replaces, this cold water causes warm surface air to condense and from large fog banks. Meanwhile, the powerful summer sun warms the surface air in the Central Valley. This warmed surface air then rises and creates a vacuum. Since any replacement air from the East is blocked by the Sierra Nevada Mountains, fog and cooler air from the Pacific is sucked in through various valleys and dips in the coastal ranges. As fog and cool air sweep inland, they lose momentum and result in an ideal, cool climate for growing premium wine grapes. While there are some sites where altitude is more important than fog or sea air in cooling the climate, this climate system composed of the cool Pacific and warm Central Valley is the most important influence on vineyard quality in California (Clarke 2002, ). 4 Dolan, Paul, interview by J.A. Gatto Interview with Mr. Paul Dolan about the impacts of climate change on the California wine industry (December 26, 2008) 5

13 Figure 2: Sensitivity of the grape quality to temperature variability Source: Jones 2005 The future available supply of water is also a pressing concern of the industry. Nearly every future climate projection for California predicts increased instances of drought. Already, grape growing regions have begun to experience more severe instances of drought. In 2006 grape- growing regions received only 14 inches of rainfall, compared to the yearly average of 29 inches. 5 Likely because grapes are not a relatively water-intensive crop, previous studies have omitted the effects of decreased precipitation levels on grape yields. In our interviews with grape growers, however, challenges presented by water shortages were voiced as a more pressing concern than temperature changes. Normally, precipitation variability can be overcome through irrigation strategies. However, growers emphasized to us that they are struggling, due to the limited availability of water rights, to acquire the water resources necessary to irrigate their crops and maintain grape productivity during successive and prolonged instances of drought. 5 Cooper, Bill, interview by Kim et al. Interview with Mr. Bill Cooper about the impacts of climate change on the California wine industry (December 24, 2008) 6

14 Greater expense & difficulty Mitigating effects on adaptation strategies adopted by grape growers and wine makers Though increased temperature and precipitation variability will impact grape productivity, growers can mitigate this impact through a variety of adaptive responses. As shown in Figure 3, there are four main types of options growers can implement to adapt to challenges presented by climate change (Cahill 2008). Figure 3: Vineyard-scale adaptation options Move sites Change winemaking Change annual management Change establishment factors Climate Soil Variety Rootstock Trellising Irrigation Canopy management Pest management Acid addition De- alcoholization Greater temperature change Source: Cahill 2008 One option is to adopt new winemaking techniques such as adding oak tannins, oak chips, or oak powder to grapes during the winemaking process to increase the acidity and therefore decrease the alcohol content of wine. A second option is to pursue management strategies such as improving irrigation systems, adding canopies to shade grape vines from extreme sun exposure, or spraying organic pesticides. Changing establishment factors is a third option that includes practices such as grafting new heat-resistant grape varieties onto existing grape rootstocks 6, planting disease-resistant clones of existing rootstocks, or altering the position of lattices or trellises that support vines so as to diminish exposure to sunlight. A final option is to expand vineyards to new locations characterized by more favorable microclimates or soil conditions. Winemakers in California have formed organizations to discuss these adaptation options. For example, the California Sustainable Winegrowing Alliance (CSWA) was created by the Wine Institute and the California Association of Winegrape Growers (CAWG) to share and 6 Grape vines are composed of rootstock (below ground) and scion (above ground) components. 7

15 promote the benefits of sustainable winegrowing practices (CSWA 2008). Though growers have experimented with each of these four options, there are various factors such as costs, implementation difficulties, and wine cultures that have limited widespread use of vineyard-scale adaptation options. First, planting new rootstocks and expanding vineyards are extremely expensive measures that not all growers can afford. Second, there are various stakeholders that are adversely affected by the implementation of several of these options. For example, in Napa Valley, environmental advocates concerned with protecting endangered fish species such as Chinook salmon and steelhead are opposed to altering and expanding the existing irrigation infrastructure of grape growers. Lastly, wine culture refer to trends in consumer tastes, winemaker flexibility, and wine judge preferences which coalesce into vogue wine styles that are more or less amenable to adaption options. For example, many growers are hesitant to graft different, heat-resistant grape varieties such as Emerald Riesling and Ruby Cabernet onto existing rootstocks for fear that consumers will simply not purchase and drink non-traditional wines. Thus, the extent to which the impacts of future climate change will be mitigated by winemaker or grower behavior is uncertain. Quantitative modeling results For our next step assessing the future effects of climate change on wine, we use a linear regression model to quantify the relationship between varying climate indices and grape productivity and prices. We then combine these to obtain grape revenue per acre. Our model finds that dormant-season precipitation and minimum temperature in April have small and nonlinear effects on both grape prices and productivity. However, these effects are not statistically significant in each of our equations. In other words, lower dormant-season precipitation and rise in minimum April temperature has a negative, but not significant, effect on grape price and productivity (per acre). These results suggest the existence of optimal levels of dormant-season precipitation and minimum temperature for grapes. Average maximum temperature in July and August has a statistically significant negative effect on grape prices, with a greater impact on cool varieties. This means that a higher average summer temperature causes grape prices to decline. Overall, our regression results echoed previous findings that temperature and precipitation variability are the most important climate factors in determining grape productivity and price (For more information on our model and results, see Appendix C). 8

16 To generate grape productivity (measured as grape quantity per acre) and price forecasts, we used two sets of future temperature and precipitation outcomes based on High and Low levels of future CO2 emissions predicted by current climate research (Cayan et al. 2008). These two scenarios give us an estimate of the overall change in temperatures and precipitation in Northern California over the next twenty-five years. Inputting these figures into our model, we obtain a projection of the net revenue changes over the next 25 years. Our regression model predicts that the grape revenue (per acre) effects of the four counties differ significantly, depending on whether High or Low levels of CO2 emissions, and therefore climate change, ensue. Such projections highlight the significance of possible future impacts of climate changes on the four counties in terms of grape price, productivity, and revenue (per acre). However, the validity of our long-term revenue projection is limited due to data limitation (only 18 years of data), modeling assumptions (assuming the rest of the California and the world remain constant), and significant future uncertainties regarding how much human behavior will mitigate the future impact of climate change (For more information on our forecasts, see Appendix D). Overview of our scenario matrix We employed a qualitative scenario analysis to help characterize the future effects of climate change on the wine industry (For more details about qualitative scenario analysis, see Appendix E). From our regression models, we are able to quantify the effects of climate conditions on historical grape productivity, price, and revenue. Further, we use our models to generate forecasts of the magnitude of these effects in the next 25 years. However, these forecasts are predicated on two key assumptions: first, the rest of the world is held constant, and second, cultural factors (such as changes in consumer preferences) are ignored. Both of these assumptions leave aside behavioral responses that could affect the impacts predicted by our model. Therefore, we also conduct a scenario analysis that accounts for these behavioral responses in narratives of the four most likely future outcomes of the California wine industry. 7 Our scenario analysis can be represented by a two by two matrix (See Figure 4 below). One axis 7 There are several extreme events that our scenarios do not account for that could have a significant and potentially catastrophic effect on the California wine industry. These events include the following: a new study that finds severe health risks associated with wine consumption; another movie like Sideways that decreases consumer interests in certain wine varietals; an international economic crisis that affects the global market for wine; an unforeseen disruption of the cooling effect caused by climate change; a New Napa in some other part of California that earns scores above 95; and rapid, extreme, unforeseen climate change. Determining what a sufficient response to any of these events would be is outside the scope of this report. 9

17 of the matrix is a climate scenario axis (temperature and precipitation) with high and low levels of climate change. The second axis is a wine culture axis with high and low levels of cultural flexibility. Because our research does not give any indication of the likelihood of one particular scenario, we assume that the four scenarios are equally likely to occur over the next 25 years. Figure 4: Future scenarios High Level of Climate Change Consolidate to Survive - Harsh climate conditions - Industry consolidation New Look - Harsh climate conditions - Room to change grower and winemaker behavior Rigid Wine Culture Flexible Wine Culture It s All About Water - Minimal varietal substitution - More demand for water Low Level of Climate Change Things Aren t So Bad - Moderate climate change - Room to change grower and winemaker behavior Exogenous Shocks - New health study - New Sideways - Global economic crisis - Disruption of cooling effect - New Napa - Rapid Climate Change Source: Authors. Climate axis Background research and our quantitative model confirmed that climate factors, in particular temperature and precipitation, are fundamental determinants of grape price and productivity. Thus, we constructed a climate axis based on the High and Low levels of climate change, based on High and Low levels of greenhouse gas emissions, predicted by current climate research (Cayan et al. 2008). Under the High level of climate change, summer temperature and overall climate variability are predicted to increase significantly, while winter temperature is predicted to increase moderately. Further, summer and winter levels of precipitation are predicted to decrease significantly. Under the Low level of climate change, summer and winter temperatures are predicted to increase moderately, while summer precipitation levels are 10

