ENVIRONMENTAL ECONOMICS

The economic approach to environmental policy seeks to internalize environmental costs and considerations into corporate decisions. Traditionally, environmental policy has been implemented principally through government regulation: the polluter either complies with the regulation or faces administrative or legal penalties. The theory underlying the economic approach is that polluters should be liable for all expenditure involved in safeguarding the environment against the damage they cause. Recently the concept has been broadened to include prevention of damage at source. The emphasis has shifted from the "polluter pays" principle to the "potential polluter pays for pollution prevention" principle.

According to the economic approach, environmental problems will be alleviated when individuals and companies will bear the real and full price of using environmental commodities and natural resources. This price will include all possible adverse effects on human life, quality of life, habitats and species.

Taxes, Subsidies and Incentives

The mechanisms used to put economic principles into effect fall into two general categories: revenue collecting devices, which provide funds for environmental purposes, and incentives for companies to reduce the level of pollution they emit into the environment. Until recently, economic mechanisms in Israel, as in the rest of the world, fell almost exclusively into the first category increasing revenues.

Economic tools such as fines, fees, taxes and subsidies are designed to punish organizations which misuse or pollute natural resources, to impose the costs of use on the user (i.e. tipping fees in landfills) and to serve as incentives for the adoption of environmentally-friendly activity.

In Israel, the use of economic mechanisms to implement environmental policy is still in its infancy. Levies (paid by polluters for the use of environmental resources) are most commonly imposed but are often too low to provide an incentive for changing environmental behavior. Levies in Israel include user fees, product taxes, administrative levies and differential taxes.

User fees cover sewage and garbage collection. Municipalities collect two types of sewage fees: a one-time fee, paid by new home owners, is used in the construction of sewers and sewage treatment plants, and an additional fee, based on the amount of water used by each consumer and included in the water bill, is used for maintaining sewage systems. By law, the fees should be set at a level appropriate for running the sewage system as a closed system; in practice, however, funds collected for sewage are often used to finance other municipal activities.

Home owners and industrial consumers also pay a garbage collection fee, usually incorporated into the annual municipal tax assessment, to the local authority. However, since the consumer cannot attach a specific value to the service, there is no incentive for reducing waste volume or separating its contents; only a separate fee reflecting the true cost of disposal would provide the consumer with such an incentive.

Product taxes imposed in Israel apply to quarry restoration, marine pollution prevention and disposable beverage containers. Quarry operators pay a fee calculated according to the type and quantity of material quarried and sold. The income from the levy accrues in the Quarry Restoration Fund administered by the Ministry of Industry and Commerce. This is a dedicated fund from which money is set aside in order to finance the restoration of disused quarries.

All ships calling at Israeli ports and all oil unloading platforms operating in Israel pay a Marine Environment Protection Fee, which is fixed according to the size of the ship and the amount of oil. The fee, as well as fines paid by violators of marine pollution prevention laws, is collected in a Marine Pollution Prevention Fund. Funds are used to finance the Marine and Coastal Environment Division of the Ministry of the Environment. The fund has played a major role in substantially reducing oil pollution on Mediterranean and Gulf of Eilat beaches.

A fee on disposable beverage containers is imposed within the framework of the Maintenance of Cleanliness Law. It constitutes 0.25% of disposable beverage sales. Fees and fines paid into the Cleanliness Fund are used to finance cleanup campaigns, educational programs, and the entire enforcement infrastructure for the Maintenance of Cleanliness Law.

At present, one kind of administrative levy is imposed in Israel for environmental purposes a monitoring fee. This fee is imposed on industrial facilities which emit pollutants into the air. The fee is collected for a specific purpose: to carry out monitoring in the vicinity of these facilities. Monitoring activities are budgeted as a closed budget. The fee charged to every polluter is based upon the relative share of pollution emitted, calculated according to the quantity of fuel used in the facility.

To switch from regular to lead-free gasoline, the price on lead-free gas was reduced, making it less expensive to the consumer than regular gas thus providing an incentive for increasing its use. Statistics reveal that consumption of lead-free gas increased by a factor of twelve in 1992 as opposed to the previous year and by a factor of 3.5 in 1993 in comparison to the previous year.

The use of subsidies to promote environmental goals is less well established in Israel than levies. Subsidies are usually used to provide incentives for the development of "clean" technology, or in cases where the polluter will not survive financially if he complies with environmental regulations. In certain cases, import duties are waived on equipment for monitoring and controlling pollution and for reducing waste. The possibility of granting financial aid to companies for the purchase of green technologies and for the establishment of eco-auditing in small and medium-sized companies is currently being considered. An interdisciplinary committee, chaired by the director general of the Ministry of the Environment, has been appointed to prepare criteria for financial support to industrial plants wishing to invest in environmental technology. In 1993, the Ministry of the Environment granted such support to three industrial plants which have invested in effluent recycling and treatment technologies.

Financial enforcement incentives make compliance with the law an economically-viable option: non-compliance results in punishment, either by advance payment or fine. Fines on activities which pollute the environment are included within the framework of environmental legislation. Several of the laws also require the polluter to pay for removal of the nuisance, for cleaning up the damaged area, and for repairing the damage. Generally, though, green fines are too low to provide effective incentives to reduce pollution levels. Moreover, enforcement is costly, as it involves continual monitoring of industrial activity.

