Climate change as a product of market failure, and the estimates of the economic effects of the climate crisis * Economic analyzes reviewed show that if Israel does not take steps to slow down climate change, the economic damage from climate change will be higher than the cost to the economy of the process of reducing emissions
Climate risks are expected to affect the state's financial situation through GDP, growth rates and the state budget, as the effects of climate change are expected to cause tangible damage to various sectors of the economy over time while also harming the ability to provide products and services. On top of that, climate change has a direct impact on price stability in the economy. Also, dealing with the climate crisis and the efforts to move to a low-carbon economy have effects on the employment market.
The audit revealed that:
In aspects of the climate crisis as a product of market failure
The damages caused by greenhouse gas emissions are the result of external effects of economic activity that are difficult to price, and as long as the emissions have no real cost or other negative consequences for the producer of greenhouse gas emissions, the economic actors do not take them into account during their activities. Due to the fact that the damage from greenhouse gas emissions is not priced and causes negative external effects that are not immediate, a market failure has occurred - the damage from the emissions is not reflected in the conventional way of measuring economic activity - through the product, and in the time horizons used in economic forecasts.
In the aspects of the assessments regarding the economic effects of the climate crisis
No governmental economic body or entity responsible for macroeconomic forecasts in Israel has, as of the end of the audit, carried out a national assessment regarding the damages and effects of climate change damage on the Israeli economy in the long term in a business as usual (BAU) scenario and in other scenarios where measures are taken Mitigation and adaptation. In the absence of economic assessments on climate (at the macro level and at the level of individual actions), the National Economic Council did not act to promote the issue in the order of government priorities (in the strategic plan) and the Ministry of Finance did not respond to requests, including from the administration in the Ministry of Environmental Protection to allocate resources. In addition, recent studies on the damages of climate change reviewed in this section raise long-term macroeconomic risks expected in the world and in Israel as a result of climate change. The loss of global GDP until the year 2050 is estimated according to various global studies that have been reviewed in the range between 2.5% and 18.1% in the BAU scenario, and in the Mediterranean region, the Middle East and Africa where Israel and its neighbors are located, the loss of GDP is even higher and is estimated in the range between 8.5% and 27.5% The estimates that exist in the world for these damages are partial due to the uncertainty that characterizes long-term scenarios concerning climate change - which raises the fear that the aggregate effects of climate change on the economy will be even more severe than the estimates reviewed (and in particular at the higher levels of warming). Since there is no model or scenario in the world that can give a complete picture of the economic effects caused by climate change, the risks arising from them will remain largely unhedged, and it must be taken into account that the results of the models are partial and yield predictions with a significant underestimation regarding the aggregate economic effects of damages the climate.
In the aspects of taking mitigation and adaptation measures
Reviewed economic analyzes show that if Israel does not take steps to slow climate change, the economic damage from climate change will be higher than the cost to the economy of the process of reducing emissions. A policy of reducing greenhouse gas emissions has clear benefits, and the Israeli economy can achieve a significant decrease in greenhouse gas emissions without harming long-term growth goals, and in a comprehensive cost-benefit analysis, the transition to a low-carbon economy could lead to an increase in GDP and social welfare.
According to the NGFS (the Authority of Central Banks and Supervisors for Greening the Financial System), an orderly transition - early and gradual - to a low- or zero-carbon economy is the scenario with the least impact on GDP. In view of the discrepancies arising from this report regarding the reduction of GAZ and regarding carbon pricing in Israel, it emerged that the State of Israel is behind in these matters compared to other OECD countries. The physical risks of the climate crisis (BAU scenario) are expected to result in an estimated loss of approximately 11% of the global GDP by the year 2050, and of 25% of the GDP by the year 2100; Whereas the estimated damages of the regulated transition are smaller than in the BAU scenario and a disorderly transition scenario to a low-carbon economy: 2% of GDP in the regulated transition scenario until 2050 compared to more than 6% in the disorderly transition scenario, and 4% in the regulated transition scenario By 2100, compared to more than 9% in the unregulated transition. Therefore, the longer Israel delays the transition to a low-carbon economy, the greater the fear that the costs to the Israeli economy will be higher.
In aspects of the effects of the transition to a low-carbon economy on the labor market
The Ministry of Economy and the Ministry of Labor and Welfare did not examine the consequences of the climate crisis and the expected changes as a result of the transition to a low-carbon economy on the employment market. The transition to a low-carbon economy can have negative effects on employment in high-emission fields. Various studies show that it is possible to reduce the negative effects on the labor market as a result of the transition to a low-carbon economy and even produce additional positive effects, but this requires planning, the establishment of a government policy for the development of employment rich in green skills that is integrated into the general policy of the transition to a low-carbon economy, and the implementation of this policy. A green policy can create jobs in several "green" economic sectors (such as the solar energy sector), while the reduction of jobs occurs mainly in "brown" sectors (such as the fuel refining sector or the aviation sector) whose activities are replaced by green sectors. For example, a study on the matter estimated that achieving the goals set by Israel as part of the Paris Agreement of producing electricity at a rate of 17% from renewable energy in 2030 would create 16,764 jobs related to the construction of solar facilities, and meeting the energy efficiency goals would directly add 1,400 jobs.
