Carbon tax in Israel: better imperfect than nothing at all – Note by Ruslana Rachel Palatnik
In September 2021 the Israeli parliament – the Knesset – gave its approval to the 2021-2022 state budget in its first reading. For the first time in the history of Israel, the budget introduces a carbon tax. The carbon tax is far from reflecting efficient emissions pricing: excise duty will gradually increase until 2028, reflecting the full price of carbon (which is also updated annually), but the tax on gasoline and diesel will reflect only 30% of the carbon price. In contrast, the excise tax on fuel oil will reflect not only the price of carbon but also the price of SOX depending on the Sulfur content.
There is a lot to criticize in the tax outline. But, in my humble opinion, this is a real revolution in Israeli policy. I have been studying energy & climate change economics for almost two decades and can testify that until recently, policymakers in Israel have refrained from dealing with environmental issues, arguing that in our small economy the priority should be given to other urgent issues such as unemployment, inflation, or geopolitical tension. Until a year ago, a carbon tax was absent from the agenda of the Israeli academy as well as the Ministry of Finance. The Ministry of Energy vehemently opposed it.
A combination of recent processes contributed to the dramatic change:
First, the COVID-19 pandemic has increased the government debt. The Ministry of Finance understood that raising VAT or income tax during the ongoing crisis means political suicide. Accordingly, the carbon tax backed by social-environmental rational suddenly became a feasible option for raising government income.
Second, for the first time in Israeli politics, the climate crisis has come out of the esoteric corner: the topic was included in the government’s guidelines thanks to the left-wing Meretz party that pushed to raise the issue upon joining the fragile coalition; carbon tax hit the Central Bank’s agenda thanks to the Governor Prof. Amir Yaron. Furthermore, the State Comptroller opened an investigation on how Israel copes with risks imposed by climate change. In parallel, the professional staff of the Ministry of Environmental Protection managed to collaborate with the other relevant Government Ministries, academics, and stakeholders in the process of formulating recommendations for carbon tax policy. The policy recommendations were based on research findings mediated to the various levels.
The outline of the carbon tax, planned for a long-term increase, has also an important role in providing certainty about Israel’s long-term policy as it sends an incentive for markets, entrepreneurs, and firms to effectively use various means to reduce emissions and invest in new technologies, processes and ideas to further reduce emissions.
The critics of the proposed tax are right – it is not optimal. I hope that decision-makers will be able to continue to update it, as well as to accompany it with supportive policies so that the State of Israel joins the global effort of reaching Net Zero at minimal cost for the economy and the society.
Ruslana Rachel Palatnik,
Senior Lecturer, Department of Economics and Management, The Max Stern Yezreel Valley College, Israel
Senior Researcher, NRERC- Natural Resource and Environmental Research Center, University of Haifa, Israel
Senior Guest Research Scholar at the Energy, Climate, and Environment (ECE) Program at IIASA- International Institute for Applied Systems Analysis, Austria