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Is it in Israel’s Best Interest Economically to Pursue Green Energy Development?

Olivia G. G. Bedford

The University of Texas at Tyler

ECON 4340: The Economics of Growth and Development

Dr. Luis Gautier

December 1, 2021
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Abstract

Israel is a growing economic superpower in the Middle East despite its small size and relative

youth compared to its long-established neighbors. However, it is an extremely ambitious nation

both economically and environmentally, and it is currently exploring avenues through which it

can simultaneously achieve greater prosperity and a smaller environmental impact. Israel is a

signatory of the Paris Climate Agreement and is a part of the United Nation’s 2030 Agenda for

Sustainable Development, and as such it is looking towards increasingly zealous methods for

reducing its greenhouse gas emissions and increasing its reliance on renewable energy. Sadly,

most previous attempts to achieve similar goals have been either totally unsuccessful or

unrealistically costly. However, an analysis of implementing a moderation carbon tax, expanding

Israel’s natural gas industry, and transitioning to a predominantly nuclear energy base shows

that this is likely the most beneficial path that Israel can take towards its goals.
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The Economy of Israel

The State of Israel is located along the coastline of the Mediterranean and is a neighbor to

Egypt, Jordan, and Syria. The history of Israel spans many thousands of years of conflict and

conquest in the Middle East, but this analysis will focus on the modern Jewish state. The nation

of Israel as we know it today was formed in May of 1948 following the mass genocide of the

Jewish people during World War II. The early days of its creation were filled with bloody

infighting between Arab residents and their Jewish neighbors, now known as the Arab-Israeli

War, and as such the nation’s economic prospects in the beginning were fairly dismal. Its

economy at the time of its founding was primarily agrarian in rural areas with various artisans,

merchants, and tradesmen taking up occupation in the capital city of Jerusalem where a modest

tourism industry thrived (Elath, et al.). However, the influx of hundreds of thousands of displaced

Jews into the tiny country served to multiply its skilled workforce quite suddenly, and it took less

than a decade for Israel to begin experiencing consistent GDP growth and rapid technological

advancements, as well.

Israeli Real annual GDP in constant 2015 USD,

1995-2020, World Bank
GDP in constant 2015 USD

400000000000
300000000000
200000000000
100000000000
0
1990 1995 2000 2005 2010 2015 2020 2025
Year

Today, Israel’s population teeters near nine million citizens whose standard of living and quality

of life rank near the top out of all countries in the world. Its ethnic makeup remains

predominantly Jewish at 75% of the total population, with Arabs making up approximately 20%
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of the population as the second-largest people group in the country (Israel). Its economy has

shifted dramatically from its agrarian origins and is now primarily service-based, with industries

such as technology, lumber, paper products, pharmaceuticals, and natural gas making up a

significant portion of overall GDP (Israel). The Israeli economy operates essentially like an

island-nation, where the majority of its raw materials must be imported from its foreign partners,

as Israel’s limited indigenous resources are not sufficient to support the needs of its ever-

growing population. However, one major facet of Israel’s economy is the natural gas sector,

which exploded in the early 2000’s after the discovery of the Tamar and Leviathan gas fields off

of the coast of Israel. These vast stores of natural gas easily have enough resources to provide

energy for the entire nation for nearly 200 years, with plenty left over for exporting to foreign

countries as well (Israel Science & Technology). Additionally, the discovery of natural gas has

provided a significant boost to the Israeli economy by greatly decreasing its reliance on

imported oil and gas from its neighbors and thus saving the government millions of dollars in

imported energy annually.

Electricity production from natural gas sources in Israel as a % of total elec-

tricity production, 1971-2015 (World Bank)
60
50
% of total electricity

40
production

30
20
10
0
1960 1970 1980 Year 1990 2000 2010 2020
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Developmental and Environmental Challenges Facing Israel

The State of Israel is currently experiencing various developmental and environmental

challenges which have arisen largely due to the mass immigration and constant conflict which

occurred during its founding years. These major events in the country’s history have had a

resounding impact on Israel’s society, economy, and environment decades after they ended.

