Here in France, Christmas preparations are in the final stages, but amidst all the shopping, cooking, and decorating, it’s easy to lose sight of the essential: how well does Santa Claus do on key
problems challenges facing the business community, policymakers and civil society in our increasingly globalised economy? In the sections below, we set out the main strands of OECD analysis and advice in a number of domains (in alphabetical order), then assess how well Santa does. Since peer review wasn’t possible, we’ve adopted the so-called P-F approach, where P is “pass” and F is “fail”.
Base erosion and profit shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits “disappear” for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low resulting in little or no overall corporate tax being paid. Despite substantial activity across the globe and company headquarters in Lapland, the North Pole, and various large department stores, we could find no evidence that Santa Claus pays tax in any jurisdiction, and reports that he may be using a special purpose vehicle to avoid paying fair taxes appear justified. FAIL
- Big data
Big data could significantly enhance productivity, resource efficiency, economic competitiveness, and social well-being. However, greater access to and use of data create a wide array of impacts and policy challenges, ranging from privacy and consumer protection to open access issues and measurement concerns. Santa collects a vast array of data on consumers’ location, preferences and behaviour, but has no structures in place to guarantee confidentiality, cross-platform compatibility, or third-party access, thereby reducing an invaluable resource to little more than a wish list. FAIL
- Climate change
While there is high awareness among businesses of a wide range of climate change risks, only a small proportion of companies are implementing climate risk management measures. Despite the possibly fatal damage global warming could cause to Santa’s ice, snow and cold-based business model, his technological choices and organisational processes not only do nothing to combat global warming, they contribute to it. Transport and distribution are particularly damaging due to the decision to concentrate production on one site, and rely for distribution on reindeer, a prime source of methane, which has a global warming potential 72 times higher than CO2. FAIL
- Gender equality
“HAVING REGARD to the 1976 Recommendation of the Council on a General Employment and Manpower Policy, [The OECD Council recommends that Members] increase the representation of women in decision-making positions by: encouraging measures such as voluntary targets, disclosure requirements and private initiatives that enhance gender diversity on boards and in senior management”. Other than anecdotal references to “Mrs Claus” we could find no evidence that Santa has designed appropriate responses to gender gaps and market failures, including: policies to reduce barriers to women entrepreneurship, support for the development and implementation of awareness campaigns, training programmes, mentoring, coaching, and support networks. FAIL
- Global value chains
International production, trade and investments are increasingly organised within so-called global value chains (GVCs). Globalisation motivates companies to restructure their operations internationally through outsourcing and offshoring of activities. While Santa pioneered just-in-time manufacturing and remains the benchmark for logistics and distribution, he has failed to locate different stages of the production process across different countries, according to the most optimal location factors. FAIL
The OECD has shown that pursuing inclusive growth outcomes requires a whole-of-government approach that aligns vision, incentives and delivery mechanisms across the policy-making cycle. A strong centre of government, medium-term budgetary considerations, and comprehensive ex ante and ex post assessment tools able to shed light on the distributional impact of policies are among the key requirements for policymaking for Inclusive Growth. Santa has implemented none of these. FAIL
The PISA results reveal what is possible in education by showing what students in the highest-performing and most rapidly-improving education systems can do. The findings allow policy makers to gauge the knowledge and skills of students in their own countries in comparison with those in other countries, set policy targets against measurable goals achieved by other education systems, and learn from policies and practices applied elsewhere. But we couldn’t find any 15 year-olds to take the test. Or any schools for that matter. FAIL
- Rural development
According to the most recent data, in more than one out of three OECD countries, the region with the highest rate of employment creation was a rural region. Easier commuting across longer distances has expanded the sphere of influence of major urban areas enabling people to live in rural regions while working in cities, contributing to a reversal of the rural out-migration trend. As far as we can tell, there is has been no employment creation by Santa and none of his employees travel to or from the home region. FAIL
- Skills strategy
In a context of high unemployment following the crisis and increased global competition, ensuring an adequate supply of skills, maximising their use and optimising further development of skills in the workforce is key to boosting employment and economic growth, and to promoting social inclusion. We could find no evidence of any of Santa’s employees moving beyond low-skill manual labour and none of them appear to be receiving training for the jobs of tomorrow. Career development is blocked at entry level, and social mobility is limited. FAIL
Everyone benefits when levels of trust and trustworthiness are high. But given present climate of suspicion restoring trust will take time and coordinated efforts from all sections of society. While unemployed young people show a high degree of trust in Santa, at least for the under 7 1/2 age group, trust tends to be eroded for later cohorts, with many stakeholders declaring they do not believe in Santa anymore. FAIL
Conclusion and outlook
Despite failing to respect international best practices in any of the domains assessed, Santa has seen solid growth again this year, skilfully leveraging intangible assets such as brand recognition and magic, as well as taking advantage of lack of international cooperation across a number of challenges including tax policy, climate-related risks, supply-chain due diligence, and intellectual property protection. However, as BEPS, COP, and FIFA show, business as usual is not an option going forward, and without an ambitious and comprehensive pro-inclusive growth structural reform agenda, his business is unlikely to survive. Better policies for better lives are not just for Christmas.