18 predicted to decrease moderately. Importantly, winter precipitation levels are predicted to increase significantly, as is overall climate variability (See Appendix D.I for more details on these climate predictions). Culture axis Non-climate factors are essential determinants of wine price (this fact was emphasized by Karen Ross, President of the California Association of Winegrape Growers 8 and Greg Jones, professor at the University of Southern Oregon 9 ). Specifically, wine culture has a significant effect on grape and wine prices. Wine culture refers to trends in consumer tastes, winemaker flexibility, and wine judge preferences that coalesce into vogue wine styles that are more or less amenable to adaptation options. First, whether consumers will purchase new wine varietals or clones of existing varietals that are more amenable to different climate conditions is a crucial determinant of how easy and effective it will be for grape growers and winemakers to adapt to climate change through substitution. Second, the willingness of winemakers to manipulate grapes during the wine making process is crucial for determining whether climate factors will be mitigated by techniques such as adding tannins during the winemaking process. Third, wine judges and writers have a tremendous impact on wine ratings and therefore price and consumer preferences. 10 Trends in consumer tastes, winemaker flexibility, and wine judge preferences coalesce into vogue wine styles that are more or less amenable to adaption options. One wine style is the traditional, fresh, austere wines of the past that are not overly fruity or sweet and have a hard, aggressive, acidic and tannic flavor. These wines generally come from Old World varieties, especially from Europe, and are associated with a period in which consumers and judges were not especially willing to consider new, different wine varietals or styles of existing varietals. A 8 Ross, Karen, interview by Byung-oh Kim. Author Interview with Karen Ross about the Impact of Climate Change on the California Wine Industry (February 9, 2009). 9 Jones, Gregory, interview by J. A. Gatto. Author Interview with Gregory Jones about Climate Change's Impact on the California Wine Industry (February 6, 2009). 10 As Greg Jones emphasized to us, if a wine score rises from an 80 to a 90, there is a 200% increase in price, and if a score rises from a 90-95, there is another 350% increase in price. A fascinating recent study conducted by Baba Shiv of the Stanford Graduate School of Business has demonstrated how much the price tag of wine affects consumer perceptions and even experience of wine quality (Shiv et al. 2008). This study found that if a person is told he or she is tasting two different wines and that one costs $5 and the other $45 when they are, in fact, the same wine the part of the brain that experiences pleasure will become more active when the drinker thinks he or she is enjoying the more expensive vintage. As such, wine judges have a tremendous amount of influence, in that their scores are crucial determinants of wine price and therefore consumer preferences. 11

19 second wine style is the continuation of trends favoring fruit bomb wines that are softer and have an overly fruity and sweet flavor. These wines generally come from New World varieties, especially from California and have become popular due to the willingness of consumers to sample and acquire a taste for new flavors and varieties. Two narratives, one rigid and one flexible, account for the most likely and relevant cultural outcomes that will affect the ability of the wine industry to adapt to climate change. In the face of increasing globalization, new wine consumers may be overly influenced by traditional judges and varieties, and therefore attracted to the austere wines of the past. This could lead to a global preference for certain wine varietals that narrows and homogenizes the marketplace, making adaptation through substitution extremely costly and difficult (Cahill 2008). Alternatively, increasing globalization could bring new consumers, winemakers and judges that are open minded and therefore attracted to softer, fruitier wines that will provide more space for growers and winemakers to adapt. The four narratives presented in Figure 4 above are not predictions, but rather hypotheses of different futures specifically designed to highlight the risks and opportunities involved in specific strategic climate and culture issues and to help decision-makers better understand the context in which their policy responses will take effect. STATE POLICY OPTIONS TO ADDRESS THESE EFFECTS In this section, we present our answers to the second question, what the State can do to address the future impact of climate change on wine. First, we establish the economic importance of the California wine industry. Second, we discuss background information about recent policy responses to climate change from the State and from other wine-producing regions in the world. Third, we present a policy evaluation rubric and five policy options based on the results of our qualitative research and interviews. As part of the evaluation process, we discuss pros and cons for each policy option. Finally, based on the evaluation rubric and our scenario analysis, we derive initial conclusions regarding our policy recommendations. The importance of the California wine industry The wine industry plays a significant role in California s economy. Since California 12

20 wines established themselves on the international scene at the 1976 Judgment of Paris wine competition, the industry has developed into an increasingly important source of consumption, production, exports, tax revenue, tourism revenue, land use, and job creation within the State. There are 2,275 wineries in California that employ roughly 4,600 grape growers (MKF 2007). If California were a country, it would be the fourth largest wine producer in the world. The industry is composed of producers, suppliers, and other allied businesses that generate $51.8 billion a year (MKF 2007, 4), which accounts for 3% of California s gross state product (Bureau of Economic Analysis 2006). The industry supports 309,000 jobs in California and 875,000 jobs in the US (MKF 2007, 2). California produces 90% of all U.S. wine and has a 63% share of the U.S. wine market (MKF 2007, 4). The industry also attracts a significant number of tourists (19.7 million visitors annually) and generates international trade revenue, as 18% of California s wine is exported to 125 countries (MKF 2007, 5-7). Therefore, the future sustainability of the California wine industry is a significant priority of the state government. Recent responses to climate change: the State of California While the wine industry has been pursuing a range of adaptation options to address the impact of climate change on wine, the State has pursued a strategy of broad climate change mitigation as well as pest prevention and water management. 11 The State Assembly Select Committee on Wine and the State Senate Select Committee on California s Wine Industry have proposed legislation related to pest and water management issues and held hearings to discuss and receive feedback from stakeholders both inside and outside the wine industry related to the implementation of these pieces of legislation. Furthermore, these State committees issue reports to disseminate information regarding climate change-related developments relevant to the wine industry. For example, the Senate Select Committee issued a report in June 2007 highlighting the increasing presence of the light brown apple moth that presents a significant threat to grape productivity (CSSCCWI 2007). Further, the State funds research relevant to the wine industry 11 As part of its mitigation strategy, the State has passed climate change legislation that our project has taken into account in devising potential policy responses. For example, Senate Bill 375 of 2008 directs the California Air Resources Board to work with California's 18 metropolitan planning organizations to redesign their transportation, housing, and regional land-use plans to reduce the amount of vehicle miles traveled. This bill would constrain the possible adaptation process of planting additional vineyards in cooler areas. While mitigation strategies have imposed some constraints on the wine industry s ability to adapt to climate change, these constraints are acceptable to the majority of grape growers and winemakers. For more detail on state policies related to climate change mitigation, see Appendix F. 13

21 through universities and State agencies. Based on our interviews, industry demand for information regarding adaptation strategies has outpaced the supply provided by the State through reports and public hearings. To fill this gap, the wine industry has arranged targeted education events related to grape growing issues through organizations such as the CSWA. Yet according to our interviews, these events only capture feedback from a select group of stakeholders and do not fully incorporate the expertise of and capture the potential synergies from a broader set of actors in California. For example, one interviewee emphasized that while there is a strong potential for cooperation between the technology sector and the wine industry, Silicon Valley is as of yet an untapped resource for grape growers and winemakers. 12 Regarding state funding for research, a universal theme across our interviews is that funding levels are currently too low. The US only spends a quarter of what Australia spends on research per volume of wine produced each year, despite the fact that Australia only produces roughly half as much wine as the US (Cahill 2008). Given such an economic importance of California s wine industry as mentioned above, the State has a strong interest in funding wine and climate change-related research. There is clear demand for a state role to help the wine industry adapt to the impact of climate change. Recent responses to climate change: Australia The State can look abroad to expand its set of available policy options to help the wine industry adapt to climate change. Governments in other wine producing countries with warmer climates, such as Australia, have already begun to experience and respond to the effects of climate change on their respective wine industries. The Australian government provides significant funding for relevant adaptation research through a unique funding mechanism in which the government matches winemaker research contributions, dollar for dollar, into a pooled research fund. 13 Another motivation is a novel grant system targeted at the wine industry and funded by the Australian government, wherein the government provides direct cash grants to winemakers during a drought that are then used to buy water from other 12 The State can try to involve technology companies in Silicon Valley with the wine industry. For example, Professor Snow Barlow (see next footnote) mentioned that IBM had come to Australia to develop more sophisticated water irrigation system. He stated that technology had helped growers know exactly how much water to use for irrigation and thereby improved water-use efficiency. 13 Barlow, Snow, interview by P. Mahdavi and V.H. Tran, Interview with Prof. Snow Barlow about the Australian response to climate change for the wine industry (February 4, 2009). 14

22 industries that place less value on water resources. 14 Lastly, State Agricultural Departments arrange workshops on climate projections, varietal choices, and water-use management to keep local grape and wine producers informed of challenges and opportunities presented by climate change (Ward et al. 2008). In the future, the State might consider implementing strategies such as these used abroad that are relevant to the climate challenges faced by the wine industry in California. Policy options In light of the existing policies discussed above, we developed five additional policy options based on the results of our qualitative research and interviews. These five options include: (1) increasing funding for research on adaptation issues; (2) establishing a Grape and Wine Adaptation Program; (3) approving the expansion of water storage facilities; (4) creating tax incentives to encourage varietal shifts and promote the planting of new vineyards in cooler areas; and (5) maintaining the status quo. In the first option, the State should increase funding for research on issues including water management, variety shifts, new clones/rootstocks, canopy management and trellising techniques. Concerning the second option, the State should establish an information-sharing program to discuss, evaluate and share information on adaptation research and techniques through a variety of workshops and initiatives. In the third option, the State should approve the construction of additional reservoirs and continue to allow for the moderately unregulated construction of wells. With regard to the fourth option, the State should structure tax incentives so as to encourage growers to switch to grape varieties and wine varietals that are more suitable for warmer temperatures and reduced precipitation levels, and encourage winemakers to plant additional vineyards in cooler, more suitable areas within California. Lastly, in the fifth option the State should maintain the status quo of not implementing a direct, comprehensive policy response to the problem of the adaptation of the wine industry to climate change. 14 Webb, Leanne, interview by H. Namekawa, Interview with Prof. Leanne Webb about the Australian response to climate change for the wine industry (February 4, 2009). 15

