Annex A. Public investment in Israel

Israel suffers from a sizeable infrastructure deficit, stemming from chronic underinvestment that has been lingering for more than two decades (the orange line in FigureA A.1) (OECD, 2018[1]). Public investment in Israel only amounted to about 2% of GDP in 2016 while the OECD average tends to be around 3.5% to 4% (the blue line in FigureA A.1) (OECD, 2018[1]). As noted in the OECD’s Economic Survey of Israel (2018[1]), “Spending on public infrastructure, which recovered after 2007, was then cut again between 2013 and 2015 to bring the public deficit back under control.” Israel’s vulnerability and ability to adapt to climate change, as well as its mitigation capacity, depend on its choices about the nature and location of infrastructure today FigureA A.1. Achieving a low-emission, climate-resilient development pathway requires a radical shift in Israel’s energy, transport and buildings infrastructure (addressed in the main chapters of this document). Israel’s underinvestment in infrastructure could have long lasting effects on Israel’s emissions profile in the future potentially jeopardising its ability to reach net-zero by 2050.

FigureA A.1. Public investment in terms of % of GDP

Note: Excluding capital transfers to state-owned enterprises for infrastructure development, which have been significant in Israel.

Source: (OECD, 2018[1]) (From: UN Department of Economic and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision; OECD, Economic Outlook Database).

 StatLink https://doi.org/10.1787/888934156276

In particular, the lack of investment in public transport infrastructure forces Israelis to rely heavily on the use of private vehicles. This, together with robust demographic growth, leads to ever-increasing emissions, pollution and congestion, amongst others. Israel’s road congestion is far higher than the OECD average (OECD, 2018[1]). Despite a relatively low vehicle ownership, Israel presents high mileage per vehicle, and thus, dense road traffic and congestion. In 2014, road traffic in Israel was 2730 vehicles per 1000 km, with 1998 passenger vehicles per 1000 km. In the same year, the OECD average was 774 and 576 total and passenger vehicles per 1000 km respectively (OECD, 2018[1]). Road congestion is very costly, equalling approximately 2% of GDP, far above the level observed in other developed countries (around 1% in the EU and the United States) (Casullo et al., 2019[2]). These costs include the cost of extra gasoline lost in traffic jams and the value of time lost due to congestion. In addition to air pollution from PM, which is responsible for the deaths of more than 2,000 people on Israel per year, according to the Global Burden of Disease database, and the number of people exposed to this pollution have been increasing (Environment and Health Fund and Ministry of Health, 2017[3]). Finally, transport infrastructure is poorly integrated with housing developments, catalysing urban sprawl (OECD, 2017[4]) and thus contributing to car dependency and congestion (see Chapter 4).

Large natural gas reserves means Israel is investing in switching from coal to natural gas. Public spending on natural gas amounted to approximately NIS 500 million, equivalent to 0.04% of GDP in 2017 (OECD, 2018[5]). Such investments lock in emission-intensive infrastructure. The major part of this producer support is due to a long-term gas agreement at guaranteed prices between the Israel Electric Company and investors in the Tamar gas field (see chapter 2).

Constrained local budgets restrict municipalities’ ability to develop any kind of infrastructure, whether it is housing, transport, or electricity. The largest share of municipalities’ budgets in Israel comes from property taxes, typically about 46% (S&P Global Rating, 2019[6]). Israel uses the “arnona” system, instead of taxing the value of the land or property; municipalities tax the use of buildings since 93% of the land is state-owned. State-owned land, however, is primarily rural, while urban cores tend to be privately owned. Tax rates change between municipalities, but the national government restricts the upper bound of taxes on the use of residential properties. This promotes the development of commercial properties (rather than residential ones), since this is more profitable for local authorities. Municipalities are chronically in debt, in absolute terms, even though, there is a decreasing debt burden as a percentage of municipalities’ operating revenues (from 40% in 2006 to 25% forecasted in 2019) (S&P Global Rating, 2019[6]). This precarious but perpetual condition means that municipalities often rely on the national government for investment in infrastructure. As it is often the case, centralisation makes it difficult to tailor investment to local conditions and needs, and often leads to inefficient infrastructure.

