The popular sources of news are reporting on the dangers of climate change , however the news and implications have not fully reached many of those that take public decisions in Israel.
There is a vast difference between the dangers and potential costs of climate change as these are expected to be on the one hand and the economic values used by various government ministries in Israel on the other hand.
I will start with some graphs on the reality of climate change so far and projected:
Considering that Israel is likely to suffer the consequences of climate change more rapidly and in a more extreme manner than most other countries, one would expect that those in charge of public policy in Israel would be at the forefront of of efforts to reduce the emissions of greenhouse gasses, the primary cause of the rising temperatures. The reality however is far from so.
The following chart was included in the recent draft proposal of the Electricity Authority to raise the 2030 target for renewable energy in Israel. The chart shows the percentage of renewable energy in various EU states in 2018. By comparison in 2018 Israel generated less than 3% of its electricity from renewable sources. Less than any of the EU states. In short the gap between Israel and the EU has become embarrassing, which has prompted the Energy Ministry to raise its target for 2030 to 30% renewable energy. This is a positive development in itself, however it is far short of what is needed to significantly reduce the emissions of greenhouse gasses. One reason that is so is that the consumption of electricity by 2030 is expected to increase more than the increase in renewable energy generation, leading to more generation of energy from natural gas than is presently the case. This will lead to increased emissions of greenhouse gasses . Another factor leading to higher greenhouse gas emissions than was previously the case in Israel is the offshore production and processing of natural gas (methane), itself a powerful greenhouse gas .
As part of its current proposal to raise the renewable energy target for 2030 to 30% the Electricity Authority has released its technical and financial reasoning behind the decision. Included in the documentation released are its calculations as to the economic valuation of the damage caused by the release of greenhouse gasses and hence the economic value of the reduction in such damage in the event that renewable energy targets are raised.
The pricing of the damage caused by the release of greenhouse gasses is highly significant with respect to many aspects of environmental and financial policy, and mostly very poorly understood, which is why I am writing about it here.
The Electricity Authority did not claim to know how to price the damage caused by greenhouse gasses , technically known as the external costs, however they did specify an upper and lower bound for such damages. The lower bound at 21 ₪ (6$) per ton carbon dioxide (Co2), or equivalent, emitted is based on published values released by the USA Environmental Protection Authority in 2017. The upper bound taken the Electricity Authority was 140 ₪ per ton (42$) as specified by Israeli Ministry of Environmental Protection. The value specified by the Israeli Ministry of Environmental Protection is also based on the values specified by the USA Environmental Protection Authority, however in 2016.
For the purpose of the following discussion it will be useful to consider the raison d’être for the calculation and consideration of environmental costs , specifically those associated with greenhouse gasses, when economic decisions are taken.
The deleterious effects of the emission of greenhouse gasses are qualitatively different than those caused by many other pollutants. The release of greenhouse gasses for the most part causes no discernible effects at the time and place of release. The gasses will rapidly disperse over the globe. The effect will thus be felt globally and over the long term. This is because many greenhouse gasses will remain in the atmosphere for a long time , in some cases for hundreds of years.
Were the effects to be immediately felt locally the affected country would have a strong incentive to stop the emissions and the affected population might have recourse to the legal or political systems to seek recompense. However as the effects are cumulative and widely dispersed over time and place, existing legal and political systems are largely ineffective.
This was recognised almost 30 years ago and the vast majority of countries (notably excluding the US) signed on to the Rio Declaration on the Environment and development. This included a number of principles most importantly:
- (2) That States have the responsibility to ensure that activities within their jurisdiction do not cause environmental damage elsewhere.
- (3) The right to development must be fulfilled so as to equitably meet developmental and environmental needs of present and future generations.
- (16) National authorities should endeavor to promote the internalization of environmental costs and the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution ..
The internalization of environmental costs and the principal that the polluter should pay the cost of pollution coupled with the principal of treating equitably current and future generations taken are means. The end in this case is the cessation of global environmental damage current and future.
The USA Environmental Protection Agency 2017 pricing
Having thus gone over the principles involved I will now return to the calculations as specified by the Israeli Electricity Authority. The lower bound at 21 ₪ (6$) per ton carbon dioxide (Co2) or equivalent released is based on published values released by the USA Environmental Protection Authority in 2017. These values expressly include only damage caused within the USA and exclude any damage caused elsewhere in the world. The use of these values as guidance by the Israeli Electricity Authority is ridiculous as damages within Israel are excluded along with any and all damages which will occur outside the USA.
The Israeli Ministry of Environmental Protection’s /USA Environmental Protection Agency 2016 pricing
The upper bound used by the Israeli Electricity Authority 140 ₪ per ton (42$) as specified by Israeli Ministry of Environmental Protection is more interesting as it takes longer to specify why it is totally inappropriate. The Israeli Ministry of Environmental Protection based its calculation entirely on values specified by the USA EPA (Environmental Protection Authority) in 2016. These values have since been withdrawn by the USA EPA a fact which did not deter the Israeli Environmental Ministry from relying on them in its latest specification in 2020. The Israeli Environmental Ministry did not adjust for the deprecation of the dollar since 2007, about 25%, however there are other problems larger than that ..
