Are Economic Tools Preferable to Direct Regulatory Measures in Achieving Environmental Goals?

Abstract

Regulators around the world are dealing with a fundamental dilemma. Clearly, modern economic activity raises the standard of living but, on the other hand, it creates many environmental hazards that harm our quality of life. To balance these conflicting effects, they are interested in bringing about social equilibrium and for the value of marginal damage to be equal to the cost of reducing it. Excessive investment will result in too much damage to the standard of living, while under-investment carries with it excessive risks. There are two primary ways to approach these concerns regulatorily: through direct command-and-control regulation or through the development and promotion of market-based economic tools (other essential components, such as education and information, will not be covered in this article). Over the years, in many Organisation for Economic Co-operation and Development countries, the use of economic tools increased at the expense of direct regulation but, in Israel, there is still a tendency to use direct regulation. Since the beginning of the 21st century, however, Israel too has seen an increase in the use of economic tools. The article considers whether it is better to increase the use of economic tools at the expense of direct regulation. Its examination is based on six case studies from various environmental fields in Israel. The results of the research reinforce the argument that economic tools can achieve policy objectives more effectively while driving the market toward environmental improvement. However, it is almost impossible to clearly attribute other achievements, such as the achievement of advanced environmental goals, the development of environmental awareness or the strengthening of environmental regulation, to a particular regulatory approach. Therefore, the results should be seen as supporting evidence and not as absolute proof of the value of economic instruments.

Keywords

Environmental regulation direct command-and-control regulation cost-benefit

Since the end of the 1960s, policy-makers around the world have been looking for tools to achieve their environmental goals. The two main environmental policy instruments are direct regulation and market-based economic tools, described as follows:

“Direct regulation” refers to any set of measures that define what is permitted and what is not. Environmental regulation of pollution generally establishes a permitted threshold for discharge/emission. The polluter who passes the threshold is liable to fines and even criminal penalties, the purpose of which is to deter the continuation of the deviation (Zito et al., 2011). Traditionally, the regulatory tools implemented in most developed countries were based on direct command and control (CAC) of the regulated acts, rather than the use of marketable permits (Hepburn, 2006). One of the central arguments against overdependence on CAC environmental regulation, however, is its need to rely on government enforcement. The effectiveness, applicability and ability to bring about the required environmental improvement of these CAC systems is not always apparent (Karsin, 2009).

The concept of “economic tools” refers to measures that rely on market mechanisms to internalise external environmental costs and to incentivise the players to move towards optimal equilibrium, without explicit guidance or guidance regarding the level of that equilibrium. Economic tools do not limit the level of pollution, but demand payment for each unit of pollution (Seroa da Motta et al., 2004).

As most countries that are part of the Organisation for Economic Co-operation and Development (OECD) have done in the past, Israel has developed a broad and varied policy aimed at conserving and protecting the environment, applying a policy based mainly on regulatory tools and CAC mechanisms. Over the last four decades, however, many OECD countries have extended their use of economic tools for these purposes, recognising that CAC regulation often leads to unnecessarily expensive solutions (Bailey, 2007). In Israel, the implementation of economic tools in environmental policy began in the late 1990s, but it is rapidly gaining momentum and is becoming a legitimate and significant tool in the country’s environmental legislation (Bank of Israel, 2010).

1 Methodology

This article’s comparison between CAC regulation and economic tools will be based on four criteria:

Implementation ability and cost: asking which tool results in higher compliance and which incurs lower government administrative costs in achieving the reduction targets (Lavee and Joseph-Ezra, 2015);

Efficiency: considering, via cost-benefit analysis, which tool achieves the highest net benefit (marginal cost of reducing the pollution compared to the marginal benefit of its removal);

Morality: applying the “polluter pays” principle – looking at whether the polluter or the exposed population bears the cost of pollution;

Harm to competitiveness and market forces: assessing the effects on economic competitiveness and trade.

This article will examine case studies according to each of these criteria separately, without specifying a quantitative weighting for each criterion. The goal is to give a general indication of the priority of using each tool.