Best wishes for the holidays from the Insights team and all our colleagues at the OECD!
Noe van Hulst, Ambassador of the Netherlands to the OECD
With the world welcoming the new comprehensive global climate agreement at COP21 aiming to limit the global average temperature rise to well below 2 degrees Celsius, it is worth noting the significant contribution that the OECD family has made. These contributions were aptly summarized in a useful joint statement by the secretariats of OECD, IEA, International Transport Forum and Nuclear Energy Agency right after COP21 kicked off. Let me highlight a few key points.
In their report Aligning Policies for a Low Carbon Economy, already discussed at the OECD Ministerial Meeting in June 2015 under Dutch presidency, the organisations called on governments to fix the policy misalignments across the economy that make the energy transition more costly than needed. A startling example of this are the fossil fuel subsidies that still amount to nearly $500 billion per year on a global level. At the IEA Ministerial Meeting in November 2015, Ministers called for the gradual phasing out of inefficient fossil fuel subsidies to end-users. This should probably be done by 2030.
In addition, IEA Ministers agreed on the need for stronger policy efforts aimed at achieving a peak in emissions already around 2020 by increasing energy efficiency and investment in renewable energy, phasing out the least efficient coal plants, and reducing methane emissions from oil and gas. The IEA has documented in detail how this could be done in a pragmatic manner.
Another important point that IEA and OECD have both been stressing repeatedly is the need to accelerate technology innovation. The IEA estimates that we need no less than a tripling of public energy investment in RD&D (research, development and demonstration) and a scaling up of collaboration between public and private entities in developed and developing countries alike. Public RD&D is obviously another area where we haven’t got it right yet and where misalignment of policies needs to be fixed.
A key area of OECD work has been on analyzing the commitments of developed countries to mobilise the $100 billion a year by 2020 for climate finance actions by developing countries, both in mitigation and in adaptation. Adaptation and increasing resilience is crucial to protect the most vulnerable (e.g. small island states) and also for the energy sector infrastructure itself. The calculations on how far we have come with mobilising climate finance for developing countries were the subject of intense debates during COP21. It is now clear, however, that even more than $100 billion is probably needed after 2020 on a yearly basis, with climate adaptation getting a bigger slice of the pie. Last but not least, the joint organisations have argued that a transparent mechanism is needed for assessing, strengthening and rolling forward mitigation contributions on a regular five-yearly basis. A clear example of a recommendation that is remarkably similar to the relevant text of the Paris Agreement in this respect.
Now that COP21 has successfully been concluded under the very able French presidency, we can surely identify more areas where OECD and IEA have made significant contributions to the final result. More importantly, it is more than likely that OECD and IEA will be called upon frequently going forward, given the immense task of implementing the ambitious climate agreement in the most efficient and cost-effective way.
Frans Lammersen, OECD Development Co-operation Directorate
The Tenth WTO Ministerial Conference, taking place this week in Kenya, offers an excellent opportunity to take stock of the achievements of the Aid for Trade Initiative and reflect on how to continue its relevance in the changing trade and development landscape.
Ten years ago when opening the Sixth WTO Ministerial Conference in Hong Kong, Pascal Lamy lamented the absence of a magic wand to conclude the Doha Development Agenda. What proved to be magic in Hong Kong was the agreement on a mandate to operationalise aid for trade. A WTO Task Force recommended using existing mechanisms for identifying and prioritising trade-related capacity constraints in developing countries around which donors should align their support.
So 10 years on, did Aid for Trade deliver on its promise?
The Initiative created strong partnerships between developed and developing countries, between the trade and development communities, between the traditional and non-traditional donors and between the public and the private sector. These partnerships are based on a common agenda with clear objectives and reciprocal commitments.