In aspects of climatic technological innovation in Israel
In 2018, the public investment rate of the Innovation Authority in the areas of energy, water, environment and sustainability was 4%, the third lowest rate among the areas surveyed. Also, comparative data regarding other OECD countries show that in the field of climate-related technologies, Israel ranks at the bottom of the ranking scale with three other countries, and it advanced by about 2% in the years 2016 to 2018 compared to the years 2000 to 2002.
Carbon pricing
In the last decade, various countries began to use carbon pricing regarding industrial sectors to meet the emission targets of the GAZ according to the Paris Agreement, through the adoption of a mechanism of a carbon tax imposed on each ton of 2CO emissions emitted into the atmosphere. This tax is imposed on the use of fuels in industry, for electricity generation and for transportation.
The audit revealed that:
Regarding international trends: Over the years, more countries are adopting carbon pricing arrangements and as of July 2021, 61 countries have already adopted such arrangements. At the same time, in the European Union countries, a policy is being promoted according to which imports from third countries with which they trade (which are not members of the Union) will be charged a "Carbon Border Adjustment Mechanism". These processes may lead to a reality in which trade partners of the European Union, of which Israel is one, may be affected by EU policies in such a way that the export of goods (mainly carbon-intensive) from Israel may be exposed to trade restrictions.
The processes for promoting carbon pricing in Israel: In Israel, since 2008, a series of works have been carried out by governmental and professional bodies, which analyzed the meanings involved in carbon taxation and insisted on the advantages inherent in this process. It was found that as of September 2021, operative steps have not yet been taken in this regard.
The climate crisis as a generator of financial risks
Climate change poses extraordinary risks in its complexity as it will affect multiple sectors, geographic areas and assets - sometimes simultaneously. Financial industries that are "threatened" by the climate crisis are, among others, the capital market, the insurance industry and the banking system.
The audit showed that The current financial regulatory guidelines in Israel as a whole do not give expression to climate risks. Their applicability is to certain types of corporations (for example, public companies) and under limited circumstances (for example, voluntary implementation, or considering ESG considerations as one part without the distinction of climate considerations). In addition to this, the guidelines do not include uniformity in disclosure and reporting, even though the ability of a financial institution to refer to climate aspects (and ESG in general) in its investment, financing or insurance policy depends on the disclosure of relevant and high-quality information by the companies in which they invest or which they finance or insure. In addition, the climate crisis creates financial risks for countries, companies and individuals through two types of climate risks: (a) "Physical risks" - acute risks, as well as chronic effects of long-term changes in weather patterns - which affect property, physical capital, infrastructure, agriculture and the real estate; (b) "Transition risks" - arising from the world's transition to a low-carbon economy. Estimates today range from $1 to $18 trillion in global property value loss as a result. The risks of the transition, which are characterized by uncertainty regarding the technologies that will mature and uncertainty regarding the regulation that will take shape, may also affect industries in Israel: the industry of manufacturing petroleum products, chemicals and their products with revenue from sales (local and export) of approximately NIS 67.5 billion; The rubber and plastic products manufacturing industry has a revenue of approximately NIS 19.6 billion; And the mining and quarrying industry has a revenue of approximately NIS 17.7 billion - and they may be affected if it is decided to impose a carbon tax, if a policy of switching to electric vehicles and renewable energy production is promoted or if tariffs are imposed on the export of this type of products in other countries.
It also emerged that as the countries of the world go on the path of aggressive mitigation (a sharp and rapid reduction of greenhouse gas emissions), the physical climate risks will decrease, while the transition risks will increase. Hence the importance of a regulated, early and gradual transition to a low-carbon economy and the need to maintain control over the transition process to a low-carbon economy or the carbon reset. On the other hand, in a situation where countries will operate in the BAU scenario (without reducing emissions) or will act little or too slowly to reduce them, as was shown in this report regarding Israel, then the physical risks of climate change will increase compared to the risks of transition, and it is even possible that in response to the realization of the physical risks, the need for transition will become stronger Fast and unregulated to a low-carbon economy, and therefore the risks of the transition will also increase accordingly.
The audit found that Israel's involvement in international activity in the field of financial risks originating from the climate is limited and amounts to the Bank of Israel's joining the NGFS organization in October 2020 and the joining of the Tel Aviv Stock Exchange in early 2021. Extensive and ongoing international activity of regulators and policy makers from dozens of countries in the field of risks was brought up the financial and economic related to climate. This activity crosses branches and includes the field of banking, investments and insurance, and even touches the macroeconomics, and it involves hundreds of government officials and regulators in dozens of countries in order to become a normative matter. The products of these collaborations yield professional recommendations, insights, position papers and best practice principles. As far as the State of Israel's involvement in international forums is concerned, it emerged that, as mentioned, its involvement is low (with the exception of the Bank of Israel and the supervision of the banks involved in diverse international activities from 2020).