2 Examining the Use of Economic Tools in Environmental Policy Compared to Direct Regulation

Case studies were chosen primarily with the goal of examining both CAC regulation and economic tools in a particular sub-sector or objective. From among these, cases were selected according to the importance of the field of activity and the level of existing data. The following case studies involve four central areas of pollution – air pollution, waste treatment, water policy and promotion of the use of treated effluents for agricultural irrigation (Lavee, forthcoming).

3 Plans to Reduce Air Pollution

Air pollution in Israel is one of the most severe environmental hazards affecting public health and quality of life. Most of the air pollution is caused by anthropogenic emissions, mainly from energy, transportation and industrial plants. Scientific studies point to the negative health effects, namely premature death, lung cancer, asthma and more (Lavee et al., 2015). In recent years, the Clean Air Law has been enacted, which includes, among other things, a multi-year government plan to improve air quality in Israel (Lavee and Menachem, 2018). The following are summaries of two case studies from the field of air pollution in the transportation sector.

3.1 Vehicle Emissions – Green Taxation

After many attempts to impose restrictions on the pollution of older vehicles, including the obligation to install catalytic converters in old vehicles, environmental reforms (summarised in Table 1a) were introduced in 2009 relating to the taxation of private vehicles, changing the tax rates imposed on the purchase of vehicles to reflect the pollution they create. The share of purchase tax increased from 72 percent to 90 percent. However, after application of a tax benefit corresponding to the pollution level of each model, the adjusted tax rates ranged from 30 percent to 90 percent. This policy resulted in less-polluting vehicles becoming cheaper while more-polluting vehicles became more expensive. A case study prepared for the OECD (Roshal and Tovias, 2016) recommended that other countries learn from Israel and adopt similar programmes for taxing vehicles.

Table 1a
Tables 1a –1c Comparisons of the use of regulatory and economic tools Table 1a. Air pollution

Policy target CAC regulation Economic tool Implementationability and costgap of theeconomic toolcompared toregulation Efficiency: theincrementalbenefit of theeconomic toolcompared toregulation Morality Harm tocompetitivenessand marketforces

Reducing air pollution from transportation Limiting emissions from vehicles (1963) Green taxation - creating a link between pollution and the cost of the vehicle The tax led to a decrease in average engine capacity, reduced emissions and a 7% reduction in emissions relative to the state of origin ILS 314 million The cost is imposed on the polluter according to the degree of pollution emitted by the vehicle Not relevant to Israel. In Israel, all vehicles are imported and therefore have no effect on competitiveness

Reducing air pollution and reducing the dangers of old vehicles The obligation to perform two annual licensing tests A plan to encourage car-scrapping The economic incentive led to a massive reduction in the number of old vehicles and a 5.8% reduction in air pollution from this group of vehicles NB of US $100 million; cost-benefit ratio of 5:3 In this case, the government bears the entire cost to achieve a reduction in air pollution Not relevant to Israel. In Israel, all vehicles are imported and therefore have no effect on competitiveness

Policy target	CAC regulation	Economic tool	Implementationability and costgap of theeconomic toolcompared toregulation	Efficiency: theincrementalbenefit of theeconomic toolcompared toregulation	Morality	Harm tocompetitivenessand marketforces
Reducing air pollution from transportation	Limiting emissions from vehicles (1963)	Green taxation - creating a link between pollution and the cost of the vehicle	The tax led to a decrease in average engine capacity, reduced emissions and a 7% reduction in emissions relative to the state of origin	ILS 314 million	The cost is imposed on the polluter according to the degree of pollution emitted by the vehicle	Not relevant to Israel. In Israel, all vehicles are imported and therefore have no effect on competitiveness
Reducing air pollution and reducing the dangers of old vehicles	The obligation to perform two annual licensing tests	A plan to encourage car-scrapping	The economic incentive led to a massive reduction in the number of old vehicles and a 5.8% reduction in air pollution from this group of vehicles	NB of US $100 million; cost-benefit ratio of 5:3	In this case, the government bears the entire cost to achieve a reduction in air pollution	Not relevant to Israel. In Israel, all vehicles are imported and therefore have no effect on competitiveness