Successive Global Reviews and Aid for Trade at a Glance reports have shown that the Initiative has raised awareness among developing countries and donors about the positive role that trade can play in promoting economic growth and development. Moreover, developing countries, notably the least developed, are getting better at articulating, mainstreaming and communicating their trade-related objectives and strategies.
As a result, cumulative aid-for-trade disbursements reached USD 245 billion and an additional USD 190 billion in other official flows, since the Initiative started in 2006. Commitments stood at USD 55 billion in 2013, an additional USD 30 billion compared to the 2002-05 baseline average. This has raised the share of aid-for-trade in sector-allocatable aid to 38% in 2013 from an average 32% during the baseline period.
But are these substantive aid-for-trade programmes also effective?
According a broad range of trade and development literature they are indeed; both at the micro and macro level. More specifically, OECD research found that one dollar extra invested in aid-for-trade generates around eight additional dollars of exports from all developing countries – and twenty dollars for the poorest countries. Results, however, may vary considerably depending on the type of aid-for-trade intervention, the sector at which the support is directed, the income level, and the georgraphic location of the recipient country.
These empirical findings are buttressed by the aid-for-trade case stories. The sheer quantity of activities described in these stories suggests that aid for trade is now central to development strategies and has taken root across a wide spectrum of countries and activities. Although it is not always easy to attribute cause and effect, the stories show tangible evidence of how aid-for-trade is helping countries build the human, institutional and infrastructural capacities for turning trade opportunities into trade flow and helping men and women make a decent living.
Despite these significant achievements, the effectiveness of the Initiative could be further enhanced through regional programmes. Deepening economic integration via regional co-operation is a key priority in the reform strategies of most developing economies. It is also actively promoted by donors. The support for and results of these programmes can be strengthened by involving Regional Economic Commissions and Regional Development Commissions to act as honest brokers to help developing countries find common ground, to offer financial incentives, to build human and institutional capacities, and to harmonise regulations.
However, what is now most important is how aid-for-trade can best support the Sustainable Development Goals. The SDGs highlight that “(…) increasing aid‑for‑trade support for developing countries, in particular the least developed (…)” would help to “(…) promote inclusive and sustainable economic growth, full and productive employment and decent work for all.” Operationalising these objectives could be achieved through focusing the Initiative on improving connectivity, expanding the scope to services and promoting green growth.
A focus on reducing trade costs – which are highest for LDCs, SMEs and agricultural goods – provides an operational focal point for an action-oriented aid-for-trade agenda among a broad collation of stakeholders, including the providers of South-South cooperation and the private sector. The advantages of such as a focus is also that it is neutral in the sense of benefiting not just exporters, but also importers and households, and trade in goods and services.
Service trade is important for developing countries. Services are not only an important economic sector in their own right, such as for instance tourism, which for 11 LDCs is the biggest source of foreign currencies, but also increasingly as an important input to merchandise trade and linking to global value chains. The emphasis should be on those areas that are central to promoting sustainable development, such as agriculture, energy and transport.
After the successful conclusion of COP21, aid-for-trade should support developing countries in moving to sustainable agriculture, building climate-resilient infrastructure, strengthening the supply chain of low-carbon technologies and environmental goods and services, and more generally helping developing countries with achieving green growth.
In short, to remain relevant after 10 years aid for trade should focus on the fundamental changes that are occurring in the trade and development landscape. The first WTO Ministerial Conference taking place on the African continent should provide the impetus to ensure that the Aid for Trade Initiative becomes an integral part of delivering the Sustainable Development Goals by 2030.
Sebastian Foulkes-Best, student at the Cité Scolaire Internationale de Lyon (CSI), France
In France, when you get into ninth grade, the classes and work are similar to the year before, although harder. Though there is one thing to get excited about, and that is that you have to do a one week internship in a company or organisation of your choice. That is how I, Sebastian Foulkes-Best, 15 years-old ended up at the OECD for a week. I wanted to get a closer view on economics, a subject that already interested me, and I thought that working and seeing the day-to-day operation of an organisation such as this one would be a good way to find out if economics is what I want to study (and possibly work in, later on).
The problem is that we all know what people like bus drivers or cashiers do, simply because we see them every day. But what about economists? Most of us end up thinking of the well-known nerdy stereotype, constantly with his head buried in numbers and data, or the talking head that gets cited in the Financial Times and says what inflation or GDP will do next year. I was to discover that these (like most stereotypes) are both totally wrong.