23 Criteria for evaluating policy options We devised six criteria to evaluate each policy option, based on our analysis of stakeholders interests, which we define as the interests of winemakers, grape growers, other crop growers, environmentalists, consumers, and elected officials and state agencies (and their budget constraints). The first criterion we consider is the state fiscal impact of each option, which we label government budget. The impact on the State budget is an important attribute given that our policy recommendations must identify funding sources or be cost-neutral in light of the current budget crisis in California. We also consider costs to winemakers and grape growers, and the political feasibility of these policy options. For political feasibility, we considered the competitive dynamics in California given that the wine industry struggles against other industries and constituencies for state resources. Furthermore, we examine the revenue of the wine industry (including tourism) in the short term, and the revenue of the wine industry (including tourism) in the long term. Lastly, we examine undesirable side effects such as negative externalities that could undermine the effectiveness of each option (for example, if grape growers expand their vineyards and unknowingly damage natural habitats). Evaluation of policy options Next, we evaluate the attributes for each option based on our background research and interviews with relevant stakeholders. Table 1 below shows our evaluation for each option based on these six criteria by assigning scores ranging from one asterisk (worst) to five asterisks (best) for each attribute. These scores are used to provide an intuitive sense of the evaluations and serve as a basis for comparison across options and attributes. 15 Next, we discuss the pros and cons of each option in a descriptive and comprehensive manner based on our evaluation of the attributes for each policy option. This discussion is an extraction of the key criteria and considerations for each option and is not exhaustive (See Appendix G for a summary of this discussion). 15 We do not aggregate the scores for each option. To aggregate the scores, one would need to quantify the relative importance of each attribute, yet we determined that this cannot be done in an objective, systematic manner. 16

24 Table 1: Evaluation of policy options Policy Options (A) Government budget (B) Winemakers and grape growers' cost (C) Political feasibility (including equity) (D) Effect on revenue of the wine industry (short term) (E) Effect on revenue of the wine industry (long term) (F) Undesirable side effect Funding research for adaptation issues Establish a new information sharing network or program Approve the expansion of water storage facilities *Budget *Low admin costs *Increased government workload *No cost *No cost *Somewhat low cost *Need to pay for facilities *Strong demand *Relatively easy *Equity among other crops *Environment protection *Lack of water availability *Strong demand *Coordinated and deepened information sharing *Effective countermeasur e for reduced precipitation *Study may take a long time. *Opposition or boycott by environmental activists Status quo Tax incentives to encourage grape variety and wine varietal switching Tax incentives to encourage additional vineyards in cooler areas *Tax revenue will decrease. *No cost. *Very high cost. *Reduced tax revenue *Reduced tax revenue *Limitations to land use *It takes time. *New varietals may not be accepted by consumers. *It takes time. *Effective measure in the long term *Consumers may accept new varietals. *Unforeseen environmental side effects *The industry may fail to adapt. Source: Authors Policy options 1. Increase funding for research Option 1: The State should increase funding for research on adaptation issues, including water management, variety shifts, new clones/rootstocks, canopy management and trellising techniques. The State should take advantage of federal funding programs such as the Specialty Crop Block Grant Program. Pros: strong demand for new research and budget neutrality We observed a strong demand for this option across our interviews and background research. The wine industry needs funding for research to learn more about what they should be 17

25 doing regarding climate change adaptation in particular, the industry wants to know how to improve water-use efficiency to deal with prolonged instances of drought and how to manage new and ongoing pest issues. 16 Overall, current levels of State funding are not perceived as sufficient by the industry. Some interviewees argued that the California and U.S. Federal governments have underfunded agricultural research as compared with other countries such as Australia. 17 Lastly, grape growers want more funding for applied research as it is important to craft adaptation skills that are directly applicable for grape growing in the short term. 18 Furthermore, this option can be budget-neutral if the State seeks funding from the Federal Specialty Crop Block Grant Program. This program provides funding to enhance the competitiveness of specialty crops, where grapes are designated as a specialty crop. Any agency, commission, or department responsible for agriculture within the US is eligible to apply. The minimum base grant each State is eligible to receive is $100,000 (U.S. Department of Agriculture). As such, the State could obtain funding from the federal government through this program for relevant research on grapes. Cons: uncertainty in obtaining funding and equity among crops In any research funding endeavor, there are inherent uncertainties concerning whether more federal money will be available in the future. Furthermore, the State needs to consider the equity among crops in California. Not only grape growers, but also growers of other crops such as avocados, walnuts, and almonds need funding for further research on climate change adaptation issues. One recent study indicates that crops will suffer up to 40% yield losses by 2050 due to the warmer climate (Lobell, et al. 2006, 208). If additional federal funds do not become available, increased funding for wine research will come at the expense of research funding for other climate-sensitive crops. However, there are several areas in which research that would benefit the wine industry, such as water management, might benefit other climatesensitive crops as well, and the State should therefore look out for such win-win situations. 16 Schmelzer, Tim, interview by H. Namekawa, Interview with the Wine Insitute s Tim Schmelzer about the future impacts of climate change on the wine industry (December 11, 2008). 17 Jones, Gregory, interview by J. A. Gatto. Author Interview with Gregory Jones about Climate Change's Impact on the California Wine Industry (February 6, 2009). 18 Cooper, Bill, interview by Kim et al. Interview with Mr. Bill Cooper about the impacts of climate change on the California wine industry (December 24, 2008). 18

26 2. Establish new information sharing network or program Option 2: The State should establish a Grape and Wine Adaptation Program on the model of an expanded Pierce s Disease Control Program or Climate Change Matrix Team 19 to discuss, evaluate and share information on adaptation research and techniques through a variety of workshops and initiatives. Initially, the State should prioritize information sharing related to water management and availability issues. This program should be composed of a managing Board, online Forum, Advisory Task Force, and Science Advisory Panel that brings together state officials, researchers, grape growers, winemakers, private companies and other participants. Pros: demand for more information sharing and for more contact with various stakeholders Industry demand for information regarding adaptation strategies has outpaced the supply provided by the State through reports and public hearings. Though groups like the CSWA have arranged targeted education events to share information related to grape growing issues, a new information sharing network sponsored by the State can fully capture the synergies across a wider variety of actors. Specifically, our interviews indicated significant industry demand for a network to capture such synergies as it pertains to water policy and water management skills. The State plays a unique role in facilitating communication between a diverse set of actors and industries given its access to resources and a broad set of contacts throughout California. Further, this new program of information sharing will supplement the existing function of these targeted education events and will not replace the targeted education events nor will it prevent direct interaction between relevant actors. Through this program, the State can tighten the relationships between relevant actors. For example, in making management decisions grape growers rely first and foremost on their own past experience and secondly on other growers, the vineyard crew, and winemakers (Cahill 2008). This reflects the notion that growers are skeptical of the utility of what they perceive as distant and abstract work of researchers which cannot help growers adjust their behavior in the short term. By increasing the interaction between a larger set of growers, winemakers and researchers, the State can provide opportunities for growers and winemakers to enhance their awareness and appreciation of current research and for researchers to more effectively communicate their findings to growers. 19 See Appendix H for more details on these two programs. 19

27 This new program will create such opportunities for the wine industry to expand and integrate its network with other relevant stakeholders across California. An example of such an integrated network is the Department of Agriculture and Food of the State of Western Australia s program to arrange workshops to keep local grape and wine producers informed of challenges presented by climate change. The workshops deal with topics such as climate projections, varietal choices, and water-use management (Ward, et al. 2008). Another closely related example is the California Air Resources Board, whose board members consist half of pollution control State agencies and half of experts in professional and science fields. The cooperation among different academia, state agencies, and industry has successfully reduced pollution emissions without hindering rapid economic growth. Cons: questionable buy-in, increased administrative costs and equity among crops The impact of climate change on wine is perceived as a longer term and therefore less urgent threat to the industry than the current short-term challenge of Pierce s Disease that prompted the PDCP. As such, there may be less buy-in for this new information-sharing program potentially undermining its effectiveness. In addition, the State will face some administrative challenges in implementing this policy option. First, the State will have the increased burden of playing a central role in forming a new information-sharing network, and will have to arrange workshops and contact stakeholders when appropriate to facilitate information sharing. However, these tasks could be contracted out depending on costs, but given the uncertainty around contracting costs, we still consider the task of arranging workshops to be a con. Second, the State needs to consider the equity among crops in California, as mentioned above. If the State establishes this program only for the wine industry, they will need to explain the rationale to other crop growers. 3. Approve the expansion of water storage facilities Option 3: The State should approve the construction of additional reservoirs and continue to allow for the moderately unregulated construction of wells. Specifically, the State should allow the expansion of water storage facilities to capture surface water and more importantly groundwater so as to help growers combat the effects of drought The State should consider other mechanisms to increase available water aside from increased storage capacity. For example, better water management or irrigation technologies could reduce the amount of water required without 20