The rise in fuel prices in Israel affected both pollutant emissions and the motivation to purchase cost-effective vehicles. In spite of this, however, the average engine capacity of cars purchased between 2000 and 2008 still increased despite the rise in price. However, since the end of 2008 (when the 2009 models entered the market), the average engine volume has declined consistently (Fig. 1). Therefore, it seems likely that environmental reform rather than the rise in fuel prices is the reason for the change in the composition of the new vehicles being purchased. Analysis has estimated the economic benefit from “green taxation” at 314 million Israeli New Shekels (ILS) a year (Lavee, forthcoming).

Fig. 1

The effect of “green taxation” on the volume of cars purchased in Israel.

Analysis of the results of these measures across the four criteria that are applied in this article is as follows:

Implementation ability and cost: The tax led to a decrease in average engine capacity, reduced emissions and a seven percent reduction in emissions relative to the state of origin.

Efficiency: The incremental benefit of the economic tool compared to regulation benefit from “green taxation” is estimated at ILS 314 million a year (Lavee, forthcoming).

Morality: The cost is imposed on the polluter according to the degree of pollution emitted by the vehicle.

Harm to competitiveness and market forces: Not relevant to Israel. In Israel, all vehicles are imported and therefore have no effect on competitiveness.

3.2 Programme for Early Scrapping of Old Cars

This programme was operated in Israel in 2010– 2013. It was based on economic research that examined both its utility and the optimal amount payable to the owners of the vehicles (Lavee and Becker, 2009). The purpose of the plan was to remove vehicles 20 years or older from the road because they emit 20 times more pollutants than new vehicles. The study was able to predict exactly the number of vehicles that were cut in the first programme, and as a result of the success, two additional programmes were approved. About 28,000 old cars were scrapped and their owners received a grant of ILS 3,000. As can be seen from Fig. 2, the percentage of old vehicles has decreased considerably during the years of operation of this programme.

Implementation ability and cost: The economic incentive led to a massive reduction in the number of old vehicles (dropping from 9 percent to 2 percent of the total number – see Fig. 2) and a 5.8 percent reduction in air pollution from this group of vehicles.

Efficiency: The incremental benefit of the economic tool compared to regulation benefit is estimated at US $127 million a year, while the cost of the plan amounted to US $27 million. NB Ratio of 5:3.

Morality: The polluter pays principle – in this case, the government bears the entire cost to achieve a reduction in air pollution.

Harm to competitiveness and market forces: Not relevant to Israel. In Israel, all vehicles are imported and therefore have no effect on competitiveness.

Fig. 2

The proportion of old cars (20 years or more) in the economy, 2009– 2013.

4 Change in Waste Treatment Policy

The waste sector was chosen for this study because that sector has made extensive use of CAC regulation over the years, but began commonly using economic mechanisms at the beginning of the 2000s. Therefore, the effectiveness of each tool can be compared more easily according to the methodology mentioned above.

In Israel, 5.4 million tons of municipal and commercial waste are produced each year, and the annual growth rate is 1.8 percent. In the past, the waste treatment policy was based mainly on its assimilation, but this solution has broad environmental implications – air pollution and greenhouse gas emissions, soil and groundwater pollution, land seizure, public health implications and more. Ayalon et al. (2001) have shown that the waste sector in Israel accounts for 13 percent of greenhouse gas emissions. In another study, Eshet et al. (2007) showed that the external effects of waste transit stations scattered around the country close to residential areas affect the nearby population up to a range of 2.3– 3.3 km from the transit station.

4.1 The Transition from Illegal Dumps to Regulated Landfill

At the end of the 1980s, about 96 percent of the municipal waste in Israel was transferred to landfills in illegal dumps, which were located in some 500 waste disposal sites and constituted a severe environmental hazard. The landfills operated without regulation, caused pollution of groundwater, soil and air, odour hazards and constituted a safety risk for flights (Nissim et al., 2005). At the beginning of the 1990s, significant actions were taken to close the landfills, primarily National Outline Plan 16, which set the standards required from waste sites and was supposed to close most of the unplanned landfills in Israel and establish some central and regulated landfill sites. The plan aroused the opposition of those municipalities chosen to host those landfill sites; and also of remote municipalities, concerned about an increase in the cost of transporting waste to these sites (Feinerman et al., 2004). Following the fierce opposition of the local municipalities, the closure of landfills was postponed despite some government decisions on the issue.