First, the sudden influx of nearly 700,000 displaced Jews in 1948 after the creation of the State

of Israel set up the nation for near-constant issues of over-crowding and congestion in major

cities, particularly Jerusalem. Resolving this problem is far easier said than done, as Israel’s

total area is approximately 8,000 square miles, nearly twelve times smaller than the state of

New York (Israel). The government faces a tremendous trade-off when considering expanding

its urban areas, as the Israeli people place a high value on the country’s natural beauty and

wildlife population, yet the need for space to grow does not go away. As a result of over-

crowding, significant air pollution from transportation has been an ongoing issue, and the Israeli

government expends approximately $9 million US dollars annually to correct for the externalities

that result (TOI Staff).

Secondly, wealth inequality has similarly been a continuous conundrum for Israel. Despite

steady increases in GDP every year, the high costs of living in urban areas and prices of

electricity cause significant wealth gaps between the ultra-wealthy and the rest of Israel’s

population. For example, the average salary for an Israeli is approximately $2,000 US dollars

per month. Basic utilities for a 915 square foot apartment are roughly $245 dollars per month,

and the cost of energy is around $0.22 per kilowatt-hour. In contrast, the average monthly salary

for a resident of Dallas, Texas, is around $6,000, and basic utilities for a 915 square foot

apartment cost $165 per month (Cost of Living in Dallas). Additionally, Texas residents usually

pay approximately $0.10 per kilowatt-hour of energy. Overall, the cost of living in Israel is 26%

higher than the average cost of living in the United States (Cost of Living in Israel). Of course,
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this is not a contrast that can be applied for every state in the US, but even on the international

scale Israel scored poorly on the wealth inequality index, ranking in the top ten out of thirty-eight

OECD member states with the highest proportion of wealth inequality in 2020 (Income

Inequality). Because of this, any energy or economic policy that is enacted must be carefully

scrutinized for its projected impact on Israeli living costs.

1 World Estimate Gini Index for Israel, 1975-2017 (World Bank)

Finally, as a member of the United Nations and a signatory of the Paris Climate Agreement,

Israel takes its commitment to combating climate change very seriously. Progress in this area

focuses primarily on decreasing overall greenhouse gas emissions in the energy and

transportation sectors, in particular, as these are the primary contributors to both overall

emissions and air pollution in Israel. In fact, transportation is the main source of emissions at

least in terms of financial cost, comprising approximately 38% of the annual costs incurred from

emissions, and it is also the prime culprit of air pollution in major cities like Tel Aviv and

Jerusalem (TOI Staff). Developing its natural gas sector has significantly assisted in bringing

down Israel’s greenhouse gas emissions as it is naturally lower in emissions than oil or coal, but
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Israel has set an ambitious target for reducing its emissions by 85% by 2050 through

aggressively shutting down the use of oil and coal, and switching to predominantly natural gas

and renewables to power its cities and vehicles (Jerusalem Post Staff). However, with wealth

inequality remaining a prominent issue for policymakers and economists in Israel, such dramatic

(and costly) changes to Israel’s infrastructure could potentially add fuel to the fire and bring

about even more significant disparities in the wealth of Israel’s population.

Electricity production from oil

Israeli electricity production from oil Israel electricity production from coal sources

Electricity production from

sources (1971-2015), World Bank (1971-2015), World Bank
100

coal (% of total)
150
(% of total)

80
100 60
40
50
20
0 0
1960 1970 1980 1990 2000 2010 2020 1960 1970 1980 1990 2000 2010 2020
Year Year

Unfortunately, Israel faces a conflict of interest when it comes to its efforts to remedy its

societal, economic, and environmental maladies simultaneously. Expanding its cities to

compensate for overcrowding will inevitably have environmental impacts, while refusing to

expand will continue to exacerbate air pollution and continue to produce high concentrations of

greenhouse gas emissions. Decreasing its reliance on oil and coal for electricity generation will

inevitably decrease Israel’s emissions, but the switch will undoubtedly cause significant

increases in electricity prices, and the construction of renewable power plants will also require

large amounts of land and funding in order to meet the energy needs of the entire nation. As of