I had not heard of the OECD, but when my mother talked to me about it, it seemed like a great place. It was partly the way I had imagined it, with long corridors and impersonal offices but I never ever would have thought that a château would be used to host these offices. The Château de la Muette was (to me at least) the most beautiful part of the OECD, even though the Delta building was well designed and pretty too, but in a more modern way. (Also, I imagined the canteen as serving bad quality food, which again was totally wrong.)
My idea was to try to talk to some economists about what they did and how they got into the profession. I had the chance to interview many of them, including the OECD’s chief economist Catherine Mann and Professor Diane Coyle who was at the OECD to give a seminar on GDP. This was an enormous privilege and made me feel very adult but also a little out of place. They both gave fantastic answers to my questions and I even got my copy of Sex, Drugs and Economics (an introduction to economics written by Diane Coyle) autographed.
Basically the economists (at least the ones I talked to) do a research process to end up with a policy being communicated to the people that will be able to use it to make our lives better. It all starts with an intuition, a thought that maybe something isn’t going quite right (for example, productivity growth). Then, there is the formulation of the question that they will try and answer (for example: “Is there a problem with productivity growth?” or “Is productivity growth slowing down?”). Economists then collect data and transform it into usable and understandable graphs to either confirm or refute this hypothesis. Then, after the study of the data transformed by economists and the answer to the first question (such as: “Yes, there is a problem with productivity”) starts the second part of the job: finding the solutions. They look closely at why there is a problem (econometrics are usually used) and how it can be solved (the suggestions and solutions that will be written in the policy). Once that is done, the formulation of a policy to solve the problem ends the research process (for productivity growth) and it all starts again for a new problem, a new intuition.
Another part of what economists do is to communicate the findings to the people, companies or countries to whom those findings are relevant to make lives better on a larger scale (“Better policies for better lives is the slogan of the OECD after all”). Obviously the jobs of the people that communicate require a whole new set of skills other than the skills needed by the people who do the hardcore data finding and refining, who in turn need different skills than the ones needed by the people that will implement the policies.
One of the first things I learnt while interviewing economists at the OECD is that there is no one economist, they all come in different shapes and forms. As Sabine Zigelski said, “It’s a career that is very hard to predict. When you start studying economics there are so many different options, which can be frightening because for a long time you don’t know where you will end up”. I literally have not found one common thread between the careers of the economists I’ve interviewed. For example, out of the people I interviewed: one studied philosophy, one played the trombone for 10 years, one worked for the Canadian government and now they all work at the OECD.
A recurring theme in the interviews was that economics, more than just a matter of facts and numbers was, a way of thinking more than anything. Which explains why it then gives such a free career path for anybody wanting to study or work in it. Philosophy for example, helped my interviewee question the basic assumptions that the markets are based on (the market is always clear, people are rational, those types of things). These seemed ridiculous coming from a philosophical perspective where you have to justify every premise and cannot really assume anything. But especially, as economics are used at a very high level of government, how could governments make large decisions that would influence people’s lives following something that seemed to be using shady assumptions? That is what got my interviewee interested in economics, and he now works at one of the most respected economic organisations in the world, the OECD.
As a conclusion, I’d like to mention that even though I am honoured to have met them, I only got to interview a small number of the OECD staff, therefore this article is not a summary of the OECD but more a report of my experience here. Indeed, the economists here work on a very vast range of subjects (health, agriculture, outer space, environment, education…) and it would be impossible for me to cover all of them in only one week.
Now that I have met some economists, and more or less understand what they do, I think I would like to become one.
You can hear Catherine Mann’s interview here. The charts she refers to were presented at the launch of the OECD study on “The future of productivity” at the Peterson Institute for International Economics in Washington with Jason Furman, chairman of the US President’s Council of Economic Advisors. You can see the charts and find out more about the event here.
If you’d like to work for the OECD, visit our careers page.
Angel Gurría, OECD Secretary-General
The Paris Agreement at COP21 marks a decisive turning point in our response to climate change. I strongly applaud this historic commitment and the robustness of a deal that includes an ambitious target for limiting the global temperature rise, a five-year review cycle, clear rules on transparency, a global goal for resilience and reducing vulnerability and a framework for supporting developing countries.