To deal with these objections, the State established two economic incentives: “hosting fees” – an on-going payment to the municipalities in whose area central landfills were created – and subsidies for those municipalities having to transport their waste further to these new landfills. The subsidy for transport costs is set for five years. In the first year, 100 percent of the difference between the cost of transportation to the local garbage dump (which was closed) and the cost of transportation to the new landfill site was subsidised. Each year the subsidy is reduced by 20 percent so that at the end of the programme, the municipality is paying the full cost of transportation. At the height of the programme, 107 municipalities participated in the initiative, and all the large garbage dumps (77) operating in Israel close to major cities and more than 250 local dumps were closed. It was the transition to the use of economic incentives that enabled the implementation of this plan. Subsidies of transportation costs to local municipalities increased by US $82 million for all closed sites, while the benefit of evacuating the central site in Israel (Hiriya site), responsible for 29 percent of the waste produced by the municipalities in Israel, was estimated at US $285 million (Ayalon et al., 2006).

Implementation ability and cost: The subsidy of transit costs led to the closure of more than 50 percent of the unregulated sites.

Efficiency: Extrapolating from results in Hiriya, where about a quarter of the waste produced in Israel was buried, it appears that the benefit of closing all the landfills is about US $1 billion a year, a cost-benefit ratio of 12 times.

Morality: The polluter pays principle – in the long run (after five years), the polluter (municipalities) pays for the transportation to the landfill site. In the short term, the government partially subsidises the programme.

Harm to competitiveness and market forces: Not relevant, as municipalities are public-sector bodies.

4.2 Reduction of Waste Disposal to Landfill

To reduce the rates of buried waste, the 1998 Recycling Regulations stipulate that the municipalities must recycle at least 25 percent of their waste. The transition to recycling was usually accompanied by direct incremental cost, so most of the municipalities did not meet the target and used various excuses to avoid compliance. In the early 2000s, however, this changed. One of the main reasons for this was the low cost of landfilling, which did not include the external costs, and therefore did not reflect all the costs for the society. Studies from the same period indicated the need for a change in the treatment policy of waste (Ayalon et al., 2000). The levy was supposed to reflect the external costs of the landfill, which would force the waste producer to internalise the costs and change the patterns of waste production.

4.2.1 Landfilling levy

The landfilling levy was implemented gradually: in 2007 it was US $2.5 per ton, and each year it increased, up to US $30 per ton in 2016. The gradual escalation in the levy in 2012 led to a 5 percent reduction in the amount of waste landfill in 2011. However, the price of landfilling in Israel is still very low compared to the accepted practice in the world and in relation to other waste treatment methods. In Belgium, for example, the landfill levy for Wallonia is almost US $120 (CEWEP, 2017).

4.2.2 Encouraging separation at source of different waste streams

To reduce significantly the amount of waste going to landfill and increase recycling of waste, it is necessary – in addition to imposing a landfill levy – to separate waste at source (Ayalon and Shechter, 1997). In 2008, the Ministry of the Environment began a programme of extensive assistance to the local municipalities to promote the establishment of infrastructures for separating waste at source into two streams (wet and dry). In addition to subsidising the required investments (purchasing garbage cans and trucks and setting up infrastructures), it was decided that each municipality that makes the separation should receive a grant of US $800 for each household that separated waste at source. After many years of refusing to collaborate, 44 municipalities (35 percent of the population) submitted applications (Lavee and Nardiya, 2013). A study that examined the life cycle of solid waste showed that when external costs are priced and internalised in the direct costs of the waste management system, the efficient solution for the waste management system is the separation of the source into two streams (Ayalon et al., 2010). Kan et al. (2010) showed that the economy loses about US $102 million each year as a result of the lack of separation at source of the various waste streams.