28 Pros: strong demand for improved water supply In general, water issues are raised more urgently than other problems related to temperature increases, with several interviewees explicitly calling for state help on water policy. For example, a vintner in Saratoga, California, mentioned that he would appreciate help from the state on retention facilities, water conservation techniques, and dike construction. 21 Another vintner stated that the wine industry could not solve its current water storage problems alone and called for the state to build infrastructure and think about improving storage capacity. 22 Furthermore, a wine executive in Sonoma indicated to us that the industry is ready to privately fund and construct new water infrastructure, but is constrained by holds on pending water applications. 23 Ultimately, more water storage facilities for capturing surface water and groundwater will increase grape growers capacity to manage water shortage problems as long as these facilities do not conflict with ecological protection or environmental needs. Cons: challenges involved in the approval of new reservoir and well construction Environmental and ecological regulations hinder the construction of new reservoirs. Assembly Bills (AB) 2121 and 3030 constrain the use of surface and groundwater, respectively. The vineyards in Napa, Sonoma, and Mendocino draw water from the Russian River system, a natural habitat for several species of endangered fish. Currently, the State Water Resources Control Board is drafting additional policies to preserve stream flows for these fish species. Such policies will dramatically reduce the water available for the vineyards, and further constrain the construction of new reservoirs (Spaulding 2008). One of our interviewees repeatedly stressed that hundreds of water applications are pending in Sonoma country and yet the State Water Resources Control Board has only been able to process 4-5 applications per year thus far. 24 significantly impacting grape production or quality (see e.g, Loveys BR, Stoll M, Dry PR, McCarthy MG Partial rootzone drying stimulates stress responses in grapevine to improve water use efficiency while maintaining crop yield and quality. The Australian Grapegrower and Winemaker 404a, and P. Dry, B. Loverys, M. McCarthy, and M. Stoll (2001) Strategic irrigation management in Australian vineyards, Journal International des Sciences de la Vigne et du Vin, 2001; 35 (3): ). 21 Cooper, Bill, interview by Kim et al. Interview with Mr. Bill Cooper about the impacts of climate change on the California wine industry (December 24, 2008). 22 Dolan, Paul, interview by J.A. Gatto Interview with Mr. Paul Dolan about the impacts of climate change on the California wine industry (December 26, 2008). 23 Downs, Pete, interview by Byung-oh Kim. Interview with Mr. Pete Downs about the impact of climate change on the California wine industry (February 6, 2009). 24 Downs, Pete, interview by Byung-oh Kim. Interview with Mr. Pete Downs about the impact of climate change on the California wine industry (February 6, 2009). 21

29 4. Create new tax incentives to encourage long-term adaptive behaviors Option 4-1: The State should structure tax incentives so as to encourage growers to switch to grape varieties and wine varietals that are more suitable for warmer temperatures and reduced precipitation levels. Option 4-2: The State should structure tax incentives so as to encourage winemakers to plant additional vineyards in cooler, more suitable areas within California. Pros: enhanced economic feasibility In the face of increasing temperatures, shifting to new varieties that are more suitable for a warmer climate and adding additional vineyards in cooler areas are effective strategies to maintain the revenue of the wine industry in the long term. 25 Further, to make up for the reduced yield of grapes due to climate change, grape growers can switch to grape varieties and/or winemakers could switch to new wine varietals by obtaining grapes from cooler areas even outside their current counties or appellations. 26 Both of these strategies, substitution and vineyard expansion, are expensive and take place in the long term. Given their high up-front costs, new tax incentives can help make these options more economically feasible for winemakers and grape growers. Cons: possible failure of tax incentives, cultural challenges, and uncertain budget effects Tax incentives may not be sufficient to prompt grape growers or winemakers to change grape varieties or wine varietals. It is very costly for growers to shift varietals, as they will not obtain income from the new plants for five to six years (Lobell et al. 2006, 209). Similarly, winemakers cannot make high quality wine from new grape varieties for the first ten years after new rootstocks are planted (Mason 2007). Furthermore, a professor at the University of California at Davis emphasized to us that tax incentives will not work by themselves because winemakers will change varietals only when they feel that it is absolutely necessary. 27 Even if winemakers shifted to new varietals, there would be some additional challenges. First, many winemakers are concerned that consumers would not accept new, unfamiliar wine 25 Research by Carbonneau (1985) shows that grape rootstocks for classical varieties can be made drought-resistant. 26 To be certified as wine of a certain appellation of a county or an American Viticultural Area (AVA), at least 75/85 percent of the grapes in the wine must come from that county/ava respectively (Wine Institute). 27 Walker, Andrew, interview by Hung Tran. Author Interview with Prof. Andrew Walker about the impact of climate change on the California wine industry (February 3, 2008). 22

30 varietals. For example, there are specific concerns about how consumers would feel about heattolerant but unfamiliar Spanish varietals replacing Cabernet Sauvignon in Napa Valley (Cahill and Field 2008). A wine lobbyist emphasized to us that it is doubtful consumers will accept new varietals as they already recognize and are comfortable with existing wine varietals. 28 Second, it would be difficult to promote new varietals due to the large amount of money required to effectively market new varietals. 29 Lastly, with any tax incentive program, there is uncertainty as to whether the government can balance the lost tax revenue with added industry revenue generated by increased production prompted by the tax incentives. 5. Maintain the status quo Option 5: The State maintains the status quo of not implementing a direct, comprehensive policy response to the problem of the adaptation of the wine industry to climate change. Pros: optimism in the wine industry The State can defend the choice not to implement any new policies related to adaptation of the wine industry due to significant optimistic views within the industry about its future, regardless of climate change. According to a survey conducted by Robert Smiley, a professor at UC Davis, winemakers are optimistic about the future of the industry and strongly predict improvements over the next few years in the profitability of the industry. For the reasons behind this optimism, the survey cited the perceived health benefits of wine, new laws that enable winemakers to ship wines directly to consumers, and the fact that wine is becoming more of an everyday beverage in many U.S. homes (UC Davis 2007). Bill Cooper predicted that the wine industry would be able to adapt to climate change through intra-industrial cooperation mechanisms such as the CSWA. Lastly, because of the relatively high crop value of grapes, many grape growers can afford to invest in adaptive resources (Cahill and Field 2008). 28 Ross, Karen, interview by Byung-oh Kim. Author Interview with Karen Ross about the Impact of Climate Change on the California Wine Industry (February 9, 2009).. 29 Walker, Andrew, interview by Hung Tran. Author Interview with Prof. Andrew Walker about the impact of climate change on the California wine industry (February 3, 2008) 23

31 Cons: risk of failure There is of course a risk that the wine industry may fail to adapt to climate change by itself. The State should at the least consider policy options that reduce the risk of this failure. Initial Conclusions Assessing the five options along the six criteria, we find that increasing funding for research and establishing a new information sharing network are superior to the other policy options based on our evaluation rubric (as presented in Table 1). We find that approving the expansion of water storage capacity is not feasible in the short term due to an unfavorable political environment. Similarly, creating new tax incentives to encourage adaptive behavior is not recommended in the short term because it is still too costly for winemakers and grape growers to change varietals and expand their vineyards. The current climate situation is not so dire yet as to require the State to pursue either of these options. Lastly, maintaining the status quo is not recommended, as the State cannot afford to risk the failure of the wine industry to adapt to climate change on its own. POLICY RECOMMENDATIONS With these policy options in mind, we map them onto the two-by-two matrix from our scenario analysis. Recall that four potential scenarios emerge for the future of the wine industry: one axis represents the relative flexibility of the wine culture, the other projects impacts on temperature and precipitation. Figure 5 illustrates these four likely outcomes in the two-by-two matrix and maps the policy options described above into each. As mentioned above, we assume that these four scenarios are equally likely to occur over the next 25 years. In this section, we first present a description of each scenario and the policy options that would be appropriate under each scenario. Second, we outline our short-term and long-term policy recommendations for the State of California. 24

32 Figure 5: Future scenarios and policy options High level of Climate Change Low level of Climate Change Rigid Wine Culture Consolidate to Survive 1. Increase research funding 2. Info sharing program 4.1. Tax incentives for expansion of vineyards It s All About Water 1. Increase research funding 2. Info sharing program 3. New water facilities Flexible Wine Culture New Look 1. Increase research funding 2. Info sharing program 3. New water facilities 4.2. Tax incentives for new varietals Things Aren t So Bad 1. Increase research funding 2. Info sharing program OR 5. Maintain status quo Source: Authors. Scenarios Consolidate to Survive (high climate change, rigid culture) The Consolidate to Survive scenario depicts a Northern California Coast facing significant increases in summer temperatures and climate variability, and drastic decreases in summer precipitation. Further, there will be a moderate increase in winter temperatures and a very slight decrease in winter precipitation. Overall, grape-growers and wine makers will face increased levels of drought, heat waves, and frost while having less water available for irrigation. A rigid wine culture in which judges and consumers prefer austere wines and are unwilling to shift their tastes imposes further difficulties on grape growers. Increasing summer temperatures cause sugar levels to rise too quickly and force growers to pick grapes sooner. This raises the alcohol content and hurts the quality of the tannins, resulting in fruit bombs. Given the rigidity of the wine culture, traditionalist California winemakers refuse to add oak chips or oak tannins or adopt other techniques for manipulating the grapes during the wine making process to bring down the sugar and alcohol levels. California wines are further hurt since the 25