The 2016 USA EPA documentation has been removed from official USA government websites, however can be found on unofficial repositories. The costs displayed are based on damages calculated as a result of greenhouse gas emissions. The damages were calculated by computer simulations run by different methodologies. The damages calculated were discounted by various percentages to reflect the authors presumption of how much people care about future damages. The final results were as follows:
For 2020 a chart was also supplied:
What is remarkable about the values supplied for 2020, 12$,42$,62$ is that they are all based on exactly the same results of the various simulations. The difference between the values is entirely due to different discount rates, essentially a value decision as to how much we care or not about future economic damage to following generations.
It is possible to calculate the real economic damage if discounting was not used or the discount set to 0. This can be seen as follows:
Curve fitting on the supplied values indicates that the actual economic damage calculated per ton of co2 was about $350.
In short Israel has signed on to the Rio Declaration on the Environment which clearly states that equitable value should be placed on the developmental and environmental needs of present and future generations. This plainly precludes discounting as above and indicates that the value 350$ should be used rather than 42$ as currently proposed.
There are other shortcomings in the USA EPA 2016 estimates of the damages caused. Some of these are explicitly stated in the documentation. These include:
- Incomplete treatment of non-catastrophic damages. ( Species & Wildlife Loss, Ocean acidification ..)
- Incomplete treatment of potentially catastrophic damages. ( such as the collapse
of the Atlantic Meridional Overturning Circulation or the West Antarctic Ice Sheet, or large releases of methane from melting permafrost and warming oceans. )
- All of the potential damages are calculated using various simulations and models. There is absolutely no way to verify these results.
- The values calculated explicitly exclude the top 5% of catastrophic events. This in itself causes a significant reduction in damages calculated.
In short the effect of using the values supplied by the USA EPA 2016 is to highly discount the damages expected to be caused by the emissions of greenhouse gasses.
The Bank of Israel 2020 /Staff of the International Monetary Fund 2019 pricing
The Bank of Israel has recently released a report on the deliberations of its research unit concerning the possibility of implementing a Carbon (Greenhouse Gas Emissions) Tax in Israel .The principal motivation for the deliberations is the perception that international and more particularly European pressure for effective action on Greenhouse gas emissions may rise in the coming years. In that case the implementation of a Carbon Tax is seen as an effective measure to bring about reductions in the release of Greenhouse Gasses in Israel.
I find it odd that Israel, which will likely be impacted more by climate change than Europe, needs prodding from Europe to get serious on the issue of Climate Change. However currently that is the case ..
Implementing a Carbon Tax, if the rates involved are substantial, will be a positive development.
The rate suggested in the Bank of Israel paper is 75$ per ton co2 or equivalent. This value is taken from a report by the staff of the IMF.
How the staff of the IMF reached this universal number is somewhat unclear. The justification for 75$ in their paper is basically that this is an estimation by the staff of the IMF.
The value 75$ does have the advantage of seductive simplicity, however in the real world taxes have to be justified and the rational explained. It is pertinent to ask what reductions in emissions would actually be achieved in Israel if and when this tax is implemented ?. There is a good deal of uncertainty about all off this and I will expand on that below.
The basic rational behind the staff of the IMF paper, and many other recent efforts on similar lines, is to use carbon taxes to improve the economics of non polluting, or at least less polluting, methods and technologies relative to those of polluting methods and technologies. Polluting methods and technologies will thus become relatively more expensive and will , at some stage, be replaced by the non polluting methods and technologies.
For a carbon tax to be effective there are a number of fairly obvious prerequisites:
- The rate of the tax must be high enough to ensure a significant price advantage for non polluting methods and technologies.
- Non polluting methods and technologies must be readily available in sufficient quantities.
- The carbon Tax should cover all, or as much as possible, of the emissions.
In practice, as their are many different sources of emissions and and different potential non polluting replacements, the amount of tax needed to tip the balance in favour of non polluting technologies is highly variable and not reducible to any specific value.
We may take as an example the case of electricity generation. Stopping the release of greenhouse gas emissions means replacing electricity currently generated in power stations by burning gas or coal with renewable energy, in the case of Israel principally solar. The cost of electricity generated in a gas or coal power station will vary depending on the technology used and between existing fossil fuel power stations where the costs of installation have already been accounted for and potentially new power stations where the costs of installation have not already been paid. The costs of replacement solar power will also vary greatly depending on both type of installation e.g. rooftop, solar farm etc and time of day and year. Renewable energy will be relatively cheap at midday summer and progressively more expensive at night where energy storage will be essential, and in winter when more and different types of energy storage will be needed.
The net effect of all of this is likely to be that a carbon tax pf 75 $ per ton will be sufficient to make renewable energy cheaper as a source of electricity for a considerable part of the supply spectrum, however this is unlikely to suffice to enable the complete cessation of greenhouse gas emissions.
The same is true for other sources of emissions, some of them will be made more expensive than the non polluting alternatives , however by no means all of the emissions.
