Leaving No One Behind – Carbon Pricing in Israel & Germany

Artist: Daniel Goldfarb

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First experts’ workshop in the event series on the Transition to a Low Carbon Economy – Perspectives from Germany and Israel. 

On November 5th, 2020, The Israel Public Policy Institute (IPPI) hosted the experts’ workshop “Leaving No One Behind – Carbon Pricing in Israel & Germany,” in collaboration with the Israel Ministry of Environmental Protection, the Bank of Israel, and with support by the Heinrich Böll Foundation Tel Aviv and the Climate Fund of the German Federal Foreign Office, represented by the German Embassy in Tel Aviv. Experts from Germany and Israel came together to discuss the effects of carbon pricing on households and the industry.

Carbon pricing has increasingly gained attention across public debates in Israel, Germany and other European countries, as it is considered an efficient policy instrument for reducing carbon emissions across large parts of the economy. Putting a price on CO₂ emissions helps to correct a significant market failure, which occurs when the polluting actors do not pay for the damage caused by the carbon emissions of their economic activities. Charging emitters per ton of the CO₂ emissions embedded in their consumption sets an incentive to reduce emission-intensive behaviors and transition to sustainable, more climate-friendly practices. In the UK, for example, carbon pricing has been effective. According to a 2018 OECD report, carbon pricing led to a 58% reduction in emissions in the electricity sector and a 25% reduction in emissions in the overall economy.

The German Ambassador to Israel, H.E. Dr. Susanne Wasum-Rainer, kicked off the event by drawing attention to the urgent task of addressing climate change: “2020 was supposed to be an important year, with many opportunities to bring climate change and climate protection to the center of public awareness. Instead, our attention was drawn to the pandemic.” Nevertheless, stressed Dr. Wasum-Rainer, the fact that global warming and climate change continue to be a shared challenge for societies cannot be ignored, and it is crucial to take actions together to achieve a sustainable future. Dr. Wasum-Rainer expressed her excitement and encouragement towards the online workshop that gathered German and Israeli experts to discuss carbon pricing as a crucial step in promoting the transition to a low-carbon economy in Israel and in Germany.

 

Part 1: Carbon Pricing in Israel

Yuval Laster, Director of Policy and Strategy Division at the Israeli Ministry of Environmental Protection addressed the following issues: the need to put a price on carbon, the social cost of carbon, carbon pricing’s effect on the reduction of greenhouse gas emissions, the impacts for economic growth, and data regarding other OECD countries that have already introduced a price on carbon. According to Mr. Laster, carbon pricing in Israel is necessary because the Israeli market does not internalize the social cost of carbon, which is estimated at 42 USD/tCO₂. According to Laster, carbon pricing could contribute to a 67% reduction of greenhouse gas emissions while having a negligible impact on economic growth in the country. Mr. Laster concluded by noting that 95% of OECD countries already have a carbon pricing mechanism in place, with Israel and Turkey being the only exceptions.

Lior Gallo, Economist at the Research Division of the Bank of Israel, then continued by stating that in Israel, 80% of greenhouse gas emissions stem from the energy industries, which rely heavily on fossil fuels. He stressed that although there are alternatives to fossil fuels, Israel has yet to transition to renewable energy such as solar power, largely due to the costs of storing energy after it’s produced (whereas with fossil fuels, production and consumption happen simultaneously). Mr. Gallo presented the Structural Environment and Energy Model (S.EV.E.N.), which envisions a major decrease in electricity storage prices as a result of technological progress and reviews its impact on Israel’s greenhouse gas emissions in 20 and 30 years. The model found that such a development would have only a moderate effect, namely a reduction of emissions ranging between nearly 0% and 20% – which would allow Israel to meet the targets stipulated in the Paris Agreement, but not to achieve net-zero emissions. These findings, suggested Mr. Gallo, further stress the need for market intervention in the form of regulation.

 

Part 2: Effects of Carbon Pricing across Households and the Industry

While there are various forms of carbon pricing mechanisms, including different mixes of taxes, levies, and emissions trading systems, putting a price on carbon would also have economic consequences for individual households. Dr. Jan Steckel, Head of the Working Group on Climate and Development at the Mercator Research Institute on Global Commons and Climate Change (MCC), presented the policy paper he had written together with Leonard Missbach in the framework of the project on the distributional consequences of carbon pricing across Israeli households. Dr. Steckel found that without the proper compensation measures for households, carbon pricing in Israel would have regressive effects. Rural and lower-income households would be the ones most affected, Arab households would face the highest costs, Jewish Orthodox households would be the least affected, and car ownership would also play a key role in creating additional costs. According to Dr. Steckel, revenues from carbon pricing could be “recycled and redistributed to various groups of society including firms and households, go into the general budget, or be invested in environmental projects.” The effects of carbon pricing could thus become progressive, through lowering electricity prices or redistributing 79% of revenues generated from the introduced carbon pricing mechanism to households via a lump-sum transfer.