2020, Israel’s installed photovoltaic (solar) energy capacity was approximately 1200 Megawatts

for the entire country; in order to reach Israel’s ambitious 2050 targets, however, this capacity

would need to increase nearly sevenfold in order to generate the amount of electricity needed to

supplement the targeted energy production from natural gas (Statistical Review of World

Energy). Conversely, relying exclusively on natural gas could prove to be too volatile for the
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Israeli market to pursue sustainably, as fluctuations in the world market price for natural gas are

more frequent and more dramatic than fluctuations in the price of oil. As a final blow, electricity

consumption in Israel is projected to nearly double by 2040 (Israel – Renewable Energy).

Simply put, a combination of natural gas and renewable energy sources is simply unrealistic for

Israel’s needs, both present and anticipated.

Thankfully, the situation in Israel is far from hopeless. There are many opportunities for

achieving environmentally friendly energy policies while still maintaining a strong economy. The

Israeli government has explored many different methods for decreasing greenhouse gas

emissions in the past, but few have succeeded due to high costs and difficulty of implementation

on a large scale. In the following section, these previous attempts will be discussed, as well as

policy recommendations for future implementation.

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Policy Recommendations

Many solutions to Israel’s economic and environmental issues have been proposed over the

years, and have encompassed a large range of potential avenues for progress. For many years,

nuclear power was a highly attractive option for creating a stable and cost-effective energy

market in Israel, and these pursuits had the financial backing of pro-nuclear nations such as the

United States and France (Bahgat). Unfortunately, due to the proliferation of anti-nuclear

rhetoric and the nuclear reactor meltdowns at Chernobyl in the mid-1980’s and again more

recently in Fukushima in 2011, the Israeli government decided to pursue other means of

electricity production that were more popular with the general public as well as with other

developed nations. More recently in 2010, former Prime Minister of Israel Benjamin Netanyahu

allocated $400 million to the construction of a wind turbine farm in the Golan Heights;

unfortunately, this plan was never realized, and Israel’s miniscule renewable energy sector is

now almost exclusively made up of solar power (Israel – Renewable Energy). Recently, the

various policy reforms proposed by the Israeli government in recent years have become

increasingly aggressive in their plans for implementation, and far more ambitious in their

proposed timeline for achieving their goals.

As a participant in the United Nation’s 2030 Agenda for Sustainable Development, Israel has

recently established a lofty goal of reaching 70% of total electricity generated by natural gas and

the remaining 30% of electricity generated by renewables in the next decade; however,

according to the table below, both of these sectors will require aggressive expansion measures

in order to meet these target goals by the proposed deadline (Israel – Renewable Energy). In

this scenario, Israel would ideally become like Norway, which is a proudly low-emission country

which still engages in exporting oil and gas to other nations without consuming any itself.

According to the Abraham Accords which were enacted in 2020, Israel and its neighbors have

established a friendly trade agreement for oil, gas, and solar, but its plans to reduce emissions
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will likely see it gradually cease the import of oil into the country and instead focus on the

natural gas it can export instead (Keinon). Interestingly, it seems unlikely that Israel truly needs

the aggressive policies that have more recently become a trend in its policy proposals. The

policy recommendations that follow are the result of an analysis of the policies most likely to

bring about sustainable and environmentally-friendly development in the State of Israel without

placing an undue burden on the population or the market.

First, a moderate carbon tax would likely be of great benefit to Israel both financially and in

terms of reducing carbon emissions in pursuit of their 2030 goals. There are currently no explicit

carbon taxes being implemented in Israel other than general taxes on carbon-emitting

substances such as gasoline and liquefied petroleum, but the Israeli government has issued

public statements making clear that it hopes to begin levying a carbon tax as soon as 2022

(Taxing Energy Use 2019). A carbon tax would indeed be advisable to implement, but an

analysis of the Czech Republic as a proxy for Israel reveals that excessive taxation is

unnecessary for achieving emission reductions. The Czech Republic is comparable to Israel in

terms of GDP, population size, and governing structure, and it is therefore a suitable proxy for

evaluating the likely impact of various environmental and economic policies on the nation of

Israel. The below graph shows the relationship between annual greenhouse gas emissions for

the Czech Republic, and the corresponding Environmental Policy Stringency index values over
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a period of nearly two decades. Clearly, there is a correlation between decreasing emissions

and gradual increases in the stringency of implemented environmental protection policies.