33 higher sugar content will lead to alcohol levels of above 15%, which puts California wines into a higher tax bracket. 30 Increasing globalization and a rigid wine culture lead to a homogenization of wine preferences. This homogenization not only hurts many of the boutique/niche wineries in Northern California that rely on consumer terroir sentiments, but also leads to a consolidation of the California wine industry in which conglomerates that can take advantage of economies of scale and afford new practices and technology to adapt to increasing climate change and variability will drive the smaller niche winemakers and growers out of business. The key challenge in Consolidate to Survive is the ability of grape growers and winemakers to develop and afford adaptation responses that enable them to continue to produce austere wines under the new climate conditions. Physical responses to heat and frost that enable growers to manipulate the microclimate in a vineyard become more important. Further, warmer temperatures increase the number of pests, as well as the likelihood of a new pest epidemic due to the crossing of a temperature threshold for a new disease or a technological innovation gone awry like the UC Davis rootstocks in the 1970s (Cahill 2008). As such, chemical responses to kill pests and mitigate the damage they cause to grapes also become more important. Lastly, the significant decrease in summer precipitation levels makes water management all the more important, furthering the trend of the consolidation of the industry into larger conglomerates that can afford increasingly scarce irrigation water and complex management practices to succeed in such an environment. These conglomerates will also be large enough to afford additional vineyards in other parts of the state or country that have more favorable climate conditions for the traditional grape varieties that go into austere wine varietals. The logic of this scenario implies that increasing funding for research, creating an information-sharing network, and creating tax incentives to encourage winemakers to add vineyards in cooler areas will help the wine industry adapt and survive. Tax incentives to encourage varietal shifts will not be appropriate given the rigidity of wine culture, whereas as the approval of new water storage facilities is not required due to the increased purchasing power of the conglomerated wine industry. Lastly, the severity of this scenario makes maintaining the status quo an untenable option. 30 Products with alcohol content greater than 15% by volume are subject to higher tax rates. 26

34 New Look (high climate change, flexible culture) The New Look scenario depicts a Northern California Coast facing significant increases in summer temperatures and climate variability, and drastic decreases in summer precipitation. Further, there will be a moderate increase in winter temperatures and a very slight decrease in winter precipitation. Overall, grape-growers and wine makers will face increased levels of drought, heat waves, and frost while having less water available for irrigation. A flexible wine culture in which winemakers, judges and consumers are open to fruitier wines enables growers to experiment with and gradually substitute more heat and drought resistant clones, grape varieties, and wine varietals such Emerald Riesling and Ruby Cabernet, which are currently planted in the Central Valley and made into bulk wines that don t specify their varietal composition (Cahill 2008). Further, growers have more space to take advantage of new clones of existing grapes and altered rootstocks that can better accommodate increased pest levels stemming from increasing temperatures. Growers develop effective business plans for gradually shifting 10% of their land at a time to new varietals and maximizing the revenue that can be made off of their land given the new climate conditions and flexible consumer tastes. While the lengthy process of replacing rootstocks may be needed to fight a particularly difficult new pest or disease, existing research enables growers to graft the plants of other varieties and clones onto existing rootstock and thereby substitute more quickly. The key challenge in New Look is the ability of grape growers and winemakers to substitute and take advantage of new research. A more flexible wine culture allows Northern California growers to continue the current trend, prompted by increasing temperatures, toward high alcohol fruit bomb wines. As such, winemakers do not have to implement techniques to manipulate grapes during the winemaking process to reduce alcohol levels or improve the quality of tannins, since consumers would be open to softer, sweeter, less balanced wines favored by new climate conditions. However, the alcohol content of these sweeter, fruitier wines will still cause Northern California wines to be taxed at a higher rate. Since less water is available for irrigation, the flexibility of the wine culture will prompt growers to instead capitalize on research and development into drought resistant and less water intensive grape varieties. Issues of water supply or management will be of lesser importance. The flexibility of the wine culture favors the continuation of a diffuse Northern California Coast wine industry in which a plethora of small boutique growers compete to find what grapes, wines, and 27

35 blends are optimal for the new balance between an altered climate and open-minded consumers. As a result, the types of blends and varietals that characterize the industry are quite different from the wines of today. In particular, it is likely that the production of Pinot Noir and Chardonnay will decrease dramatically, as the thresholds for these wines are too low for research to overcome the significant climate changes that occur in this scenario. The logic of this scenario implies that that increasing funding for research, creating an information sharing network, approving new water storage facilities, and creating tax incentives to encourage varietal shifts will help the wine industry adapt and survive. The availability of lower-cost substitution strategies makes tax incentives to encourage the planting of additional vineyards in cooler areas not feasible. Lastly, the severity of this scenario makes maintaining the status quo an untenable option. It s All About Water (low climate change, rigid culture) The It s All About Water scenario depicts a Northern California Coast facing moderate increases in summer and winter temperatures, significant increases in climate variability, moderate levels of drought in the summer, and significant increases in winter precipitation. Overall, the significant increase in winter precipitation will raise the probability of large-scale floods but also create new opportunities to increase the available supply of water for growers. A rigid wine culture will force growers to turn to irrigation techniques and support the expansion of water storage facilities as a last resort to maintain their vineyards and the grape varieties currently grown in Northern California. The inflexibility of the wine culture will preclude any option of substitution of new varietals or use of newly developed clones. As such, a premium will be put on new, more effective irrigation techniques and technology as well as improved and expanded water storage facilities. Specifically, growers will increase the number of wells, clamor for the right to build additional reservoirs, and request subsidies for advanced irrigation technologies. Grape growers will use nighttime irrigation to mitigate frost and summer irrigation to mitigate the effects of heat waves. The increases in temperature and climate variability will not be so severe as to lead to a consolidation of the industry. Instead, the costs and challenges of meeting these climate challenges will be low enough such that growers and winemakers will rely more on collective action projects with each other to overcome these challenges. The inflexibility of the wine 28

36 culture will preclude the use of new clones to techniques to manipulate grapes and alter flavors, and as such diminish the options available outside of collective action projects for one-to-one cooperation between growers, winemakers and researchers. As such, traditionalist winemakers will face the difficult choice of either manipulating grapes to combat the higher sugar level and alcohol content that will come with moderate temperature increases, or to accept lower scores and therefore prices for the wine they produce. New projects to store and manage the larger available supply of water will proliferate, but at the same time create new difficulties for the state as it attempts to oversee and regulate these new projects in the face of existing regulations and entrenched constituencies. Through its collective active projects, the industry will turn more toward Silicon Valley businesses in the hopes of designing smart water transport and management structures that capitalize on the newly available supplies of water. As minor flooding already occurs along the major rivers in the Northern California during the wintertime, potential catastrophic flooding due to significant increases in winter precipitation will threaten growers. The logic of this scenario implies that that increasing funding for research, creating an information-sharing network, and approving the expansion of water storage facilities will help the wine industry adapt and survive. Tax incentives to encourage varietal shifts will not be appropriate given the rigidity of wine culture, whereas the moderate level of climate change in this scenario is not sufficient to create tax incentives to promote the planting of new vineyards in cooler areas. Lastly, the challenge presented by the rigidity of the wine culture makes maintaining the status quo an untenable option. Things Aren t So Bad (low climate change, flexible culture) The Things Aren t So Bad scenario depicts a Northern California Coast facing moderate increases in summer and winter temperatures, significant increases in climate variability, moderate droughts in the summer, and significant increases in precipitation in the winter. Overall, the significant increase in winter precipitation will raise the probability of large-scale floods but also will create new opportunities to increase the available supply of water for grape growers. Flexible winemakers, judges and consumers encourage growers and winemakers to experiment with grape substitution and new blends in order to optimize their products to new 29

37 climate conditions. Thus, the increase in climate variability will prompt growers to engage in new efforts to apply existing research on drought and heat resistant clones and water management techniques. Growers will not only discuss amongst themselves new techniques and clamor for additional research, but also individually experiment with applying certain research findings and techniques in their own individual vineyards. As such, the diffuse character of the Northern California coast wine industry will persist as niche growers compete to best utilize existing research to fulfill new consumer tastes. Large-scale substitution will not occur as it is more cost-effective for growers and winemakers to invest in and utilize existing adaptation techniques to mitigate most of the significant changes that will come with increased climate change and variability rather than engage in the long term, capital-intensive process of substitution. While flexible consumer tastes may encourage some growers to substitute new varieties that become especially popular, it is likely to be easier for growers and winemakers to create new blends and clones of existing grapes and wines that will not require planting new rootstocks. The moderate increase in precipitation and climate variability will not cause growers to clamor for permission to build additional water storage facilities. Yet summer droughts will continue to pose a significant challenge that will require growers to use irrigation to mitigate the damage caused by heat waves. Overall, this scenario does not include significant new climatic or cultural challenges for the wine industry. As such, the logic of this scenario implies two possible state responses. One response is to maintain the status quo, given the moderate levels of temperature and precipitation change and the flexibility of the wine culture. A second response is to increase the funding of research and create a new information-sharing network so as to hedge against any difficulties presented by the significant increases in climate variability. Approving the expansion of water storage facilities, and creating tax incentives to encourage varietal shifts or to promote the planting of new vineyards in cooler areas are not appropriate given the moderate level of climate and cultural challenges present in this scenario. Short-term and long-term policy strategies Based on our analysis, we find that the State should adopt an adaptation management strategy that directly addresses and aims to reduce uncertainty regarding the future impact of 30