Avital Eshet, Head of Economic Policy and Enviro-Innovation at the Israeli Ministry of Environmental Protection, presented the Ministry’s research on the potential effects of carbon pricing on the market. She highlighted findings by the OECD and the World Bank, according to which, carbon pricing was found to have no statistically significant effect on competitiveness of the industry. This can be partially explained by the fact that due to tax exemptions and in the case of emissions trading systems with generous free emissions allowances, the carbon tax that was actually imposed in many cases was quite low. As Ms. Eshet explained, carbon pricing may have a negative impact in the short-run by increasing production costs, but in the long-run, it sets high environmental standards that drive innovation in clean technologies – which is the key to improving competitiveness.

The speakers then discussed the effects of carbon pricing on different sectors of the Israeli market, with Ron Kamara, Project Manager at EcoTraders, identifying the sectors that would be most vulnerable to carbon pricing, meaning would see their costs increase significantly as a result of a carbon tax in the amount of 140 ILS/tCO₂ (approximately 42 USD/tCO₂). Taking into account the energy intensiveness of each sector and how it stands to be affected by differences in taxation schemes between countries, the analysis found that four sectors – petroleum products and chemicals, rubber and plastics products, textiles and wearing apparels, and cement sector – are relatively vulnerable to short-term impacts on their competitiveness. According to the analysis, the overall tax burden – prior to adjustments triggered by the carbon tax such as fuel switching – is expected to range from 0.06% to 1.5% of revenue, depending on the subsector – but the implementation of emission reduction pathways can reduce this burden by 40% on an industry-wide level.

Finally, Dr. Michael Jakob, Senior Researcher at MCC, concluded the event with a discussion about Border Carbon Adjustments (BCA) being proposed in the EU, and raised concerns of the reduced impact of unilateral measures due to carbon leakage. From the EU perspective on BCA, Dr. Jakob highlighted four key issue areas that included the sector emissions to include in such an adjustment, how to measure the equivalence of trade partners’ climate policies, WTO law consistency, and the use of revenues. The current challenge is deciding which emissions to include in the EU Green Deal because only a few energy-intensive and trade-exposed key sectors are at risk of leakage, which on a global scale cannot be circumvented by BCA. Dr. Jakob highlighted two ways in which BCA could be successfully implemented, with the first being a border tax where imports are subject to taxes and supply to domestic producers or through applying Article XX from the World Trade Organization (WTO), which permits countries to go beyond regulations if one provides proof that it is appropriate and necessary for a higher objective, such as protecting the environment.  He noted that a carbon pricing strategy in Israel would help avoid the EU BCA, though it is still unclear whether the BCA will only assess equivalency on the basis of a national carbon pricing strategy or whether other climate policies, like renewable energy strategies, would also be considered. Finally, the presentation ended with a discussion about the viability of a BCA in Israel, which Dr. Jakob argues would be much more feasible, for technical and legal reasons, than in the EU case.

Following the workshop, the findings presented at the event regarding the effects of a carbon tax and its evaluation of schemes to compensate affected households were incorporated into the Ministry of Environmental Protection’s official policy planning process.

 

Speakers at the event:

  • Avital Eshet, Head of Economic Policy and Enviro-Innovation at the Israeli Ministry of Environmental Protection
  • Lior Gallo, Economist at the Research Division of the Bank of Israel
  • Dr. Michael Jakob, Senior Researcher at the Mercator Research Institute on Global Commons and Climate Change (MCC)
  • Ron Kamara, Project Manager at EcoTraders
  • Yuval Laster, Director of Policy and Strategy Division at the Israeli Ministry of Environmental Protection
  • Dr. Jan Steckel, Head of the Working Group on Climate and Development at the Mercator Research Institute on Global Commons and Climate Change (MCC)
  • Prof. Nathan Sussman, Professor of Economics at the Graduate Institute in Geneva & Former Director of Research at the Bank of Israel
  • Dr. Susanne Wasum-Rainer, German Ambassador to Israel
  • Amir Zalzberg, Head of Transportation and Fuel Department at the Israeli Ministry of Environmental Protection

 

 

 

 

 

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