Countries’ nationally determined contributions to emissions reductions post-2020 lay a pathway to a low-carbon, climate-resilient future that could safeguard the future health and prosperity of billions of people. But this is just the beginning of the road. The agreement is a framework for action, and governments now need to act.
Each country must spell out a credible roadmap for action consistent with the goal of holding the average temperature increase to well below 2 °C above pre-industrial levels and pursuing efforts to limit the increase to 1.5 °C. The timescale and sequencing of actions will vary across countries, reflecting their different circumstances, but this goal requires the full engagement of all major economies. Sustainable development and climate goals must be mutually reinforcing and advanced economies must fulfil their promises to support developing countries in addressing climate change with finance, technology and capacity building.
Strong and coherent domestic policy is essential to drive the changes we need, including putting a meaningful price on carbon, eliminating fossil fuel subsidies, spurring investment in green technologies and innovation and tackling the policy misalignments that impede climate action. Effective policies will unleash the transformational capacities and capital of the private sector and will allow investors, and other actors such as cities and regions, to plan with confidence. The low carbon transition requires little more money than the trillions already being invested today. But it requires a massive shift towards low-carbon, energy efficient and climate-resilient systems. We welcome the recognition that Article 2 of the Agreement gives to making finance flows consistent with this goal.
A key role of the UNFCCC will be to monitor and review country performance against commitments, not only in emissions reductions but also in climate finance. The Agreement provides mechanisms for regular reporting, review and updating to check whether national targets and pathways are consistent with our collective climate goals. International organisations like the OECD can provide data and analysis to support transparency and accountability in many of these areas and we stand ready to support all countries in this process. The OECD will continue to work with governments to help remove the barriers to climate action that are built into existing policies from the fossil fuel age in everything from investment, taxation, electricity land use and transport.
This is a watershed day for the world and especially heartening for the OECD as one of the first international bodies to call for zero net emissions in the second half of the century, for a price on carbon and for greater efforts to channel finance into the low carbon economy.
I would personally like to congratulate the French President François Hollande, the COP President Minister Laurent Fabius, French Environment and Energy Minister Ségolène Royal, Ambassador Laurence Tubiana and their team on helping steer us to a successful outcome. The Paris Agreement builds on the considerable efforts by previous COP Presidencies, notably the Peruvians who laid the groundwork for this agreement in Lima a year ago and made subtle, inclusive and tireless efforts to support an agreement over the subsequent year. We owe a great debt of thanks to Christiana Figueres, the Executive Secretary of the UNFCCC, and her team for their exceptional commitment, energy and leadership over the past many years.
Angel Gurría, OECD Secretary-General
Everybody is interested in the impacts of what companies are doing – shareholders, clients, the media, governments… And as recent experiences as well as the current discussions at and around COP21 show us, the environmental practices and impacts of doing business are coming under increasing scrutiny.
Workers want to know whether pension funds for example are investing their savings for the transition to a green economy – or whether they are supporting the carbon lock-in that we are trying to move away from. According to Bloomberg, at least 14 energy companies are facing shareholder resolutions on environmental and social policies, and more than 190 resolutions were proposed in 2014, an 88% increase compared to 2011. Investors are starting to base decisions on environmental criteria too. A recent report to the Storting, the Norwegian parliament, reveals that the world’s largest sovereign wealth fund, Norway’s Government Pension Fund Global, has divested from 114 companies on climate grounds “whose business models [are] considered unsustainable in the long run”.
Where the big players lead, the others will follow, and firms would be well-advised to incorporate good environmental practices into their modes of operation. It is not the OECD’s role to say how they should do this of course, but we can help by reaffirming the importance of what is being done through credible reporting to the global community. Concretely, firms can use the standards the Norwegian pension fund cites as the basis for its decisions: “The mandates require that the work shall be based on internationally recognised standards like the UN Global Compact, the OECD Principles of Corporate Governance and the OECD Guidelines for Multinational Enterprises. These international standards define corporate governance norms, and express best corporate practice expectations on the handling of environmental and social issues”.
So what kinds of information do companies that respect these OECD guidelines have to report? Under the “Disclosure” chapter of the OECD Guidelines for Multinational Enterprises, companies are expected to provide both financial and non-financial material information, including “foreseeable risk factors”. Companies are well-aware that climate change and other environmental impacts may now pose foreseeable material risks to their supply chains, their installations and their clients. The G20/OECD Principles on Corporate Governance specifically include environmental risks among foreseeable risk factors and the 2011 update of the OECD Guidelines introduced a reference to reporting of greenhouse gas emissions produced by the company both directly (from its transport fleet for example) and indirectly (for instance by consuming energy generated by fossil fuels).
