Abstract
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 (OECD 2018), carbon pricing led to a 58 reduction in emissions in the electricity sector and a 25 reduction in emissions in the overall economy. Accordingly, carbon pricing has become a common policy instrument around the world, especially among OECD countries. Of the 185 signatories to the Paris Agreement, 96 countries, which account for 55 of global greenhouse gas emissions, indicated that they use, or plan to use carbon pricing as a tool to meet their emission reduction goals (Ramstein et al. 2019). 92 of countries in the OECD, of which Israel has been a member since 2010, have a carbon pricing mechanism in place in order to reduce carbon emissions (carbon pricing, emissions trading or a combination of both), i.e. all countries except Turkey, Australia and Israel. To keep up with Israel’s commitment in the framework of the Paris Agreement, Israeli policymakers are currently looking to advance a national carbon pricing plan that will support the decarbonization process of the Israeli economy. 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. Thus, a carbon price can be a highly sensitive and politically delicate task, particularly in times of a global epidemic and economic turmoil. Its introduction thus requires a transparent and inclusive design which addresses the potential adverse economic effects on households. Against this background, the following paper aims to provide decision makers and experts with tangible findings and insights on which segments of the population in Israel might be negatively impacted by a carbon pricing reform. It can help to address socially unbalanced outcomes as part of the planning process. Examining how different types of Israeli households would be impacted by a carbon pricing reform, the analysis presented in this paper reveals that if no further policy measures are taken, a carbon price in Israel will have regressive distributional outcomes: In relation to their total expenditures, low-income households would be more adversely impacted by the higher costs associated with carbon pricing than richer households. In addition, Arab households, rural households or households that own (and use) a car would be affected to a greater extent than other households. In order to advance a balanced and effective carbon pricing scheme in Israel, one that affords protection for lower income households, some of the generated revenues could minimize the additional cost burdens through the introduction of redistribution mechanisms. As demonstrated by the different scenarios presented in this paper, lump-sum transfers (diverted from the carbon pricing revenues) could lead to progressive outcomes. In addition, this paper contains information on subsidy schemes, for instance on electricity prices, public transportation and food, which would ultimately alleviate unintended distributional consequenc
