Energy guru Eytan Sheshinski has a plan to use Israel’s sovereign wealth fund for future generations to realize the country’s climate goals
Sep 5, 2022
On the day we spoke with energy guru Prof. Eytan Sheshinski, a report by the Energy Ministry was published on state profits collected from natural gas and minerals in the first half of 2022. Unsurprisingly, the report showed an impressive increase – almost 50 percent – in profits from natural gas.
Due to its importance in the production of electricity, natural gas has usurped oil as the global economic and geopolitical axis since the Russian invasion of Ukraine in February. The shortage of natural gas in Europe, Asia and many other parts of the world has also resulted in a price spike in electricity bills. U.K. households face ever-rising prices; factories in Germany, China and the United States have been forced to shut; cities in Egypt have fallen dark; and politicians are already trembling in fear over the harsh winter that awaits voters.
‘Benjamin Netanyahu predicted that tens of billions of dollars would be accumulated in the fund – and that did not happen.’
Yet despite this surge in prices, the Israeli Citizens’ Fund – a kind of sovereign wealth fund that accumulates revenue from the taxes on excess profits of energy companies for the benefit of future generations – is still far from being a success story. The fund was supposed to go into operation four years ago, but it only started functioning four months ago after accumulating 1.2 billion shekels.
“It is disappointing. Benjamin Netanyahu predicted that tens of billions of dollars would be accumulated in the fund – and that did not happen,” says Sheshinski, professor emeritus of economics at the Hebrew University. He played a key role in mapping Israel’s energy economy in two state committees appointed in the previous decade, following historic natural gas discoveries in the Mediterranean. “The current forecast of the Israel Tax Authority is that the fund will have accumulated $11 billion by 2030, and about $50 billion by the year 2050,” he adds.
Sheshinski has an urgent vision for the fund: investing the money in the fight against the climate crisis. He presented his plan to the steering committee of the Israel Academy of Sciences and Humanities, along with calls to impose a carbon tax to bring Israel in line with its climate goals.
By its nature, a carbon tax is regressive and particularly harms the weaker sections of society, since it is imposed on basic products such as electricity, transportation, heating and air-conditioning. Sheshinski believes the revenue accumulated by the fund can play a major role in subsidizing and mitigating its impact.
On top of that, he suggests that the fund be used for the development and promotion of renewable energies, green transportation and a variety of ways to promote Israel’s climate vision.
However, he admits that the fund has a long way to go before realizing these ambitious goals.
“There are two main reasons for the scarcity of the fund,” Sheshinski says. First, in the early years after the fund was announced, there was a continuous decrease in natural gas prices around the world. “Of course, this was good for consumers and manufacturers,” he notes. “But the trend has reversed significantly over the last two years.”
When natural gas prices were low everywhere else, the Israel Electric Corporation still paid a high price to the energy companies.
“That’s right. The thing is that the Electric Corporation contract fixed the price to the consumer price index in the United States, which was unprecedented. During all this time, we’ve paid more for gas than anywhere else – except for countries that buy liquefied gas, such as Japan and countries in the Far East. But right now, contracts are lower than prices anywhere else.”
Would you call the Israeli Citizens’ Fund a failure?
“I can’t say. Part of what happened was indeed caused by the low natural gas prices and doesn’t depend on any of the agreements.”
According to Sheshinski, the second reason for the slower-than-expected accumulation of wealth “could be the outcome of manipulation, as done by Israel Corp. in delaying the payment of the excess gains levy. How much did the drop in prices contribute and how much did these manipulations? I can’t judge. No study has been done on this matter yet.
The second Sheshinski committee determined that companies producing natural resources other than natural gas – such as phosphates and potash, like those produced by the ICL Group (formerly Israel Chemicals Ltd) – must pay capital gains tax on excess profits. Last year, the Israel Tax Authority demanded that the company pay more than 240 million shekels ($72 million) for excess profits made since 2016. However, the company claimed there was no obligation for it to pay any taxes at all.
An agreement was finally reached under which ICL, which is controlled by Israel Corp., will pay the state 188 million shekels for the years 2016-2020. It was also decided that a mechanism for calculating and collecting the tax for the following years will be established.
Did the agreement give any discount to the company, or was it better to reach a deal rather than continue to lose more taxes?
“Yes, there was a significant discount. Israel Corp. didn’t pay the required levy until this agreement, which largely forgives past debts. But from here on, it adopts the interpretation of the Tax Authority and the government as the basis for any calculation.
“Unlike natural gas, which was a new discovery and an emerging industry at the time the law was written, Israel Corp. has existed in one form or another for 60 years.”
The fund’s goals
The Israeli Citizens’ Fund first took shape in 2011 as part of the law known as Sheshinski 1, which imposes a tax on excess profits from natural gas and oil production. While 11 percent of total royalties on revenues from natural resources go to the treasury and are used in the annual state budget, the taxes on excess profits – at rates of between 25 and 42 percent of the final profits – go to the fund. The tax is collected only after the gas reservoirs return 150 to 200 percent of the investment in their development.
The fund is not supposed to be used for any current budgetary needs or short-term goals (except for a small portion of it). The idea is to spread any income from depleting natural resources over many generations, and there are some 40-such funds globally. The sovereign wealth funds of Norway and Qatar – the former rich in oil and other minerals; the latter the world’s biggest producer of natural gas – are the largest, each holding assets of $1.3 trillion.
‘The law stated that every year, the fund will allocate 3.5 percent to its stated goals after it reaches the extent of 1 billion shekels.’
Credit: Ofer Vaknin
Sheshinski explains that the sovereign wealth funds are also intended to prevent the occurrence of the “Dutch disease” – an economic phenomenon that affected European countries, mainly the Netherlands, Great Britain and Norway, after the discoveries of North Sea oil in the 1960s. When dollars start flowing into countries from energy exports, the local currency strengthens but this hurts other export industries.
