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Israel plans 2023 carbon tax after upping emissions reduction target

04 August 2021 Keiron Greenhalgh

Israel plans to introduce a carbon tax in 2023, rolled out in phases through 2028, according to the country's Ministry of Finance, in what would be the first tax of its kind in the heavily hydrocarbon-dependent Middle East region.

The 2 August unveiling of the carbon tax plans follows swiftly behind the government committing to a 27% emissions reduction target by 2030 and an 85% reduction by 2050, compared with a 2015 baseline. Those plans were also the basis for an updated nationally determined contribution submitted to the UN Framework on Climate Change Convention on 29 July.

The first phase of the carbon tax would apply to coal, liquefied petroleum gas (LPG), fuel oil, petcoke, and natural gas, the finance ministry said. Taxation of GHG emissions from landfills and other sources will be introduced in the future, it said in a statement (only in available in Hebrew).

However, the ministry said, the tax would be introduced in such a fashion that the price of electricity would not rise by more than 5% through 2028.

Diesel and gasoline will not be taxed any further as part of the scheme, due to existing levies, the ministry said. Taxation on transportation fuel is already among the highest in the Organisation for Economic Cooperation and Development (OECD), it added.

"The step we are taking today is historic and aligns with the developed countries that are struggling with the climate crisis," Minister of Finance Avigdor Liberman said in the statement. "We will continue to produce plans that will prevent economic-environmental damage and bring significant economic benefit in the long run."

Liberman's colleague Karine Elharrar, the minister of energy, added that lower socio-economic strata would not be penalized by the tax, with the government planning to introduce an aid fund.

The carbon tax will encourage investment in renewable generation, said IHS Markit Principal Research Manager Silvia Macri, as well as boosting power prices, which in turn will support distributed solar PV installations.

Israel currently has less than 2.5 GW of renewable power capacity, according to IHS Markit, with solar photovoltaic accounting for about 90% of that.

Israel is looking to source 30% of its power from renewable facilities by 2030 and has a 20% by 2025 interim target. The remainder will be gas-fired.

At the end of 2020, Israel had 19.5 GW of installed generation capacity, of which natural gas-fired plants accounted for 43.9% and coal-fired units 24.8%, according to IHS Markit.

Gas is the fuel of choice in Israel for non-renewable power for one reason, the country has substantial gas reserves, whereas the country's crude oil reserves are marginal, and all coal requirements must be imported.

The Tamar and Leviathan offshore gas fields have provided security of energy supply, export earnings, and the possibility of a stronger geopolitical hand. Israel is set to halt using coal for power generation by 2025 and hopes to eradicate use of gasoline and diesel in the transportation sector by 2030.

Path to carbon tax

The path to this week's carbon tax announcement was paved over 13 months earlier by the Ministry of Environmental Protection concluding that an examination of the implications of introducing penalties for pollution found carbon pricing would not hurt Israel's GDP or growth rates.

"We are gearing up in the battle against the global climate crisis. Carbon pricing is the most efficient economic tool to reduce greenhouse gas emissions," then environment minister Gila Gamliel said 10 June 2020.

Israel would be joining the vast majority of OECD countries in putting a price on carbon, she said, as well as introducing mechanisms that strengthen the environment and increase energy efficiency. An announcement on energy efficiency is in the pipeline, the finance ministry said when announcing the carbon tax this week.

A year earlier, the environment ministry said Israel could see the impact of climate change, and, unlike with the COVID-19 pandemic, it wouldn't be taken by surprise, and wouldn't ignore "the potentially huge risks associated with climate change—for society, the economy and the environment."

The ministry noted that the OECD specifically recommended the Israeli government consider carbon pricing through a fuel-excise mechanism that would cover 80% of GHG emissions.

GHG emissions reductions

A little over a week before the NDC submission and carbon tax announcement, Prime Minister Naftali Bennett and a cohort of ministers unveiled plans for cutting the nation's GHG emissions, the first time national goals had been set, the environment ministry said.

Among the targets the government set to meet the 2030 target of the 27% reduction from 2015 were:

  • Cutting carbon emissions from the electricity sector by 30% compared with 2015's 37.6 million metric tons (mt).
  • Reducing manufacturing sector GHG emissions by at least 30% from 2015's 12 million mt.
  • A minimum 47% reduction of carbon emissions from solid waste compared with 2015's 5.5 million mt. Part of the path to that target will be a 71% cut in the amount of municipal waste dumped compared with 2018.

The emissions plan is also targeting a 96% reduction in carbon emissions from the transportation sector by 2050, an 85% decline from the electricity sector, and a 92% reduction in municipal waste sector pollution.

Bennett also tasked Elharrar with setting 2050 renewable energy targets within 12 months of the Knesset approving the emissions plan, which it has yet to do.

IHS Markit expects Israel will add about 16 GW of on-grid renewables capacity by 2050, but believes it is unlikely the 2030 target will be achieved. IHS Markit sees 15 GW of renewable newbuild being needed to meet the 2030 target.

Floating solar is considered a crucial component in meeting the 2030 target, said Macri, with developers looking to reservoirs for siting their facilities.

Opposition from local communities and the Ministry of Defense means onshore wind has failed to take off and meet capacity quotas, despite applications being submitted and tariffs being higher than for solar PV, said Macri. Environmental concerns related to bird migration have also hindered the sector's progress, she said.

Posted 04 August 2021 by Keiron Greenhalgh, Editor, Climate & Sustainability Group, IHS Markit

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