Corporate “climate information” seeks to give a balanced overview of how climate change could affect a business for better or worse. For example a firm that produces air conditioning equipment may expect demand for its products to grow if summers continue getting warmer, but if the regulations on energy consumption of electrical goods are tightened, it may find itself with a product line that no longer meets the new standards. Businesses also have to consider impacts beyond their immediate operations and look at the whole supply chain. A firm seeking to reduce its carbon footprint would favour a supplier using renewable energy rather than fossil fuels for example. Disclosure would mean that these companies would describe what they are doing to react to opportunities and risks through their strategies, governance, and policies to mitigate climate impacts and to adapt to and manage the effects of climate change.
By identifying climate-related risks and opportunities, this information will help to integrate climate into core decision-making processes by companies. Consumers, investors and governments will find this information useful, but collecting this information makes good business sense too by showing where a firm could streamline processes; reduce costs; and improve efficiency. And yet despite the long-term advantages of incorporating climate factors into company strategy, a 2014 climate disclosure study by CERES of US companies found that over 40% do not include any climate-related information in their filings and a 2015 study by Influence Map warns that investors are not getting a full picture of how regulation aimed at tackling climate change would affect the performance of the companies in which they invest. The situation is similar for asset owners. A survey by the Asset Owners’ Disclosure Project shows that nearly half of the top 500 global asset owners have done nothing to protect their investments from climate change. Only 7% calculate their portfolio’s emissions; a mere 1.4% have reduced their carbon intensity since 2014; and none have assessed their portfolio-wide exposure to fossil fuel reserves. Other recent studies reach similar conclusions.
Part of the reason for this poor performance is that climate disclosure is a relatively recent discipline and many companies are struggling to understand the importance of collecting and reporting climate information. On the other hand, there is also evidence that companies are increasingly providing climate information on a voluntary basis, such as under the CDP, which operates on behalf of over 800 investors.
They would be helped by improvements to government reporting schemes, and there would be a lot to gain from aligning the different schemes so as to make the disclosed information reliable and comparable across borders. A report by the OECD and the Climate Disclosure Standards Board shows that while 15 of the G20 countries have mandatory reporting schemes in place or in preparation, most schemes only require reporting of emissions within national boundaries, which results in emissions produced throughout most of the value chain being left out. The majority of schemes require emission data to be verified, but only a minority require third party-verification which means that the information may not be reliable. Only a few schemes ask companies to report on climate change-related risks they face or their strategies to address those risks.
The good news is that both governments and investors are ready to scale up climate disclosure and the use of climate information. France for example recently issued legislation requiring investors to report on their portfolio’s carbon footprint, and Sweden may soon follow. And the Financial Stability Board has just announced the creation of an industry-led disclosure task force on climate-related risk.
All these initiatives are encouraging. Knowing what we’re doing about climate change helps us to do it better.
COP21: Getting the most out of corporate climate change disclosure: Event at COP21 on 10 December chaired by Mr Gurría. The discussion focused on four themes:
- How could reporting frameworks be streamlined to ensure that disclosure is meaningful?
- What kind of approach can best scale up corporate disclosure: mandatory law, voluntary standards, a combination of both?
- What kind of corporate climate change disclosure is needed to foster change in corporate management?
- What other incentives are needed to make disclosure work in support of the climate agenda?
A Californian enigma: Record-high agricultural revenues during the most severe drought in history
Guillaume Gruère, OECD Trade and Agriculture Directorate
Drought in California has been in the headlines frequently these last three years, with startling pictures of empty reservoirs, rivers and canals, wildfires, disappearing snowpack and dry earth. The ongoing drought in the State is believed to be the most severe in the last 500 years.
The drought is having many different effects. After limiting outdoor watering use in cities, the governor has imposed an emergency state-wide reduction of 25% in urban water consumption. The use of water from the Central Valley project, a federal grand canal which links the northern and southern parts of the state, was banned for farm irrigation. Some media reports are asking how soon the Central Valley will turn into a desert; others ask when the population will start to leave the “Golden state”.