2) OECD values for GHG emissions and ESI values

However, the Czech Republic has two interesting characteristics: its ESI values are quite

moderate relative to other nations, and its carbon tax is among the lowest carbon taxes levied

by any other OECD Member State (Czech Republic 2021). This tax has largely been beneficial

to the Czech Republic in general, and is likely to have encouraged corporations to explore

various avenues of reducing their carbon footprints. This would be consistent with the proposals

of the Porter Hypothesis of environmental policy strictness, which suggests that adjusting the

strictness of environmental regulations can in fact increase efficiency and induce innovation

when a proper balance is struck that suits the economy in question. Given this information, it is

encouraging for Israel that a moderate tax will likely bring about the desired benefits without

needing to tax into excess.

The second policy recommendation is for Israel to return to its original plan to become a nuclear

power-based economy. There are many fears when it comes to nuclear power, but these are

largely ungrounded in reality. It is in fact quite difficult to die in a nuclear accident, even one as

seemingly apocalyptic as Chernobyl where only 28 firefighters were killed due to Acute

Radiation Syndrome, and only 15 deaths from thyroid cancer occurred in fifteen years following

the accident (Key Energy Topics). There were additionally no effects on fertility or infant
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mortality for women and children who were residents of Chernobyl at the time of the meltdown.

Lastly, there are more deaths that occur annually merely from driving than deaths that result

from nuclear power. Fear of nuclear energy is understandable, given the popularity of anti-

nuclear rhetoric, but empirically and realistically these fears are unfounded. Ignoring the

potential of nuclear power is not a wise choice for the Israeli government to make if it truly wants

to achieve dramatic carbon emission reductions, and maintain a cost-effective energy sector,

and decrease wealth inequality for Israeli citizens (Aslan).

The stability and sustainability of nuclear power is a powerful method of reducing the cost of

energy overall and maintaining it at a steady rate. Additionally, nuclear power is both low-waste

and low-emission, which is a highly attractive incentive for countries that are seeking to

implement more environmentally-friendly energy sources. A single nuclear power plant requires

hundreds of times less land than a solar plant, thus saving a large amount of landscape in Israel

from being cleared for renewable energy plants, instead allowing it to be protected from

development or used for the much-needed expansion of towns and cities. Nuclear power plants

are also virtually immune to extreme weather as well, while solar and wind are quite vulnerable

to high wind speeds, snow, long periods of rain, and other sudden weather phenomena, which

Israel experiences frequently. While it would certainly be possible to install solar panels on

buildings rather than establishing a formal power plant to save space, solar panels are

nevertheless extremely sensitive to weather changes and are expensive to maintain.

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In conclusion, switching to a primarily nuclear-powered energy sector will likely bring the cost

reductions and market stability that the Israeli economy needs, while continuing to trade natural

gas with Israel’s neighbors will continue to be a profitable source of income for the government.

Additionally, the implementation of a moderate carbon tax will help bring in additional revenue

for the construction of the necessary nuclear plants and continued development of the natural

gas industry in Israel. Implementing these recommendations will help reduce greenhouse

emissions overall. They will assist in decreasing air pollution in urban areas as Israel is able to

use its land for new housing rather than costly power plants. These recommendations will also

likely help decrease wealth inequality as the cost of living gradually decreases for Israelis as the

country is empowered to become more energy independent. Lastly, becoming reliant on nuclear

power, lowering emissions, and being able to use the landscape of Israel wisely, will inevitably

bring about the most desired outcome of all—protecting the environment and natural beauty of

Israel for years to come.

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References

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