The economic approach to environmental policy seeks to factor pollution into industry’s cost-benefit equation. Traditionally, environmental policy has been implemented principally through governmental regulation: the polluter either complies with the regulations, or faces administrative or legal penalties. But this method involves high administrative costs. The theory underlying the economic approach is that polluters ought to be liable for all expenditure involved in safeguarding the environment against the damage they do. The mechanisms used to put the "polluter pays" principal into effect fall into two general categories: some are revenue collecting devices, which provide funds for environmental purposes; others create incentives for companies to reduce the level of pollution they contribute to the environment. Economic mechanisms in Israel fall exclusively into the first category increasing revenues.

Five kinds of economic mechanisms are in use today. Levies are a price paid by the polluter for the use of environmental resources. Examples include systems of emissions licensing, fees added to the purchase price of products like pesticides, packaging materials, batteries, and fertilizers, and sewage effluent fees. 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. Deposit-return requires consumers of bottled beverages to pay a set fee in addition to the purchase price. This fee is restored in exchange for the return of the product or container. Market creation rarely used involves the creation of artificial markets in which participants buy the right to pollute, which they may then transfer to third-party purchasers. Financial enforcement incentives make compliance with the law an economically viable option: non-compliance results in punishment, either by advance payment or by a fine in case of non-compliance with the law. In order to be effective, these incentives must be relatively high. Moreover, enforcement is costly, as it involves continual monitoring of industrial activity.

In Israel, the use of economic mechanisms to implement environmental policy is still in its infancy. Levies are most commonly imposed but they are usually too low to provide an incentive for changing environmental behavior.

Israel, like most countries, uses revenues from polluter levies to finance environmental activities. User fees imposed in Israel cover:

Sewage – Israeli municipalities collect two types of sewage fees. The first is a one-time fee paid by new home and apartment owners, based on the size and location of the dwelling. The fees collected are used for the construction of sewers and sewage treatment plants. The second type is used for maintaining sewage systems, and is based on the amount of water used by each consumer, and included in the water bill. Both sewage fees amount to a substantial sum of money although exact figures are not available. By law, the fees should be set at a level appropriate for running the sewage system as a closed system; in reality, however, funds collected for sewage are used to finance other activities within the municipality; and

Garbage Collection – Home owners and industrial consumers pay a garbage collection fee to the local authority. Since the fee is usually incorporated into the annual municipal tax assessment, 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 are limited to:

Quarry Restoration – Buyers of the raw material pay a fee calculated according to the type and quantity of material quarried. 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, but such a levy does not necessarily promote environmentally sound mining techniques;

Marine Pollution Prevention Fee – All ships calling at Israeli ports, and all oil unloading platforms operating in Israel pay this fee, which is fixed according to size of ship and amount of oil. The amount paid by each vessel is not connected to safety measures (or lack thereof) for reducing the risk of pollution, should an accident occur. The fee, as well as fines paid by violators of marine pollution prevention laws, is collected in a Marine Pollution Prevention Fund, which in 1991 totalled $700,000. It is used to finance the Marine and Coastal Environment Division of the Ministry of the Environment, which employs nine inspectors, vehicles and equipment, a boat, and a station in the Gulf of Eilat. There is no doubt that the fund has played a major role in substantially reducing oil pollution on Mediterranean and Gulf of Eilat beaches; and

Disposable Beverage Containers Fee – This levy is imposed within the framework of the Cleanliness Law. It constitutes 0.25% of disposable beverage sales. In 1991, fees and fines paid into the Cleanliness Fund amounted to $400,000 enough to finance cleanup campaigns, educational programs, and the entire enforcement infrastructure for the Cleanliness Law.

Only one kind of administrative levy is currently imposed in Israel for environmental purposes:

Monitoring Fee – This is a fee charged to 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 amount and type of fuel in use in the facility.

One differential tax has been designed with the environment in mind:

Lead-Free Petrol – To switch from regular to lead-free petrol, the Ministry of Energy has adopted the system employed by some of the European countries: the tax on lead-free petrol is reduced, making it less expensive to the consumer than regular petrol thus providing an incentive for increasing its use.

The use of subsidies to further environmental goals is less well established in Israel than levies. However, import duties are waived on equipment for monitoring and controlling pollution and for reducing waste. The director general of the Ministry of the Environment is empowered to make decisions on the waiver of customs duties.

Enforcement incentives have not yet evolved into effective tools for environmental management in Israel. A number of provisions do impose fines on activities which pollute the environment. Some require the polluter to pay for removal of the nuisance, for cleaning up the damaged area, and for repairing the damage. Generally, though, these fines are too low to provide incentives to reduce pollution levels.

In conclusion, the use of economic mechanisms is an inseparable part of social efforts to protect and improve the quality of life, and to allow sustainable development in Israel. Environmentalists must take maximum advantage of the political system in order to implement economic policies which will benefit the environment. In Israel, the Ministry of the Environment will continue negotiating to increase revenues from environmental taxation.

The positive examples of the Marine Pollution Prevention, Disposable Beverage Container and Quarry Restoration fees prove that revenues can indeed be enhanced through environmental taxation. Excellent results have been achieved through these levies.