In first, Environment Ministry to examine imposing carbon tax on polluters

Israel one of just 3 OECD countries without a tax or emissions trading program to cut gas emissions, but new workshop of experts suggests this might change

Sue Surkes is The Times of Israel's environment reporter

The unrecognized villages around Ramat Hovav in southern Israel suffer from a high level of air pollution from nearby chemical evaporation ponds, December 28, 2017 (Yaniv Nadav/FLASH90)
The unrecognized villages around Ramat Hovav in southern Israel suffer from a high level of air pollution from nearby chemical evaporation ponds, December 28, 2017 (Yaniv Nadav/FLASH90)

In a dramatic move for Israel, the Environmental Protection Ministry on Wednesday held a joint workshop of experts with the Bank of Israel to discuss global warming, its potential impact on the Israeli economy, and carbon taxation to tackle it.

Unlike most other OECD nations, Israel has neither a carbon tax nor a “cap and trade” program (also known as an emissions trading scheme) aimed at reducing and eventually eliminating the use of fossil fuels, whose combustion is destabilizing and heating up the global climate.

Nor, to date, has it carried out any in-depth examination of ways to deal with greenhouse gas emissions by making the polluters pay.

Unlike fixed rate carbon taxes, countries with emissions trading schemes set an overall limit for national carbon emissions and distribute permits to emitters setting out how many tons of carbon dioxide (CO₂) they can emit. The permits can be traded, without affecting the total overall emissions limit, and the prices vary according to supply and demand.

Israel is one of just three nations in the 37-member OECD (along with Turkey and Australia) that implement neither scheme. Of the 34 that do, 45 percent do cap and trade, 39% combine this with a carbon tax, and 8% impose the carbon tax alone.

Many central banks have been grappling for years with the impact of climate change on financial stability. The subject is increasingly being taken into account in economic discussions and decisions. In addition to the OECD, international bodies such as the UN, the International Monetary Fund, the European Union and the International Energy Agency today see global warming as a threat that demands policy responses.

Worldwide, the focus is on carbon dioxide, recognized as a major polluter and contributor to climate change. Similar steps have not yet been applied to emissions of methane — the main constituent of natural gas — even though there is increasing evidence that it contributes to global warming even more than CO₂ does.

Also, where carbon taxes are used, they tend to be imposed on the biggest emitters, the energy industry. In the coming years, it is expected that more sophisticated models will be developed to allow different carbon tax rates to be imposed on different sectors of the economy.

Environmental Protection Minister Gila Gamliel (Marc Israel Sellem/POOL)

“Carbon pricing is the most effective economic tool for reducing greenhouse gases,” said Gila Gamliel, the recently appointed environmental protection minister, at the start of the workshop. “In taking this step, we will join the overwhelming majority of OECD countries which price carbon, but also encourage energy efficiency.”

Bank of Israel Governor Amir Yaron said, “The debate on global warming and its implications for economic activity is occupying increasing time in economic discourse and decision-making processes around the world. Studying the subject and developing ways to prepare for its effects are part of the Bank of Israel’s research activities and raising awareness of this issue is important to me.”

A joint statement said that the ministry and the bank will work with other partners in the government to “examine these issues further, consult with stakeholders in environmental organizations and industry, and at the end of this process, will be able to recommend to the government the best policy on carbon pricing.”

The governor of the Bank of Israel, Amir Yaron, attends a press conference in Jerusalem, March 31, 2019. (Yonatan Sindel/Flash90/File)

Under the 2015 Paris Accords, Israel pledged to reduce its global warming gases from 10.1 tons per capita to 8.8 tons by 2025 and 7.7 tons by 2030.

The accords aim to limit the global temperature increase during this century to a maximum of 2 degrees Celsius above pre-industrial levels, while attempting to keep it down to 1.5 degrees.

According to a Bank of Israel research paper prepared for the confab, Israel will fulfill the pledges if the Energy Ministry completes the move from coal-fired power stations to natural gas ones by 2024 and reaches its aim of 30% energy from renewable sources by 2030.

The level of emissions per capita in Israel dropped from 10.5 tons in 2010 to 9.7 tons in 2017. Even without converting the power stations and increasing production using renewable energy, greenhouse gas emissions per capita are expected to reach 8.8 tons per capita as early as 2021, years before the target date.