4.2.3 Analysis Applied to Transition and Reduction Programmes

Implementation ability and cost: From the beginning of the use of economic tools there is a decrease in landfills.

Efficiency: The economy will gain about US $102 million each year as a result of separation at source of the various waste streams.

Morality: The polluter pays principle – in the long run the polluter (municipalities) pays for the source separation. In the short term, the government partially subsidises the programme.

Harm to competitiveness and market forces: Not relevant, as municipalities are public-sector bodies.

4.3 Recycling Market of Beverage Containers and Deposit Law on Beverage Containers

The importance of the Deposit Law on Beverage Containers (Deposit Law) stems from the significant volume of plastic from the total waste (41 percent), most of which comes from beverage containers. Increasing the volume of recycling of beverage containers would significantly reduce the volume of landfill. The Deposit Law was enacted and came into force at the end of 2001. It obliged shops to collect a deposit from members of the public for each small beverage container (with a capacity of less than 1.5 litres), to be refunded when the container is returned. In 2010, the law was amended so that it also imposed a responsibility on the manufacturers and importers to collect and recycle larger containers, and set a target for these actions (Ayalon et al., 2000). The objectives of the Deposit Law include, among other things, raising the level of cleanliness in public spaces and reducing the amount of waste buried (Lavee, 2010). Although the purpose of the law is the same for both types of beverage containers, the government used two different policy tools to encourage consumers to return the containers. For the small containers, it used an economic tool, while for larger containers, it used a regulatory action in the form of a voluntary collection target that beverage manufacturers and importers must meet.

The use of two different policy tools allows us to compare the economic incentive with the regulatory obligation. According to the ELA Recycling Corporation, the rate of return of the small beverage containers that require a deposit is about 80 percent, while the voluntary return rate of the large beverage containers is only 55 percent. But if we examine the volume of voluntary recycling, and do not consider containers collected from sorting stations, which also contain other plastic containers thrown into the recycling cages, the rate of voluntary recycling in Israel is estimated at only 11– 30 percent, similar to other countries. A study conducted in the US in 2014 found that the rate of return of beverage containers in countries where there is a deposit law is about 80 percent, compared to 23 percent in countries where there is no such law (MSC, 2014). The net benefit per container is US $0.03, or US $44 million per year for the total number of containers returned (Lavee, 2010). Thus, the economic viability of implementing the Deposit Law is clear: the economic tool is the means by which it can bring the economy to optimum levels.

Implementation ability and cost: Collecting about 80 percent of the tanks under the deposit refund law, compared to 30 percent under the voluntary collection target.

Efficiency: Benefit of US $44 million per year from the Deposit Law.

Morality: The polluter pays principle – since the beverage manufacturers are the polluters and the law is imposed on them, the cost is borne by the polluter.

Harm to competitiveness and market forces: There is some damage to competition, but since the law applies uniformly to all beverage manufacturers, there is no harm to specific manufacturers.

5 Change in Environmental Policy in the Water Sector: Agricultural Irrigation

From the mid-1990s until the end of the first decade of the 2000s, when the desalination plants began operation, Israel’s water sector suffered from an on-going shortage of water. This study focused on one of the actions taken: encouraging the agricultural sector to switch from the use of fresh water to treated wastewater-system effluents.

Using wastewater for irrigation has additional external benefits beyond the reduction in freshwater usage: agricultural irrigation water accounts for about 36 percent of the annual recharge of the Coastal Aquifer, and the treated wastewater contributes significantly to the enrichment of the aquifer (Haruvy, 1998). Other positive effects are the reduction of demand for fresh water for agriculture, and therefore the decrease in the need for new drilling or the construction of desalination plants (Friedler, 2001).

In 1992, the government decided to incentivise the agriculture sector to make the switch to the use of effluents, by the use of a quota policy. The price of water under the quota was subsidised. Any deviation from the quota was accompanied by fines and administrative enforcement (Becker and Lavee, 2002). The policy did not achieve the desired goal of converting 50 percent of the water used for agriculture to treated wastewater (see Fig. 4). Farmers did not switch to significant use of treated wastewater (Finkelshtain and Kislev, 1997).