In terms of climate risks in the banking system, it emerged that:
Since the letter sent by the supervisor of banks to the banking system regarding environmental risks in 2009, he has not conducted an audit focused on environmental risks. Reference to environmental risks came up during audits conducted in six cases between 2012 and 2017, and in all the years he did not address in these audits climate risks that have a unique complexity and profile.
In addition, in the findings of a review conducted by the supervisor of banks in 2019, it was revealed that his instructions in the letter he sent in 2009 "were implemented in a rather limited way, and mainly in relation to credit. Most of the banks anchored procedures for identifying aspects of environmental risk when granting credit, but did not anchor procedures for monitoring and controlling the risk." The supervision's impression of the banks was that "the risk management system and the internal audit system are involved in a relatively limited manner in relation to environmental risk management, and no procedures have been defined for risk management in a group perspective. In addition, it was found that there were no effective discussions regarding the issue in the management and the board of directors."
It also emerged that the wording of the bank supervisor's letter from 2009 did not explicitly mention climate change, did not refer to the horizontal and uniform implementation of the letter, and did not specify the implementation mechanisms required to implement its instructions. This left a wide discretion to the banking corporations and did not promote uniformity in the banking system. Over the past years, knowledge and practice in the field of environmental risks, and in particular in the field of climate risks, have developed greatly. However, the audit revealed that for a decade since the supervisor's letter - from 2009 to 2020 - the supervision of banks at the Bank of Israel did not deal nearly with environmental or climate risks and did not update its guidelines in accordance with the developments of international professional bodies and in accordance with developments in other countries, and did not ensure that The banking corporations implemented the instructions of the letter he issued in accordance with the international norms, as ordered.
It was brought up that the balance portfolio of the Bank of Israel is not invested in sustainable and responsible ESG investments. Also, the Financial Stability Committee at the Bank of Israel did not discuss the issue of financial risks originating from climate change.
Positively, it was noted that in the years 2020 to 2021, the activity of the supervisor of banks on the subject increased, and he took various actions, most of them during and after the audit. For example, in December 2020, the supervisor of banks sent a letter to the banking corporations on the subject of "environmental risk management" with a statement of his intention to hold talks with them on the subject of environmental risks and their preparation for meeting supervisory expectations, including those detailed in the documents of the international supervisory authorities. Also, the Policy and Regulation Department at the Bank of Israel formulated a draft "Proper Banking Management" on the subject of "Environmental Risk Management" which includes, as of August 2020, a reference to climate risks.
Looking at climate risks in investments, insurance and savings it was found that As of the date of the audit, the Securities Authority has not conducted an audit on environmental risks and regarding the manner in which public companies follow guidelines on environmental reporting.
In addition, an examination conducted by the Ministry of Higher Education in 2012 on the prospectuses of 33 public companies (having substantial environmental information) found great variation between the reports of the companies, both in terms of the scope of the report and in terms of the reported contents, and that there were companies that did not include an environmental report or that the report was insufficient compared to their actual situation. The main conclusion that emerged from the work of the Office of the High Commissioner for Human Rights was that the regulations should be amended with a focused definition regarding the types of environmental information required and the level of detail, while proposing a uniform reporting template. It emerged that during the seven years that have passed since then, the actions that were carried out as previously proposed regarding environmental reporting obligations applicable to public companies - did not lead to the proposed amendment.
It also emerged that disclosure and reporting about the combination of environmental and social considerations and considerations from the field of corporate governance (ESG) in business and financial policies in the format published by the Securities Authority do not differentiate the climate from the rest of the ESG considerations. Also, the voluntary nature of ESG disclosure and the ability to report in different formats lead to the fact that the discretion regarding the holding of the disclosure, the information it will include, how often, its nature and the location of the publication will remain in the hands of the companies themselves. Without high-quality and comparable disclosure, which is in line with the principles of disclosure accepted in the world, the Securities Authority may find it difficult to promote an investment policy that takes climate aspects into account, and the companies, for their part, will not be required to improve their performance in order to attract investors.
Also, the Capital Market, Insurance and Savings Authority's guidelines from 2007 did not refer to climate aspects and did not include guidelines for the reporting format regarding ESG aspects that must be published and whether to include climate aspects and in particular the creation of a uniform format for reporting. Also, the Capital Market Authority did not conduct dedicated audits regarding these guidelines and did not deal with environmental aspects. In addition to this, it was not found that the Capital Market Authority acted regarding climate risks in other aspects other than disclosure, such as instructions to insurers or pension funds to include climate risks in their risk management policies.
State Comptroller Engelman He pointed out that it is recommended that the various bodies address the climate risks alongside the other ESG considerations. As can be seen from the findings, the preparation of the government and financial regulators in Israel for potential risks is in its infancy.
For all parts of the review on the science website:
- Introduction: Israel's progress in dealing with the climate crisis is negative to zero
- Chapter 1: Mitigation - the action to reduce greenhouse gas emissions that are not carried out in Israel
- Chapter 2: Adaptation - the national preparation for adapting to climate change is lacking
- Chapter 3: Economic and financial aspects of the climate crisis; Market failure
- Chapter 4: Lack of organizational, functional and professional preparation for handling the climate crisis
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