Sheshinski notes that the former governor of the Bank of Israel, Prof. Stanley Fischer, emphasized the need for a wealth fund to fight the “Dutch disease.” He estimates that the Bank of Israel, through intervention in foreign exchange markets, is doing enough to stabilize the exchange rate. Therefore, the main goal at the moment should be to preserve wealth for future generations.
“The law stated that every year, the fund will allocate 3.5 percent to its stated goals after it reaches the extent of 1 billion shekels. The rest will stay untouched. Realpolitik demands mean our governments do not have long-term visions; therefore, the fund will invest in infrastructure and long-term investments that are not addressed in the normal budget.”
Not all funds are run like those of Norway or Qatar, which finance a part of the public pension pot and invest money all over the world (holding close to 10 percent of global assets). “In Africa, the governments more or less looted the funds for their short-term goals,” Sheshinski says.
You propose to use the fund to meet climate goals. Why should a small country like Israel, which is responsible for 0.3 percent of the world’s carbon emissions and doesn’t really affect the global balance, prioritize this?
“That’s a cynical question. The whole world recognizes that climate change is a problem for all of humanity. It’s a rare instance where humanity agrees that it causes external disturbances. In the United States, thousands of economists have called for a carbon tax to be imposed,” he says, citing a tax that has already been implemented in several states.
Free pass for imports
Apart from the moral reasoning and agreements Israel has signed in order to reduce emissions, Sheshinski offers a very convincing economic reason. According to him, “If we think we shouldn’t impose a carbon tax or act in another way, other countries will tax Israeli exports. We cannot avoid being partners in the global effort to reduce carbon emissions.”
Indeed, tariffs on the import of high-carbon products are already being discussed. The United States and European Union have already announced plans to impose tariffs on high-emission aluminum products. There is a lot of logic in this. Today, countries tax carbon or use trading in emission permits (credits) for products made on their territory, yet give a free pass to imports that are produced in a polluting manner. Such legislative proposals have been advanced in the United States, Canada, Russia, Japan and the EU.
This idea may be well thought out, but Israel has no practical climate policy. Where do we start?
“That’s true. Israel has set goals – zero emissions by 2050 and 30 percent renewable energies by 2030 – but not the ways to achieve them. There’s no way we will succeed without much more rigorous policies.
‘We need to act wisely and make sure there will be no shortage of natural gas for local consumption.’
“As I see it, a carbon tax imposed directly on emissions is the main instrument. Emission permits are less suitable for Israel, because there are fewer competitive markets. The carbon tax is also being discussed in America, which is much more competitive than our markets. Studies show that in Israel, a carbon tax is the one measure that can lead to a significant reduction in emissions – up to 60 percent of the present total.”
How should we use the fund’s revenue to promote these goals?
“In addition to the revenues from the carbon tax, the fund can be used to compensate low-income families who consume more energy-consuming products than high-income families. There should be a compensation mechanism that can help prevent energy-consuming products from becoming more expensive as a result of the carbon tax. Also, the revenue can be used to subsidize electricity-driven public transportation. Maybe not to provide it free of charge, as some countries do, but to make it cheaper. You can also subsidize the transition to electric vehicles.”
How can we overcome political obstacles and convince the public of the need for this?
“Through the subsidies. There is significant opposition to taxes, but this is a tax that all of humanity adopts. The fund’s revenues will lessen the negative effects, especially for low-income families. We will impose the tax and subsidize any vulnerable community affected by it.”
‘We’re in a world where there are dramatic changes in energy prices. There’s an alternative to the risks.’
Finance Minister Avigdor Lieberman reduced the tax on fuel in order to lower prices. Is he using tax as a political tool?
“I don’t want to comment on Lieberman. Any action taken before the elections will be interpreted as a political move. What we’re talking about should be the main task of the new government that will be established in a few months.”
How do we ensure that this money does not end up in the pockets of interested parties?
“We have to be careful when transferring money to avoid increasing the use of energy.”
The fund’s revenue now relies in part on natural gas exports, which are controversial. We see countries like Egypt, and also parts of Norway, where electricity became more expensive because they exported their gas and now there’s not enough to produce local electricity.
“The debate about exports started from the moment the law was enacted in 2011: Should we set a quota? Should we leave the gas for domestic use? A well-known historical example is Great Britain, which exported but then had to import at a higher price. The situation in the world has changed: we are a country with more than 1 trillion cubic meters of proven gas. Israel today can export to Europe through the liquefaction facilities in Egypt and take advantage of the high prices.”
Do you think that in 15 years’ time Israel will have to import natural gas from other countries? Won’t that be considered a lost opportunity?
“We need to act wisely and make sure there will be no shortage of natural gas for local consumption. We’re not considering Egyptian or European interests, but rather the opportunity to utilize a natural resource.”
It sounds like a kind of short bet in shares: you sell high now on the assumption that you’ll buy cheaper in the future. It’s more suitable for a casino or a stock exchange. A tactical bet, not a strategic one.
“Every market has its own risks. True, Israel needs a security reserve. And we do have it – the potential of natural gas in the ocean compared to the predicted consumption is great. It’s possible to increase exports yet maintain a reasonable reserve. The Karish and Tanin natural gas fields will start operating very soon, and there’s a strong probability of discovering new reserves in the future. The higher that gas prices will be globally, the more we have an incentive to conduct new explorations.”
So, in the short- and medium-term, should we continue to use polluting energy so we could accumulate the sums needed to clean up the future?
“We’re in a world where there are dramatic changes in energy prices. There’s an alternative to the risks.”
The ICL Group declined to comment for this article.