Other economic mechanisms in use today include deposit-return and market creation. Deposit-return of glass bottles was successfully used in Israel for years before the advent of plastic, non- returnable bottles. Today, the system is still used with returnable beer bottles with a 90% return rate. The feasibility of expanding the system to other beverage containers and to pesticide packaging is currently being examined. Israel is also reviewing possibilities for the creation of new markets for green products, especially for products assembled from recycled materials. Current efforts focus on the promotion of government purchase programs for recycled paper.

Green Accounting

Today the use or misuse of air, land and water takes little if any consideration of the true economic/social cost of such use. If it were possible to measure the social or regional cost of using a natural resource and to obligate users to pay this cost, market forces would bring about a substantial reduction in pollution. Yet, it is difficult to measure all the impacts of a specific activity on land, air and water in the present and in the future and more difficult still to translate these impacts into monetary terms.

National green accounting the use of advanced accounting tools to quantify and measure such resources as clean air, forests and streams is only now beginning in Israel. A notable example is a research project undertaken by the Natural Resources and Environmental Research Center in Haifa University which, during the course of a three-year-survey, assessed the economic costs of air pollution in the highly-industrialized city of Haifa. The project focused on the economic valuation of reductions in air pollution- induced morbidity. It concluded that large investments in pollution-prevention equipment are economically as well as environmentally justifiable. The development of national green accounting can serve an important role in the struggle to preserve open spaces and nature reserves and in the assessment of large- scale infrastructure and development plans, such as the paving of new highways vis a vis the development of mass transportation systems such as railroad or subways.

Life-cycle cost analysis quantifies in monetary terms the "cradle- to-grave" cycle of a product in terms of raw materials, emissions, waste, energy, and other environmental impacts. Israel’s new program of "environmental labeling" represents an important step in this direction.

At the initiative of the Ministry of the Environment, the Israel Standards Institute has published a standard for ecological labeling, dubbed the "green label." The label represents an holistic judgement, giving overall assessment of a product’s environmental quality relative to other products in its category. A product will be granted the eco-label when it meets certain environmental criteria in such realms as waste, soil pollution, water pollution, air pollution, noise, energy consumption, natural resource consumption and other factors (e.g. health, damage to flora or fauna or degradation of landscapes).

One of the stated purposes of the "green label" is to direct manufacturers to review and account for the environmental impact of their products at each stage of the product’s life, from preproduction to disposal. The aim of life-cycle analysis is to help ensure that consideration of environmental effects throughout product life will constitute an integral part of the production process, as do the quality and safety of the product itself.

Environmental Management Systems

Increasing concern about environmental protection has led organizations worldwide to undertake environmental audits in order to assess their environmental performance. On their own, however, audits cannot provide an organization with the assurance that its performance not only meets, but will continue to meet, legislative and policy requirements. To be effective, they need to be integrated into the overall management system and policy of the company.

In Israel, an interdisciplinary technical committee on environmental management systems has reviewed the subject and helped prepare an Israeli standard, published by the Standards Institute of Israel in February 1994. The new standard for environmental management systems (IS 1550) is based on the British Standard for Environmental Management Systems (BS 7750). It requires organizations to formulate policies and objectives taking into account information about significant environmental impacts.It is applicable to any organization which wishes to assure itself of compliance with a stated environmental policy and to demonstrate such compliance to others.

Environmental management audits and environmental management reviews are inherent, but separate, parts of the system. Audits assess the effectiveness of the system and the achievement of the environmental objectives; reviews check the continuing relevance of the environmental policy, update the evaluation of environmental effects and check the efficacy of audits and follow-ups.

Elements incorporated into environmental management systems relate to the establishment and implementation of the system and the definition and documentation of environmental policy. In addition, the standard relates to such issues as organization and personnel, environmental effects, environmental objectives and targets, environmental management manual and documentation, operational control, environmental management records, environmental management audits and environmental management reviews.

Since risk and damage potential from environmental disasters is most significant in dollar terms, companies will have an incentive to adopt eco-auditing and environmental statements. The incorporation of high premiums on new environmental insurance policies will further encourage companies to deal with risk management and eco-auditing as will new banking policies which seek to incorporate environmental considerations into business and funding decisions.

Israel and the World Community

On the positive side, environmental protection is labor-intensive; economic growth, employment and environmental sustainability are interrelated. Israel, within the context of regional and bilateral agreements, is currently investing efforts in identifying potential environmental professions in Israel which would be advantageous both to environmental protection and to the national economy.

In Israel, where environmental fine levels are relatively low and legal actions are few, industry will have to be convinced that expenditure on prevention is lower than expenditure on the repair of damages. Moreover, pollution control and waste reduction can actually strengthen economic competitiveness through more efficient use of raw materials and through the development of a green image, an effective marketing tool in an increasingly environmentally- conscious world. Since nearly a third of Israel’s export is directed toward Europe, Israel will have to accommodate itself to stringent international environmental requirements. As a signatory to the General Agreement on Tariffs and Trade (GATT), Israel will work along with the other parties to the agreement to promote environmental protection standards, within the framework of the World Trade Organization (WTO). Business practices will have to comply with national and international environmental regulations. Sound environmental practices, including risk assessment and environmental management, will have to be integrated into corporate management.