For example, in Netanya (a city located on the coast), the municipality needed upfront financing to develop housing infrastructure (OECD, 2017[4]). Land in the city core tends to be privately owned, and the city lacks the funds to adapt sewage, water, and basic infrastructures to densify these areas. In contrast, developing state-owned land – in the periphery of the city – enables collaboration with the national government for large-scale projects, for example, developments with a capacity of 5000 residential dwellings. The Israeli Land Authority provided funding for infrastructure and public facilities for Netanya (OECD, 2017[4]). In Netanya, these incentives have resulted in an urban core rampant with plots of undeveloped private land in the centre of the city and rapid peripheral growth in areas that are underserved (OECD, 2017[4]).

Israel needs strong and credible climate policies to shift investments in the right direction. In the short-term, the Israel government can correct price signals across the economy to reflect the true social costs of emissions, pollution and congestion. This can be done by using taxation and other pricing mechanisms (see recommendations of chapters 2, 3 and 4). Moreover, Israel needs to ensure that public funds are invested in sustainable infrastructure, to avoid locking in emissions until the end of the century. This can also help to mobilise private investment towards low (and preferably zero or positive) emissions infrastructure.

Annex. Green Finance for low-emissions development: some key issues

Staying well-below 2°C entails new low-carbon infrastructure projects and important retrofitting measures, which need substantial investment. Even though there are different estimates of the exact amount of global investment needed, all point to a magnitude that is within the trillions. According to the OECD, the needs for investment in infrastructure globally amounts to USD 6.9 trillion per year, until 2030 at least, to be compatible with climate objectives, and a probability of keeping temperatures under 2°C to 66% (OECD, 2017[7]) Public funds on their own will be insufficient because of the constraint put on government budgets, even including public finance (e.g., institutional investors on public pensions funds) will fall short of reaching the goal of 6.9 trillion annually (OECD, 2017[7]). Therefore, mobilising private finance is critical to create the low-carbon resilient infrastructure of the future, in addition to retrofitting or even decommissioning of existing infrastructure to be compatible with mitigation. Governments can mobilise investment in low-emissions infrastructure by fostering: (1) an enabling policy environment to catalyse investment – such as strong and credible climate policies that signal long-term policy stability to investors as discussed in the previous chapters and discussed further in Investing in Climate, Investing in Growth (OECD, 2017[7]); (2) Strategic use of public finance to mobilise private finance for sustainable infrastructure; (3) co-ordinated cross-government development of pipelines of bankable projects; and (4) the development of green taxonomies and instruments to ensure that private investors can find the right combination of risk-return profiles in sustainable projects. The following paragraphs briefly address issues 2-4 in the Israeli context. Further detail of specific green finance issues are dealt with in the appropriate sectoral chapters.

Strategic use of public finance to mitigate risks and enable transactions

Public actors in Israel can use a variety of instruments to mobilise institutional investment in sustainable infrastructure. Institutional investors manage up to USD 54 trillion of assets (e.g., pension funds as well as insurance companies) in the OECD countries alone (Röttgers, Tandon and Kaminker, 2018[8]). A recent analysis presents findings from an updated database of institutional investments on 152 projects in G20 countries between 2010 and 2018. This work identifies a variety of ways public finance can mitigate risks using public finance, or enabling transactions without assuming liability on public funds (Röttgers, Tandon and Kaminker, 2018[8]). Risk mitigants are instruments that direct use of public funds in a project or backing of a project with public funds. Options include, for example, co-investment when a public actor (national and subnational governments, MDBs, DBs, etc.) invests alongside private, or cornerstone stake, which is when there is investment by a public actor in a fund or project to reach a majority of equity stake, in order to attract private investors, amongst others (Röttgers, Tandon and Kaminker, 2018[8]). Israel could use other instruments, as transaction enablers, that would not require using public funds, but facilitate investment. For example, warehousing and pooling is when smaller projects are bundled together to achieve commercial scale that is attractive and viable for institutional investors (Röttgers, Tandon and Kaminker, 2018[8]).The OECD Progress Update on Approaches to Mobilising Institutional Investment for Sustainable Infrastructure provides a typology of de-risking instruments and techniques available to public actors to crowd-in private capital including institutional investment for infrastructure (Röttgers, Tandon and Kaminker, 2018[8]).

