The tragic wildfires in Los Angeles are being partly attributed to climate change intensifying a drought in the area.
Last November, the OECD reported on how 79 countries around the world are tackling the international environmental crisis (“Pricing Greenhouse Gas Emissions 2024”).
Broadly, there are three main economic techniques: (1) energy taxation; (2) carbon pricing, or Emissions Trading System (ETS); and (3) reducing energy subsidies, such as bus companies.
Recent progress was negative due to the inflation/energy crisis, which resulted in higher government energy subsidies.
According to the OECD, “There is no silver bullet for carbon pricing and energy policy as countries have opted for a complex array of policy instruments to mitigate climate change that suit their economic, political, and social circumstances.” In other words, it’s not going too well.
Energy taxes
According to the OECD, 75 out of 79 countries covered tax energy use, but only for about 47% of energy use – not on international aviation or sea transport, for example. They account for only about 3.2% of fiscal revenues.
Fuel excise taxes are most commonly implemented. But energy tax revenues are falling as we gradually switch from fossil fuels to electric cars, heat pumps in buildings (instead of gas boilers), and electrification of industrial processes. Many governments are considering a sales ban on internal-combustion engines (including Israel in 2030).
Electric cars accounted for 18% of all cars sold in 2023, up from 2% in 2018.
Assuming no changes in rates of specific energy taxes and carbon prices, total revenue losses could amount to €76 billion in 2030.
What are governments doing to top up tax revenues? Possibilities include phasing out purchase subsidies and tax breaks for electric vehicles, and distance-based road-use charges. Norway has begun taxing ferries and municipal parking.
Governments are also turning to ETS carbon-pricing instruments, i.e., making the polluter pay.
EU example of ETS
According to the European Union, its ETS makes polluters pay for their greenhouse-gas (GHG) emissions.
It covers emissions from the electricity and heat generation, industrial manufacturing, and aviation sectors, which account for roughly 40% of total GHG emissions in the EU. The EU’s ETS operates in all EU countries plus Iceland, Liechtenstein, and Norway, and it is linked to the Swiss ETS.
The EU’s ETS is based on a “cap and trade” principle. The cap refers to the limit set on the total amount of GHG that can be emitted by installations and operators covered by the system. This cap is reduced annually in line with the EU’s climate target so that overall EU emissions decrease over time.
By 2023, the EU’s ETS had helped bring down emissions from European power and industry plants by about 47%, compared with 2005 levels.
The EU’s ETS cap is expressed in emission allowances, with one allowance giving a right to emit one ton of carbon dioxide equivalent (CO2eq).
Allowances are sold in auctions and may be traded. As the cap decreases, so does the supply of allowances to the EU carbon market.
Since 2013, the EU’s ETS has raised more than €175b. from selling allowances and fines.
The EU hopes to reduce its net emissions by 55% by 2030, compared with 1990 levels.
The situation in Israel
Last July, the Environmental Protection Ministry published its 2023 report for monitoring the implementation of Government Decision No. 1282 – a national 100-step plan to prevent and minimize air pollution and greenhouse-gas emissions in Israel.
The ministry admitted there have been delays, which it only partly attributed to the Israel-Hamas War.
The OECD has reported on Israel’s slow progress (“OECD Environmental Performance Reviews: Israel 2023”).
According to the OECD, Israel has raised its climate ambitions in recent years.
It has set an 85% GHG reduction target for 2050, as well as sectoral targets for GHG emissions from electricity generation, solid waste, transportation, and industry.
Israel is not on track to reach these targets, however, and it will need to introduce additional measures across all sectors.
Adopting the government-approved draft Climate Law with its binding targets should help. Israel intends to tax kilometers traveled starting in 2026.
According to the OECD, Israel’s excise taxes on motor fuels are among the highest among OECD countries. Israel is planning to gradually increase excise taxes on other fossil fuels so that carbon pricing would cover about 80% of its GHG emissions.
The OECD thinks Israel’s fossil fuel subsidies for buses, as well as support for natural-gas producers, should be phased out.
As always, consult experienced professional advisers in each country at an early stage in specific cases.
Leon@hcat.co
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.