Yet these dramatic effects have not stopped the agricultural sector from growing. Even though large amounts of land were fallowed and there were significant losses in production and agricultural jobs (an estimated direct agricultural revenue loss of $1.5 billion in 2014), figures for 2013 and 2014 show the highest agricultural net income ever recorded in California. The fruit and nut industry, in particular, just like the state’s economy, continues to grow despite a four-year quasi absence of precipitation. Curiously, consumers have not seen any price increase in their food basket and are unlikely to do so.
How is this possible? The response lies underground. Groundwater has allowed high value Californian agriculture to continue thriving. It is estimated that groundwater has replaced 70% of the surface water lost through lack of rain in 2014. The California Central Valley aquifer, serving as a natural reservoir, has been used by farmers to replace unavailable surface water, helping California remain the top agricultural state in the leading agricultural nation, even under extremely high water stress.
Groundwater pumping like this is highly unsustainable; it is drying up the resources California will need in the future to face climate change. A growing body of evidence suggests that groundwater withdrawals largely exceed natural recharge and cause long-term environmental damage. While available data is partial and insufficient for a full diagnosis, satellite and other sources show that the Central California Aquifer is one of the most rapidly depleting aquifers globally.
Intensive pumping of groundwater for irrigation also generates large, increasing, and, in some cases, irreversible environmental damages. Pumping in coastal areas has led to sea water intrusion, making groundwater increasingly saline and difficult to use for irrigators and cities. Pumping in the valley has also compacted aquifers, resulting in a drastic lowering of the land (geologists call this land subsidence). In some areas, the land has gone down by 2m in the last 25 years and 20m in the last 90 years! This has not only damaged infrastructure, houses and canals, but is also probably irreversible, reducing the capacity of aquifers to store water in the future. A 2014 study even suggested that groundwater pumping has contributed to seasonal uplift of the Sierra Nevada Mountains (by up to 1-3mm) and that it has increased micro-seismic activities around the San Andreas Fault.
So what can we do? Groundwater has long been unregulated and unmonitored in California. Until last year, each landowner could use groundwater under his or her land with little or no constraint. This changed in September 2014 with the introduction of the California Sustainable Groundwater Management Act (SGMA) which requires the formation of regional groups of users to set up a monitoring and management system to reach sustainable use of groundwater resources. In the absence of action by such local collectives, the state reserves the right to exert its authority.
The recent OECD report, Drying wells, rising stakes: Towards sustainable agricultural groundwater management, shows that California is one among the many semi-arid regions in OECD countries that face a similar situation. Farmers have largely benefited from the development of groundwater irrigation, during what has been called the “silent revolution”. But they have also started to see the effects of intensive pumping as water tables have dropped, rivers and wetlands have dried up (even under rainy conditions), and salinity has intruded into fresh water bodies.
Although groundwater policies have begun to be put in place, many management systems still lack critical components to be fully effective. Information and data monitoring systems for groundwater remain largely insufficient. This is because not enough attention is paid to groundwater despite the fact that it will become even more important as climate change advances. A good management system will comprise regulation, the right economic incentives and collective action – the tripod approach in this figure:Some countries do not enforce the regulations they have put in place (resulting in tens of thousands of illegal wells), and other countries even give incentives, such as reduced-price electricity for pumping, which exacerbates the problem.
With its recent reform, California may now be moving in the right direction. While the implementation of SGMA will take time and will be challenging, it is encouraging that more and better information will foster a promising combination of collective management, new regulations and economic instruments. At a minimum, it will help ensure that farmers play an active role in managing this critical resource, rather than simply emptying nature’s “savings”, inducing lasting environmental effects and jeopardising their future. It could also help ensure that this dry region remains a major producer and exporter of a broad range of agricultural products.
Policies to manage agricultural groundwater use, 16 OECD country profiles providing an overview of the national and regional policies to manage groundwater use in agriculture.
Howitt, R.E., MacEwan, D., J. Medellín-Azuara, J. R. Lund, and D. A. Sumner (2015), “Economic Analysis of the 2015 Drought for California Agriculture”, Center for Watershed Sciences, University of California – Davis, Davis, CA, 16 pp.
Pacific Institute (2015) Impacts of California’s Ongoing Drought: Agriculture, Oakland California.
Giannini Foundation of Agricultural Economics (2015), “The Economics of the Drought for California Food and Agriculture”, Agricultural and Resource Economics Update, Vol 18 (5), University of California.
The second International conference on Groundwater management in agriculture will take place in San Francisco in June 2016.