One option moving forward could include introducing or strengthening a green finance mandate of existing national development banks or even establishing a dedicated public financial institution like a green investment bank. Green investment banks are the critical actor missing from the landscape of financial institutions; they facilitate development by educating consumers, centralising administration for originators and lenders, and connecting capital supply to financer demand. These banks are capitalised from a diverse mix of public and private funds, and can reduce risk to private investors. A number of such institutions already exist in other jurisdictions- Clean Energy Finance Corporation (Australia), Connecticut Green Bank (USA), Green Finance Organisation (Japan), Green Investment Group (UK), NRDC Green Bank Development in India, Mexico and Chile; Coalition for Green Capital (South Africa, Colombia, Rwanda, Indonesia and the USA).

Pipelines of bankable projects to signal where private actors should invest

The gap between the need for sustainable infrastructure and current investment – the 6.9 trillion needed each year globally until 2030 - is not due to a shortage of capital available in financial markets. The problem can be partly be explained by a lack of bankable projects (OECD, 2018[9]). Countries often lack detailed infrastructure investment plans, therefore, it is unclear where project investments are needed, when they should be built, how to finance them, or if they are sufficient to meet long-term objectives. Essentially, inhibiting the flow of sustainable infrastructure investment (OECD, 2018[9]).

In contrast, well-defined infrastructure planning can facilitate investment flows; Israel should consider developing robust infrastructure project pipelines. Investors can then identify and source investment opportunities that match their needs from the available options (OECD, 2018[9]). This will scale up investment in “suitable” projects across sectors; accommodate the requirements of investors; and allocate preparatory support to certain projects (OECD, 2018[9]). This could help Israel achieve its mitigation objectives while investing in projects that are not yet bankable. The report, Developing Project Pipelines for Low-carbon Infrastructure, provides best practices on how to do this (OECD, 2018[9]).

Carrying out strategic and integrated long-term planning is identified as an important need in this report. As discussed (chapters 3 and 4), generating a strong planning framework that aligns actions from different levels of government with climate and wider well-being goals will be crucial. The development of master plans, which include pipelines of projects that need to be prioritised for different territories to contribute to national goals are key to constructing this framework. Israel could consider engaging in a decentralisation process that can shift responsibilities and funds to the local level (which is generally better positioned to respond to local needs). In this case, local institutions e.g. metropolitan bodies could be assigned the development of such master plans. The central government could guide and support this by: a) making master plans compulsory; b) developing guidelines for ensuring best practice (including for analysis underlying the development of pipelines as part of these planning tools); and c) creating incentives through national programmes that can provide additional funds for the development of infrastructure projects, but which are only granted when master plans are developed and for projects that are part of the pipeline included.

Sustainable finance taxonomies and instruments

There are efforts worldwide that grapple with how to determine whether investments are in line or not with the Paris Agreement and broader environmental and sustainability goals. Making finance flows consistent with climate targets, as called for in Article 2.1c of the 2015 Paris Climate Agreement (UNFCCC, 2015[10]), means shifting investments and finance away from activities that undermine these objectives. A number of frameworks are being developed to ensure investments are consistent with low-emissions development pathways – perhaps, the most highly anticipated is the EU Sustainable Finance Taxonomy, recently adopted by the European Council1, which not only assesses an activities to climate objectives but also whether or not it causes significant harm to other environmental objectives. Israel could consider building on these frameworks to classify its own investments.

The EU taxonomy for sustainable activities is a framework to identify which economic activities – not financial products - are sustainable, and therefore, qualify for a future voluntary EC Ecolabel (Finance, 2019[11]). After implementation of the taxonomy, every financial product subject to the NRFD2 regulation and marketed in the EU will need to make reference to it. The current draft EU taxonomy3 provides criteria for defining activities that are beneficial but not for defining those that are detrimental to climate objectives or that may play a role in the interim. The EU Taxonomy evaluates six environmental areas – mitigation, adaptation, water, circular economy, pollution and ecosystems. In order to be classified as environmentally sustainable, an activity must demonstrate that it makes a substantial contribution to one of the six environmental areas, while it does no significant harm to the other five. So far, the draft taxonomy covers agriculture and forestry; manufacturing; electricity, gas, steam and air conditioning supply; water, sewage, waste and remediation; transport; information and communication technologies; and buildings, classified by NAEC codes for industrial activities. The criteria developed to date only cover certain production processes. Activities and products that are not covered by the EU taxonomy will be ineligible as taxonomy compliant, regardless of level of emission intensity.