Fig. 3

Collection of containers with deposit refund and voluntary collection. Note: The blue line is the rate of return (%) of deposit refund containers, the red line is the rate of return (%) of large containers.

Fig. 4

Annual water consumption by agricultural sector in Israel, by source of water, 1985– 2050. Source: Water Authority, 2010.

In the early 2000s, the government decided to combine two economic measures simultaneously. The first of these was subsidising the reclamation of effluents for agriculture. The State funded 60 percent of the cost of the investment, on the condition that the farmers would undertake to waive the quotas for fresh water they received under the previous policy of quotas. Secondly, since 2006, the government has stopped subsidising the price of fresh water for agriculture (Lavee, 2011). Thanks to these government policy measures, the consumption of fresh water in agriculture declined by about 60 percent between 1985 and 2010, and the consumption of treated wastewater in agriculture increased by nearly 900 percent (Fig. 4). According to the government forecast, by 2025, the use of effluents in agriculture will account for about 90 percent, and the economic benefit will amount to US $212 million a year (Lavee, 2014).

As a result of government policy, Israel has become the world leader in the use of treated wastewater – see Fig. 5.

Implementation ability and cost: The consumption of fresh water in agriculture declined by about 60 percent between 1985 and 2010, and the consumption of treated wastewater in agriculture increased by nearly 900 percent.

Efficiency: The economic benefit will amount to US $212 million a year.

Morality: The polluter pays principle – not relevant.

Harm to competitiveness and market forces: The cost of treated wastewater is lower than the cost of fresh water even compared to the cost of fresh water before the reform. The government assistance in the transition from fresh water to effluents has reduced the costs for farmers and therefore their competitiveness has increased.

Fig. 5

Comparison of the percentage of treated wastewater used around the world, 2014. Sources: California data: Olivieri et al., 2014; all other data: Water Authority, 2015.

6 Comparison Between the Application of Direct Regulation and the Operation of Economic Instruments

In the last two decades, a growing proportion of environmental policy in Israel has been based on the use of economic tools rather than regulation. This change is the result of policy-makers understanding that a market approach should be applied, and that positive and negative incentives can motivate individuals to internalise the external and social effects of their actions more effectively (Lavee, forthcoming).

Tables 1a, 1b and 1c present comparisons based on CAC regulation and the use of economic tools for six policy processes in Israel. The table contains a reference to policy objectives and a comparison of the results of both approaches, accompanied by quantification in monetary terms where possible. In all issues presented, economic tools were used after policy-makers had tried, and failed, to achieve results through regulation. The increased use of economic tools led to a change in consumption and production patterns, accompanied by external influences while avoiding harm to the proper functioning of the economy and minimising costs to the State.

Table 1b
Solid waste minimisation

Policy target CAC regulation Economic tool Implementationability and costgap of theeconomic toolcompared toregulation Efficiency: theincremental benefit of theeconomic toolcompared toregulation Morality Harm tocompetitiveness and marketforces

Reducing unregulated landfills Regulations prohibiting the use of illegal landfills Subsidising the cost of transferring to organised landfills The subsidy of transit costs led to the closure of more than 50% of the unregulated sites During the period of the plan, benefit of US $1 billion; cost-benefit ratio of 12:3 In the long run the polluter (municipalities) pays for the transportation to the landfill site. Not relevant, as municipalities are public-sector bodies (not participants in the competitive market)

Reduction of waste transferred to landfills Regulations of Recycling 1998 Waste disposal levy From the beginning of the use of economic tools there is a decrease in use of landfills Savings of US $102 million per year from source separation. In the long run, the polluter (municipalities) pays for the source separation. Not relevant, as municipalities are public-sector bodies