In order to render a fuller range of greenhouse gas emissions more expensive than the alternatives, higher values will have to be used. The values suggested by CE Delft, an independent research and consultancy organisation advising on environmental issues are 100€ per ton of co2 emissions in 2020 rising to 270€ circa 2040. CE Delft is used as a source of valuations for other pollutants by the Israeli Ministry of Environmental protection ..
For any Carbon Tax to be effective there has to be readily available non polluting alternatives. In the case of electricity supply this means renewable energy. In Israel currently there are regulatory impediments to a rapid ramping up of renewable energy supply. Israel is a highly regulated economy especially with regard to land use. There has been some progress made in reducing regulatory impediments to solar installations , however much more is needed.
The potential of roofs for the generation of solar energy is far from being realised despite the fact that the prices being paid for solar energy installed on small roofs are quite generous. Not all roofs are suitable and some are already in use for other purposes , however one can look at history for some ideas how to proceed. In 1976 , in light of the energy crisis at the time, a law was passed making the installation of rooftop solar water heating mandatory on new buildings. Solar Water heating remained the most prevalent and productive form of renewable energy in in Israel until this year. In 2012 Solar Water heating was reckoned to have lowered the need for electricity generation by about 4 TerraWatt hours or about 6% of the electricity generated at the time. In short making solar electricity generation mandatory on new buildings and infrastructure is one obvious next step.
There are other steps which could be taken such as enabling the Electricity Company, or other companies, to offer to install solar panels in exchange for payment. This would take much of the hassle out of the installation and management of solar power in a residential setting. When inducements are insufficient, other means could be used such as taxation of roof space not used for energy generation.
Roads currently cover about 350 square kilometers of Israel or more than 1.5% of the land area. Dual use for electricity generation will be enabled by constructing supports above roads. The potential is considerable. More than half of current electricity consumption could be generated in this manner , with the added advantage that most of the roads are within short distances to consumers , which will considerably lessen the need for expensive and time consuming construction of additional transmission infrastructure.
Agricultural land and open spaces could potentially supply far more energy than is actually needed. There is sensitivity around these usages, however climate change is an existential threat to both agriculture and wildlife in Israel so a realistic balance should be found.
I have mentioned these few possibilities out of others to emphasise that there is no shortage of potential to supply all of the energy consumed in Israel from renewable sources. There is however a lack of imagination and political will.
There is another aspect to a carbon tax which it is worth while exploring. What will the tax proceeds be used for ? The Bank of Israel assumes that they will be used as any other tax revenues. However there are a number of reasons to prefer that the income collected should be used to help pay for the transfer to non polluting technologies and also the sequestration of greenhouse gasses. The advantage of using the proceeds to finance the transfer to non polluting technologies is clear. Using the money in this way will be twice as effective, as just taxing the pollution, in creating an economic advantage for non polluting technologies. If the proceeds are used to finance non polluting technologies a lower level of tax will be needed to achieve the same effect, which will be easier politically.
Also if the State just uses the proceeds as a source of income, technically the State is not internalising the cost of pollution at all. The State will also have a vested interest in preserving polluting processes as a source of income. This is not just theoretical. Currently there is an expectation among many politicians and economists that Israel will benefit from income from the exploitation of natural gas reserves. This leads to a lack of interest in curtailing the gas industries and the inherent emission of greenhouse gasses. So far far the Energy Ministry has refrained from even considering renewable energy targets above 30% in 2030. The effect of this, if unchanged, is to lock in usage of gas as the principal energy source at around 70% in 2030.
In Conclusion – How to price Carbon.
Having dissed the various approaches currently adopted by various government ministries I will set out how I think the issue should be dealt with.
There is no reliable way to set an upper limit for the potential damages caused by climate change. However, as a practical manner, we need some figure to work with as a basis for a Carbon Tax. So considering the results of the USA EPA simulations 500€ (Euro) per ton of Co2 or equivalent emitted is a reasonable price. This likely has the advantage as well as being well above the the generic cost of sequestration and permanently removing carbon dioxide from circulation.
In order for any economic measures to be effective they will have to be accompanied by appropriate regulations and enforcement.
Garnering political support for measures, on the scale needed, is critical. The UK set up in 2008 its own independent climate change committee providing advice to the government. The UK committee on climate change, has provided the technical and economic rationale for the recently adopted law in the UK mandating net zero emissions of greenhouse gasses by 2050. It is high time for Israel to set up its own independent climate change committee.
As a final note I will add that various government ministries are taking some steps to reduce emissions and facilitate the transfer to renewable energy. The Energy ministry is increasing its renewable energy target for 2030 to 30%. The Environment Ministry has put out its own somewhat more ambitious proposals specifically objecting to current plans to set up more gas powered peaker power stations. The upcoming budget proposals include some measures to facilitate renewable energy installations.Any substantial carbon tax will be an improvement on the current total absence of a carbon tax. And so on.
However, Israel and the Middle East are highly vulnerable to the deleterious effects of climate change. Hence treating the root causes of climate change, in a timely and effective manner is essential for the future security and economy of Israel and the rest of humanity.
On Modeling and Interpreting the Economics of Catastrophic Climate Change
Martin L. Weitzman