The government has also said it expects to meet its obligation under the Paris Accords to achieve 10% renewable energy by 2020.

However, the BoI paper said expected attempts by European and other countries to make environmental targets more stringent and to impose stricter deadlines are likely to pressure Israel to go beyond measures already being planned, such as more electric cars and more renewable energy. If that happens, say the researchers, a carbon tax will be the way to go.

“Such developments, if they occur, may very well challenge the Israeli decision-making system,” the paper said. “Particularly in light of the intention to move the economy to gas (which contributes to global warming, even if much less than coal).”

An aerial view of the Tamar natural gas processing platform 24 kilometers off the coast of Ashkelon in southern Israel, October 11, 2013. (Moshe Shai/FLASH90)

Since the Paris Accords, both the US and Australia have backed down from their emissions reduction targets, while the European Union, conversely, is making them more ambitious. In a policy document last year, the European Commission committed to zero emissions by 2050 (a policy enshrined into law by Britain, France, Sweden, Denmark and New Zealand). The document also discussed sanctions — such as imposing special taxes or refusing to renew trade deals — on partners who fail to meet global warming targets, a move that could significantly affect Israel, given its substantial reliance on EU trade.

This photo taken on December 12, 2015 shows then Foreign Affairs Minister and President-designate of COP21 Laurent Fabius (C), raising hands with then Secretary General of the United Nations Ban Ki Moon (2-L) and then France’s President Francois Hollande (R) after adoption of a historic global warming pact at the COP21 Climate Conference in Le Bourget, north of Paris. (AFP PHOTO / FRANCOIS GUILLOT)

Subsidies to incentivize energy efficiency are full of weaknesses, cost a lot and are difficult to monitor, said the researchers. By making polluters pay, carbon taxes hit both manufacturers and consumers in the pocket, get them to internalize the real costs of a product, and help to change behavior.

“As these changes have not so far occurred through market mechanisms, and as there is no reason to think that they will occur on their own in the future, government intervention is needed,” the paper says.

The BoI paper quoted a 2019 paper by the International Monetary Fund, which proposed setting the carbon tax at $75 per ton of carbon dioxide emissions.

It said taxes paid on electricity in Israel are low compared with other OECD countries. Israelis therefore use it freely, contributing to the country’s emissions of global warming gases.

A worker installs air conditioners on the rooftop of an office building in central Jerusalem, on February 8, 2018. (Nati Shohat/Flash90)

The Bank of Israel’s researchers estimated that a carbon tax could cause the prices for fuels used to generate electricity to rise anywhere between 60% and 140% (except for diesel fuel, whose excise taxes are already higher than a carbon tax).

They propose that a carbon tax should be phased in gradually to enable businesses to adapt.

A separate document prepared for the meeting by the Environmental Protection Ministry also comes down in favor of carbon pricing, saying it guarantees market stability — the value of cap and trade, on the other hand, goes up and down — and is easier to collect via the existing tax infrastructure. It also notes that the excise taxes currently charged on fuels do not reflect their so-called “external,” real costs to the economy from the point of view of pollution and contribution to climate change.  In the case of crude oil, for example, the tax is just NIS 15 ($4.4) per ton, whereas the damage it causes through global warming is costed at 442 NIS ($129) per ton and the harm caused by pollution is valued at NIS 2,633 ($776) per ton.

Excise taxes from transportation bring in NIS 16.9 ($4.92) billion per year while the costs of road congestion amount to NIS 20 ($5.82) billion, accidents cost NIS 9 ($2.62) billion, pollution amounts to NIS 4.5 ($1.31) billion and global warming costs NIS 1.8 billion ($523 million).

Carbon tax rates vary in different parts of the world. While the IMF recommends a tax of $75 dollars per ton of CO₂, the OECD has recommended $45-$90 per ton up to 2020 and $55 to $110 up to 2030. In practice, the average tax per ton in the OECD has been $24, rising in recent years.

The Environment Protection Ministry has adopted the US Environmental Protection Agency’s calculation that the impact, or real cost, of each ton of CO₂ on society is $42 (NIS 140) per ton. The actual price of the carbon tax will still be determined, along with the sectors to which it is to be applied and the procedures and machinery for implementation.

Some of the income from a carbon tax could need to be used to help poorer populations hit by the rise in prices as well as local companies, the paper said.

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