38 climate change on the wine industry. In our analysis, we do not make any claims regarding the likelihood of any one future scenario regarding the effect of climate change on the wine industry. We assume that the four scenarios are equally likely to occur over the next 25 years. We therefore recommend that in the short-term the State take the two actions below to best help the industry meet any of the four scenarios. Short-term recommendations 1. The State should increase funding for research on adaptation issues, including water management, variety shifts, new clones/rootstocks, canopy management and trellising techniques. The State should take advantage of federal funding programs such as the Specialty Crop Block Grant Program. 2. The State should establish a Grape and Wine Adaptation Program to discuss, evaluate and share information on adaptation research and techniques through a variety of workshops and initiatives. Initially, the State should prioritize information sharing related to water management and availability issues. This program will be composed of a managing Board, online Forum, Advisory Task Force, and Science Advisory Panel that brings together state officials, researchers, grape growers, winemakers, private companies and other participants. Long-term recommendations In the long term, the State should monitor both the changing climate and the changing wine industry, determine roughly which scenario the Northern California Coast is following, and update its analysis in light of any further developments. In order for the State to determine which scenario is unfolding in the future and craft an effective policy response, key indicators should be monitored for both our climate and culture axes. For the climate axis, monitoring is straightforward. Measurements of seasonal temperature and precipitation levels are currently collected at the vineyard, country, state, and federal level. For the cultural axis, measurement is more difficult. Trends in the amount of sales of certain wine varietals, trends in wine scores, and trends in wine prices should be monitored to determine whether consumers, winemakers, and judges are more rigid or flexible. Cultural change is nearly always a slow, gradual process, so the 31

39 State should not give too much attention to dramatic changes in consumption, scores, or price in any given year and instead look to long-term trends to determine where the industry is headed. Based on this analysis, we recommend that the State implement a specific subset of the following three policy options that will be appropriate for each scenario: Approving the expansion of water storage facilities 31 Creating tax incentives to encourage winemakers to shift to varietals better suited to new climate conditions or to encourage winemakers to plant additional vineyards in cooler areas of California Maintaining the status quo Our two short-term recommendations will reinforce any of these long-term options. This report thereby provides the State with a comprehensive strategy to deal with both the short-term and long-term potential impact of climate change in California on the wine industry. 31 Again with the caveat that expanding water storage should be done in conjunction with water efficiency measures. 32

40 REFERENCES Air Resources Board of California, Report to the Board on the Success of Air Pollution Controls in California: A 40 th Anniversary Retrospective. Public meeting on Feb 28 th Accessed Feb from <ftp://ftp.arb.ca.gov/carbis/board/books/2008/022808/08-2-8pres.pdf > Ashenfelter, O. C. and K. Storchmann Using a Hedonic Model of Solar Radiation to Assess the Economic Effect of Climate Change: The Case of Mosel Valley Vineyards. CEPS Working Paper. 130: Berger, D Appelation America. December 17. Accessed Oct from < Bindi, M., L. Fibbi, B. Gozzini, S. Orlandini, and F. Miglietta Modelling the impact of future climate scenarios on yield and yield variability of grapevines. Climate Research. 7: Bureau of Economic Analysis: GDP by Country Report Accessed Feb from < Cahill, K. N. et al Modeling climate change impacts on wine grape yields and quality in California. Global warming, which potential impacts on the vineyards? Cahill, K. N. and C. B. Field Future of the Wine Industry: Climate Change Science. Practical Winery and Vineyard. Accessed January from < Cahill, K. N Winegrower responses to environmental stresses: An analysis of farm-scale adaptive capacity. For submission to Global Environmental Change, DRAFT updated 18 November. California Department of Food and Agriculture Grape Crush Report: Final 2007 Crop. Sacramento, CA: USDA National Agricultural Statistics Service, California Field Office. Accessed Feb from < California State Senate Select Committee on California s Wine Industry Light Brown Apple Moth Threatens Grapes. Committee Newsletter: June 2007 Wine Report. Accessed Feb from < Carbonneau, A The Early Selection of Grapevine Rootstocks for Resistance to Drought 33

41 Conditions. American Journal of Enology and Viticulture. 36 (3): Cayan, D.R., E. P. Maurer, M.D. Dettinger, M. Tyree, and K. Hayhoe Climate change scenarios for the California region. Climatic Change. 87: S21-S42. CSWA. California Sustainable Winegrowing Alliance website Accessed Oct from < Daily Wine News. October11, Accessed Oct from < Diffenbaugh, Noah Climate Change could Slash U.S. Wine Industry. Reuters, July 11. Dry, P., B. R. Loveys, M. G. McCarthy, and M. Stoll Strategic irrigation management in Australian vineyards. Journal International des Sciences de la Vigne et du Vin. 35 (3): Egelko, B State bid to limit emissions hits court snag. San Francisco Chronicle. July 26. Elkjer, T. Apellation America. August 20, Accessed Oct from < Evans, N California State Assemblymember Noreen Evans. Accessed: Feb from < democrats.assembly.ca.gov/members/a07/ enews.htm> Franson, P Five Ways California Vintners are Weathering Climate Change. San Francisco Chronicle, October 24. Griliches, Z, and M D. Intrilligator (eds). Handbook of Econometrics. Vol. 1. Amsterdam: North- Holland Publishing Company, Haeger, J. W. and K. Storchmann Prices of American Pinot Noir wines: climate, craftsmanship, critics. Agricultural Economics. 35: Hausman, J. A Specification and Estimation of Simultaneous Equation Models. In Hayhoe, K. et al Emissions pathways, climate change, and impacts on California. PNAS: Heien, D. and P. Martin California s wine industry enters new era. California Agriculture. 57 (3): Holman, F. (ed) New Wine Atlas: Wines and Wine Regions of the World. Orlando, Websters International Publishers. Intergovernmental Panel on Climate Change Climate Change 2007: Synthesis Report. Contribution of Working Groups I, II and III to the Fourth Assessment Report of the 34

42 Intergovernmental Panel on Climate Change [Core Writing Team, Pachauri, R.K and Reisinger, A. (eds.)]. IPCC, Geneva, Switzerland. Jackson, D.I. and P.B. Lombard Environmental and Management Practices Affecting Grape Composition and Wine Quality - A Review. American Journal of Enology and Viticulture. 44 (4): Jones, G. et al Climate Change and Global Wine Quality. Climate Change. 73: Kuminoff, N. V., D. A. Sumner, G. Goldman The Measure of California Agriculture. University of California Agricultural Issues Center. Lobell, D. B., C. B. Field, K. N. Cahill, and C. Bonfils Impacts of Future Climate Change on California Perennial Crop Yields: Model Projections with Climate and Crop Uncertainties. Agricultural and Forest Meteorology. 141: Loveys, B. R., M. Stoll, P.R. Dry, and M. G. McCarthy Partial rootzone drying stimulates stress responses in grapevine to improve water use efficiency while maintaining crop yield and quality. The Australian Grapegrower and Winemaker. 404a: Lucey, S. and A. Cuellar Wine Business. December 15. Accessed Dec from < Mendelsohn et al The Impact of Global Warming on Agriculture: A Ricardian Analysis. American Economic Review. 84 (4): MKF Research Report on Economic impacts of California Wine in St. Helena. Nemanil et al Asymmetric warming over coastal California and its impact on the premium wine industry. Climate Research: Ogilvy, J., and P. Schwartz. Plotting Your Scenarios. in Learning from the Future: Competitive Foresight Scenarios. Edited by Liam Fahey and Robert M. Randall. Penn, C Research, wine, and grapes: The $11 Million gap. Wine Business Monthly. Perkins, S Global Vineyard. Science News. 165 (22): Shiv, B., H. Plassmann, J. O Doherty, and A. Rangel Marketing actions can modulate neural representations of experienced pleasantness. Proceedings of the National Academy of Sciences. 105: Stewart, R.J., P. Raskin, and J. Robinson The Problem of the future: sustainability science and scenario analysis. Global Economic Change. 14: Tonietto, J. and A. Carbonneau A multicriteria climatic classification system for grape- 35

43 growing regions worldwide. Agriculture and Forest Meteorology. 124: University of California, Davis Optimistic wine industry to unveil new wines, survey finds. Press Release. Accessed Feb from < Ward et al Planning and Managing Vineyards under a Changing Climate. Wine Industry Newsletter. Vol 88: September. Webb, L., P. Whetton, and E. Barlow Potential impacts of projected greenhouse gasinduced climate change on Australian viticulture. Wine Industry Journal (AU). 21 (4): Modeled impact of future climate change on the phenology of winegrapes in Australia. Australian Journal of Grape and Wine Research. 13: Future Climate Change Impacts on Australian Viticulture. Paper presented at the conference `Global warming, which potential impacts on the vineyards?` Dijon, France, March White et al Extreme heat reduces and shifts United States premium wine production in the 21 st century. PNAS. 103: Wine Grape Grower's Australia Latest News. October 5. Accessed Oct from < Wine Institute (CA) California Wine Institute website. Accessed Oct from < 36

44 APPENDICES Appendix A: List of Interviewees (We received permission from each interviewee to cite their comments in the report) 1. Climate and wine/grape researchers Snow Barlow, Professor at the University of Melbourne Kimberly Nicholas Cahill, Researcher for the Interdisciplinary Program on Environ ment and Resources, Stanford University Gregory Jones, Professor at Southern Oregon University Andrew Walker, Professor at Department of Viticulture and Enology, UC Davis Leanne Webb, Researcher at the University of Melbourne 2. Winemakers and grape growers 32 Bill Cooper, Cooper-Garrod vineyards, Saratoga, CA Paul Dolan, Paul Dolan Vineyards, Mendocino, CA 3. Lobbyists and businesspeople in the wine industry Pete Downs, Senior Vice President for External Affairs, Kendall Jackson Karen Ross, California Association of Winegrape Growers Tim Schmelzer, Wine Institute 4. State Officials Gita Kapahi, Director of Public Participation, SWRCB, Environmental Protection A gency, the State of California Eric Oppenheimer, Senior Environmental Scientist, Division of Water Rights, SWR CB, Environmental Protection Agency, the State of California Jeanice Tipps, Assistant to Vitoria Whitney, Chief of the Division of Water Rights, S WRCB, Environmental Protection Agency, the State of California 32 Our report relies on the original research of Kim Cahill, who interviewed twenty grape growers and winemakers between July 2005 and August For a full citation of Cahill s research, see References. 37