There is a proliferation of other sustainable finance taxonomies that Israel could also draw on. The Climate Bonds Initiative aims at classifying green bonds. Other taxonomies evaluate whether the multilateral development banks are sustainable and offer a climate finance tracking methodology. Other countries have created national level methodologies – China Green Taxonomy, Japan Green Bonds definition, France Label GreenFin, others.

Climate risks and financial stability

The then Governor of the Bank of England, Mark Carney, highlighted three major financial risks stemming from climate change: physical risks from climate impacts, transition risks from the potential for stranded assets during the transition to low-emissions economy, and the liability risks facing those responsible for activities contributing to climate change. Since the publication of the recommendations of The Task Force on Climate Related Financial Disclosures (2017), 50 central banks and regulators have joined (42 members and 8 observers), the Network for Greening the Financial System (NGFS). The Bank of Israel is not part of it as of yet. In early 2019, the NGFS made a call to action: to integrate climate-related risks into financial stability monitoring and micro-supervision, taking into account sustainability factors to their own portfolio management.4 An increasing number of Central Banks have been approaching the subject of climate change for the last few years. For example, Netherland’s Central Bank (De Nederlandsche Bank) is stress testing the financial system to energy transition risks, while the Bank of England is starting to stress test climate resilience (De Nederlandsche Bank, 2018[12]). The new head of the European Central Bank, Christine Lagarde, stated that European Central Bank will start including climate change into the Bank’s economic forecasts, and argues that rating agencies, such as Moody’s, should start to consider climate change when evaluating credit.5

References

[2] Casullo, L. et al. (2019), Assessing incentives to reduce traffic congestion in Israel.

[12] De Nederlandsche Bank (2018), An energy transition risk stress test for the financial system of the Netherlands, De Nederlandsche Bank, https://www.dnb.nl/binaries/OS_Transition%20risk%20stress%20test%20versie_web_tcm46-379397.pdf.

[3] Environment and Health Fund and Ministry of Health (2017), Environmental Health in Israel | 2017.

[11] Finance, T. (2019), EU taxonomy technical report by the TEG.

[9] OECD (2018), Developing Robust Project Pipelines for Low-Carbon Infrastructure, Green Finance and Investment, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264307827-en.

[5] OECD (2018), OECD Companion to the Inventory of Support Measures for Fossil Fuels 2018, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264286061-en.

[1] OECD (2018), OECD Economic Surveys: Israel 2018, OECD Publishing, Paris, https://dx.doi.org/10.1787/eco_surveys-isr-2018-en.

[7] OECD (2017), Investing in Climate, Investing in Growth, OECD Publishing, http://www.oecd-ilibrary.org/docserver/download/9717061e.pdf?expires=1511263658&id=id&accname=guest&checksum=1A7E03B32D7079B807ECEF0BCAC610E9 (accessed on 21 November 2017).

[4] OECD (2017), Spatial Planning and Policy in Israel: The Cases of Netanya and Umm al-Fahm, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264277366-en.

[8] Röttgers, D., A. Tandon and C. Kaminker (2018), “OECD Progress Update on Approaches to Mobilising Institutional Investment for Sustainable Infrastructure”, OECD Environment Working Papers, No. 138, OECD Publishing, Paris, https://dx.doi.org/10.1787/45426991-en.

[6] S&P Global Rating (2019), Public System Finance Review: Israeli Municipalities, S&P Ratings Direct, https://www.maalot.co.il/Publications/SR20190123152558.pdf.

[10] UNFCCC (2015), The Paris Agreement, https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement (accessed on 8 June 2018).

Notes

← 1. https://www.consilium.europa.eu/en/press/press-releases/2020/04/15/sustainable-finance-council-adopts-a-unified-eu-classification-system/

← 2. The Non-financial reporting directive of the EU, that requires large public-interest companies with more than 500 employees to disclose certain information on how they operate and manage social and environmental challenges.

← 3. On the data of the 18th December 2019.

← 4. https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp191121_1~af63c4de7d.en.html

← 5. https://www.theguardian.com/world/2019/dec/02/christine-lagarde-ecb-should-do-more-to-tackle-climate-emergency