45 Appendix B: Map of California and the West Coast: Wine-Growing Regions Source: Gregory V. Jones Climate Change: Observed and Predicted Impacts on the Wine Industry. King County Regional Climate Change Conference: Oct Seattle, WA. 38

46 Appendix C.I: Methodology and Findings of Quantitative Models Our model is designed to analyze the historical impact of climate on grape revenues by considering the effects of accumulated precipitation and minimum and maximum temperatures (our climate indices) on grape variety production and prices. We look at grape prices and production data for seven grape varieties in four grape-growing districts in Northern California, for the period : the varieties include Chardonnay, Pinot Noir and Sauvignon Blanc (grouped together as cool varieties), and Cabernet Sauvignon, Merlot, Syrah, and Zinfandel (grouped together as warm varieties). The districts we use are Mendocino, Lake, Sonoma and Napa. For these districts, we use a set of climate indices including average maximum temperature in July and August, average minimum temperature in April (the beginning of the growing season), and accumulated precipitation in the dormant season (Nov-Mar). The maximum temperature variable is used to measure the hottest points during the growing season, which we use to determine if temperatures in these months exceed the grapes growing threshold. Similarly, we use the minimum temperature variable to measure the effects of earlyseason frost to determine if temperature exceeded the growing threshold in the lower bound. We use lagged variables of grape productions and prices as our control variables for both regressions of grape productions and prices. We use a linear regression model to quantify the relationship between varying climate indices and grape production and prices, which we then combine to obtain grape revenue. We use the model, along with third-party temperature and precipitation projections (Cayan 2008), to predict the numerical change in grape revenue in the four scenarios. Essentially, we input future temperature and precipitation estimates and the model gives an output of the change in grape prices and production for a given set of years. (For specific details of the model, see Appendix G.II) The results of our analysis can be discussed in terms of productivity (grape tonnage per acre) and prices (grape prices per ton) for four types of variables: dormant-season precipitation (accumulated inches in Nov-Mar), minimum temperature (minimum temperature in April used as a proxy) and maximum temperature (average maximum temperature in July and August used as a proxy) in growing season, and district (county) effects. Firstly, we should note that previousyear prices help to predict current-year prices, roughly accounting for roughly 90% of the year- 39

47 to-year change. Also, previous-year prices help to determine productivity in the current year. As for the impacts and relationships between our climate and district variables, see Appendix F.II. Overall, our regression analysis confirmed that the two mechanisms through which climate impacts grape price and production are seasonal temperature and precipitation levels, though the effects are somewhat mild and non-linear. Our analysis indicates that, as predicted, the production of warm grape varieties i.e. grapes that grow at relatively warm temperatures, like Merlot or Zinfandel decreases with a higher maximum temperature in July and August (the higher the temperatures in these months, the higher chance that grapes don t survive given the heat threshold of each variety). For the cold grape varieties Chardonnay, Pinot Noir, Sauvignon Blanc our analysis indicates the same relationship between production and max temperatures in July and August but also a positive relationship with minimum temperatures in the beginning of the growing season. Essentially, production of cool varieties increases with a higher minimum temperature in April (the higher the temperature in April, the lower the chance of frost). 40

48 Appendix C.II: Quantitative Model For each of the warm and cool varieties, our model will have a pair of equations to estimate its productivity and price. For any variety type i (either warm or cool), its pair of equations is: = = Given : log price per ton of type i grape varieties in year t : log quantity per acre of type i grape varieties in year t : non-growing season accumulated precipitation in year t : average minimum temperature in April : average maximum temperature in July and August : Dummy variable for district 1 (=1 for Mendocino, = 0 otherwise) : Dummy variable for district 2 (=1 for Lake, = 0 otherwise) : Dummy variable for district 3 (=1 for Sonoma, = 0 otherwise), : Random errors of prices and productivity of type i grape varieties in year t Selection of our model We conducted background research focusing on climate change s impact on wine and other agricultural products to select an appropriate model for our project. Previous studies that assess climate change s impact on wine have used a simple regression model with different dependent and independent variables to estimate the sensitivity of wine and grape price, quality and quantity, and land price to various aspects of climate change such as average temperature, number of extreme hot days, and precipitation. Thus, the goal of our literature review was to determine the most appropriate model, variables and data sources for answering our specific questions. 41

49 As such, we analyzed various existing models, including a hedonic land price model (which captures the effect of climate change on agricultural land prices), a simultaneous equations supply/demand model (which captures how climate change affects the output and consumption of wine and grapes), and non-structural models that directly determine how variables such as wine and grape price and wine and grape quality and quantity are affected by temperature, precipitation, and land prices. However, each model we examined was either not applicable to our project or contained variables that were not applicable. For the latter, we could not apply several of the variables used in previous studies because of data availability problems and also because grape and wine quality cannot be used as a dependent variable in our analysis because our target is to measure the economic impacts of climate change on the California wine industry, and quality is not sufficient enough to estimate those effects. Secondly, these existing models have severe limitations in their ability to capture the substitution effect, which is fundamental in understanding the relationship between climate change and wine. Lastly, some models cannot control other complex interactions between variables that affect grape and wine prices, as these prices are decided by various factors other than grape and wine quality such as vintage name value, marketing strategy, and competition between different wine makers. Ultimately, no previous study has sought to directly understand the impact of climate change on wine revenues (prices and quantities), and as such no previous model is perfectly suited to answer our question. Therefore, we decided to narrow down the scope of the variables in our analysis to those for which data is available and to choose the model that does the most to overcome the aforementioned limitations. Results and interpretation The results of our model are presented in the table below. Based on our results, we make the following assessments: Previous year prices help to predict current year prices, roughly accounting for 90% of current year prices. Also, previous year prices have a small negative impact on productivity for the current year; Non-growing season precipitation has a non-linear effect on prices and productivities of both varietals, with similar effects. Given max (ngp) = 50, the overall effect is 42

50 positive for productivity. The effect on price is unclear and economically insignificant; Minimum temperatures in April have a non-linear effect on prices and productivities of both warm and cool varieties, yet have more influence on the cool varietals. Given that the range of temperatures for tminapr is between 36.7 and 47.9, the overall effect is negative for productivity; the effect on price is also unclear; Max temperatures in Jul/Aug have statistically significant non-linear effects on prices; The effects are negative overall, more for warm varieties; The effects on productivity are not shown up, but the signs are negative; Lastly, the high R-squared values for the price regressions give us more confidence in predicting prices, yet less so for productivities. Appendix Table 1: Regression Results Dependent Var Equation 1 Equation 2 Equation 3 Equation 4 Dep = ln(price), warm varieties Dep = ln(tons per acre), warm varieties Dep = ln(price), cool varieties Dep = ln(tons per acre), cool varieties Lagged ln(tons per acre) (0.0172) ( ) *** ( ) *** ( ) *** Lagged ln(price) (0.017) *** ( ) ** ( ) *** ( ) * Non-growing precipitation ( ) * (0.0099) ** ( ) *** ( ) Non-growing precipitation ^ ( ) ( ) ** ( ) ** ( ) Min tempt in Apr ( ) (0.2169) * ( ) *** ( ) ** Min tempt in Apr ^ ( ) ( ) * ( ) *** ( ) ** Max tempt in Jul&Aug ( ) *** ( ) * ( ) *** ( ) Max tempt in Jul&Aug ^ ( ) *** (0.0021) * ( ) *** ( ) Dummy for Mendocino ( ) ( ) *** ( ) ( ) ** Dummy for Lake (0.043) ( ) *** ( ) ( ) Dummy for Sonoma ( ) ( ) *** ( ) ( ) * Constant ( ) *** ( ) ** ( ) *** ( ) ** # of obs R-squared Adjusted R-squared Note: Std errors are in parentheses in the cell entries * p<0.1, ** p<0.5, *** p<

51 Appendix C.III: Descriptive Statistics The tables below show the cross correlations for our variables. The first table is a comprehensive correlation chart. The second and third tables show correlations for all variables for warm and cool varieties, respectively. Correlation table p t acreage ngp gp gat ngat gnt ngnt gxt ngxt tminapr tmaxjulaug income p 1 t acreage ngp gp gat ngat gnt ngnt gxt ngxt tminapr tmaxjulaug income Correlation table for type==1 p t acreage ngp gp gat ngat gnt ngnt gxt ngxt tminapr tmaxjulaug income p 1 t acreage ngp gp gat ngat gnt ngnt gxt ngxt tminapr tmaxjulaug income Correlation table for type==0 p t acreage ngp gp gat ngat gnt ngnt gxt ngxt tminapr tmaxjulaug income p 1 t acreage ngp gp gat ngat gnt ngnt gxt ngxt tminapr tmaxjulaug income A few notable correlations are: Tons and acreage ( for all varieties), which supports the usage of a combined variable, productivity, which is tons/acreage; Growing-season minimum temperature and tminapr (0.7673), which supports the usage of one of these variables only (not both). We decided on tminapr, based on consultations with climate experts; Tons and tmaxjulaug ( for warm varieties), indicating a preliminary negative relationship between max temperatures and grape growth. Our regressions support this hypothesis (see above). 44

52 Appendix D.I: Productivity, Price, and Revenue Forecast We adopted two climate scenarios simulated by current climate research of low climate scenario [B1] and high climate scenario [A2] as presented in Table 2.1 below (Cayan et al. 2008). These two scenarios give us an estimate of the overall change in temperatures and precipitation in Northern California over the next twenty-five years ( ): Under low climate scenario [B1]: Summer temperature is expected to increase 1.7 degree Celsius, while winter temperature is expected to rise 1.3 degree Celsius. Summer precipitation is expected to drop 6% while winter precipitation is expected to rise 13%. Under high climate scenario [A2]: Summer temperature is expected to increase 2.1 degree Celsius, while winter temperature is expected to rise 1.4 degree Celsius. Summer precipitation is expected to drop 29% while winter precipitation is expected to drop 1%. Based on stimulated figures of temperature and precipitation (for both summer and winter) in A2 and B1, we input them into our model to project grape price, productivity, and revenue (per acre) for the four counties. We presented our projected annual changes in grape price, productivity, and revenue (per acre) by the 4 districts for the period from 2009 to Overall, we find that only the grape revenue (per acre) of Napa County is estimated to drop in the future while other districts revenue are expected to increase on average, largely driven by our predicted decrease in grape prices in Napa compared to our predicted increase in grape prices for other counties. For instance, under the high climate scenario [A2], Napa grape revenue (per acre) on average is expected to drop 3.76% for warm varieties and 2.88% for cool varieties annually, while under the low climate scenario [B1], the reductions are 2.50% and 1.85% respectively. However, such increase in price has masked the reduction and/or the slow rise in grape productivity. For example, our model predicts a future decrease of grape productivity annually for Lake county, but an increase of grape revenue overall, mainly attributed to our projected increase in prices. For Mendocino and Sonoma, we project slow increase in grape productivity. Overall, our regression and projection provide evidence of possible future impacts of climate changes on the four counties, though we are aware of our estimation errors, mainly attributed to data limitation (only 18 years of data), modeling assumptions (other factors are fixed), and our long-term projection (over the next 25 years). 45

53 Appendix Table 2.1: Projected Temperature and Precipitation changes, low climate scenario [B1] and high climate scenario [A2] simulations (under Geophysical Fluid Dynamic Laboratory), for (Cayan et al. 2008) Appendix Table 2.2: Projected Annual Changes in Price, Productivity, and Revenue (per acre), by District, for Average annual % change Mendocino Lake Sonoma Napa Scenarios Warm varietals % % tons price per acre % rev per acre Cool varietals % % tons per price acre % rev per acre A2 (high) B1 (low) A2 (high) B1 (low) A2 (high) B1 (low) A2 (high) B1 (low)

54 Appendix D.II: Projected Revenue Changes per Year, by District, for The following charts present grape revenue projections for two climate scenarios (low and high, as outlined in the report) for warm and cool varieties for each district we analyzed in our model (Mendocino, Lake, Sonoma and Napa). Appendix Table 3: Revenue Projections for Four Districts, Revenues for cool grape varieties in Mendocino, Lake and Sonoma increase in the long-term under either climate scenario. Similarly, revenues for warm grape varieties in these three districts increase steadily in the long term. Napa is the exception to these trends, as revenues for both varieties decrease over time, after a brief increase in revenue in the short term. As discussed in our report, these results do not take into account changes in consumer tastes (as captured in the culture axis in our scenario analysis) and thus do not accurately reflect changes in price. Thus, these projections overestimate revenue changes and should be interpreted as such. We present these projections simply to offer a graphical representation of the linkages between our modeling results and our modeling projections. 47

55 Appendix E: Scenario Analysis The problem of how the wine industry in California is affected by climate change is a member of a larger class of problems stemming from the unsustainable tendencies that have characterized the recent interaction of human and natural systems. These tendencies have stimulated a search for new approaches to this new class of problems, which has recently coalesced around a new sustainability science (Stuart, et al. 2004, ). Sustainability science is a field of study that seeks to illuminate the interactions between nature and society by addressing the behavior of complex human-natural systems to multiple and interacting stresses. To incorporate the myriad interlocking systems that characterize sustainability problems, a holistic perspective is required which crosses disciplines, spatial scales and times. Such a perspective is necessary, as one group of authors describes, in order to examine the range of plausible future pathways of combined social and environmental systems under conditions of uncertainty, surprise, human choice and complexity (Stuart, et al. 2004, 139). Scenario analysis provides a powerful tool for integrating knowledge, scanning the future in an organized way and internalizing human choice into sustainability science. So, what exactly do we mean by scenario analysis? The key distinction within scenario analysis is between the quantitative (modeling) and qualitative (narrative) traditions. In quantitative scenario analysis, a model is constructed that seeks to capture the various interlocking systems that create sustainability problems through the inclusion of various independent variables. This model in turn is used to generate numerical forecasts of the future world for policy makers, which are used to justify current policy responses. In qualitative scenario analysis, narratives are constructed of potential futures in which today s policy decisions may be played out. Such narratives are not predictions, but rather hypotheses of different futures specifically designed to highlight the risks and opportunities involved in specific strategic issues. Qualitative scenario analysis is therefore a creative tool rather than a forecasting instrument, which seeks to help decision-makers to actually imagine themselves in a future world in order that they can better understand the context in which their policy responses will take effect. Together, quantitative and qualitative scenario analysis provide the comprehensive perspective necessary for policy makers to make sense of the interlocking systems that characterize sustainability problems such as the effect of climate change on California wine. 48

56 Appendix F: California Policies regarding Climate Change Assembly Bill (AB) 3030 of 1992: Allows a select set of public agencies to (voluntarily) implement a groundwater management plan to have management authority over unregulated groundwater basins. AB 1493 of 2002: Directs the California Air Resources Board (CARB) to develop standards for implementing greenhouse gas limits for cars and light trucks from 2009 to However, the Environmental Protection Agency refused to let the state enforce these limits, and California is currently suing the Federal Government (Egelko 2008). AB 2121 of 2004: Improves the management of water rights by requiring the State Water Resources Control Board (SWRCB) to institute in-stream flow standards on Northern California coastal streams, including the Russian River. AB 32 of 2006 (The California Global Warming Solutions Act): Mandates that California's greenhouse gas emissions be lowered to 1990 levels by AB 118 of 2007: Provides approximately $200 million annually through 2015 to fund new programs such as air quality improvement projects and alternative and renewable fuels. This bill creates a revenue stream for the programs via increases to vehicle and vessel registration fees. Senate Bill (SB) 375 of 2008: Directs CARB to work with California's eighteen metropolitan planning organizations to redesign their transportation, housing, and regional land-use plans to reduce the amount of vehicle miles traveled. Climate Action Team: Established by Governor Schwarzenegger under an Executive Order on June 1, 2005, to implement the abovementioned state-level actions with respect to climate change. Energy sources: A renewable portfolio standard (RPS) was established in California in 2002 under SB The RPS requires that the percentage of energy in California increasingly come from renewable sources generated within and outside of the state. Moreover, the California Solar Initiative provides rebates provide homes and businesses with incentive to install solar power generators. Transportation: Emissions from this sector account for a significant amount of overall greenhouse gases. CARB is acting administratively to create regulations to require retrofits 49

57 on heavy trucks to reduce their nitrogen oxide and greenhouse gas emissions. Grape Diseases and Pests: Pierce s Disease Control Program (PDCP) in the Department of Food and Agriculture was set up to reduce the impact of the Pierce's Disease and the glassywinged sharpshooter on the State s agriculture. Pierce s Disease (PD) appeared in California about 50 years ago, while the glassy-winged sharpshooter (GWSS) suddenly started infesting crops including grapes in southern California in the late 1990s. The PDCP manages various kinds of programs to support the State s agricultural industries (including the wine industry) with substantial skills and knowledge to prevent the impact of PD/GWSS through programs and initiatives such as the PD/GWSS Board, PD/GWSS Forum, PD Advisory Taskforce, and PD/GWSS Science Advisory Panel. Water: The Department of Water Resources created a Climate Change Matrix Team in 2006 to provide solutions to impacts of climate change on future water management. 50

58 Appendix G: Policy Options: Pros and Cons Table Policy Options Pros Cons 1 Increase funding for research on adaptation issues through the specialty crop block grant program 2 Establish a new information sharing network or program 3 Approve the expansion of water storage facilities 4 (1) (2) Structure tax incentives to encourage the switch to new varietals Structure tax incentives to encourage winemakers to plant additional vineyards in cooler areas 5 Keep the status quo - Strong demand - Budget neutrality - Coordinated and deepened information sharing - Strong demand - Possible business cooperation - Effective countermeasure for reduced precipitation - Effective measure in the long term to adapt to climate change - No additional cost for the State - Equity among crops - Competition for the grant - Increased government burden - Equity among crops - Environmental protection - The available water rights are limited - High cost for winemakers to change - Consumers response - Uncertain tax revenue effects - High cost for winemakers to change - Uncertain tax revenue effects - Risk of the wine industry failing to adapt 51

59 Appendix H: Before and After the New Information Sharing Program This chart shows the difference between current information sharing programs and our recommended state-sponsored program, the Grape and Wine Adaptation Program (GWAP). In the latter, researchers, private companies and the wine industry communicate with each other and exchange information through the GWAP. This differs from the current setup, in which the wine industry itself acts as the facilitator of information; as such, the wine industry cannot fully capture the synergies created by the GWAP. Appendix Table 4: Comparison of Current and Recommended Information Sharing Networks 52