Encouraging source separation

Increasing public cleanliness and reducing landfilling A voluntary collection destination for large drink containers Deposit on small beverage containers Collecting about 80% of containers under the deposit scheme, compared to 30% under the voluntary collection target Benefit of US $44 million per year from Deposit Law Since the beverage manufacturers are the polluters and the law is imposed on them, the cost is borne by the polluter Since the law applies uniformly to all beverage manufacturers, there is no harm to specific manufacturers

Policy target	CAC regulation	Economic tool	Implementationability and costgap of theeconomic toolcompared toregulation	Efficiency: theincremental benefit of theeconomic toolcompared toregulation	Morality	Harm tocompetitiveness and marketforces
Reducing unregulated landfills	Regulations prohibiting the use of illegal landfills	Subsidising the cost of transferring to organised landfills	The subsidy of transit costs led to the closure of more than 50% of the unregulated sites	During the period of the plan, benefit of US $1 billion; cost-benefit ratio of 12:3	In the long run the polluter (municipalities) pays for the transportation to the landfill site.	Not relevant, as municipalities are public-sector bodies (not participants in the competitive market)
Reduction of waste transferred to landfills	Regulations of Recycling 1998	Waste disposal levy	From the beginning of the use of economic tools there is a decrease in use of landfills	Savings of US $102 million per year from source separation.	In the long run, the polluter (municipalities) pays for the source separation.	Not relevant, as municipalities are public-sector bodies
Encouraging source separation
Increasing public cleanliness and reducing landfilling	A voluntary collection destination for large drink containers	Deposit on small beverage containers	Collecting about 80% of containers under the deposit scheme, compared to 30% under the voluntary collection target	Benefit of US $44 million per year from Deposit Law	Since the beverage manufacturers are the polluters and the law is imposed on them, the cost is borne by the polluter	Since the law applies uniformly to all beverage manufacturers, there is no harm to specific manufacturers

Table 1c

Water

Policy target	CAC regulation	Economic tool	Implementationability and costgap of theeconomic toolcompared toregulation	Efficiency: theincrementalbenefit of theeconomic toolcompared toregulation	Morality	Harm tocompetitivenessand marketforces
Reducing the use of fresh water and encouraging the transfer of effluents	Allowance of quantities of fresh water	Subsidising the reclamation of effluents for agriculture, and stopping the subsidy of fresh water for agriculture	The consumption of fresh water in agriculture declined by about 60 percent, and the consumption of treated wastewater in agriculture increased by 900%	The economic benefit will amount to US $ 212 million a year	Not relevant	No, the cost of treated wastewater is lower than the cost of fresh water

The use of economic tools has led to a reduction in air pollution from transportation due to the “green taxation” policy and the car-scrapping plan. The economic incentive for taxation created a link between the level of pollution and the price of the vehicle and led to the internalisation of the external influences from travelling in a polluting vehicle and, as a result, a decrease in engine volume. The car-scrapping programme helped remove older vehicles from the roads at a higher level than the differential vehicle licensing fee based on vehicle age.

In the field of waste treatment, the adoption of a regulation prohibiting the use of unregulated waste sites was unsuccessful in achieving goals. Success came only when policy-makers adopted an economic model that enabled the various elements in the field to adapt to the change and internalise the external influences caused by their actions. Also, the reduction in the amount of waste was effected through imposing a landfill levy and subsidising recycling activity, which increased turnover and reduced the amount of landfill waste.

In the case of the collection of the beverage containers, the collection rate under the CAC regulation has been low, and it has taken a long time for recycled containers to reach the collection point. Also, enforcement requires the supervisory body to examine compliance with the recycling targets – an expensive process. On the other hand, the container-deposit system uses market forces, and has led to the fact that about 80 percent of the small containers are recycled by persons seeking to harvest the economic value attached to each empty container.

Environmental policy in the water sector presented another example of the significant change. With the goal of increasing the agricultural use of treated wastewater-system effluents, the government’s switch from CAC administrative quotas to the use of economic tools, has resulted in Israel’s becoming a world leader in the use of treated wastewater.

On the basis of the criteria used, it seems that economic tools have an advantage in their ability both to motivate processes and achieve the goals of government policy, and to satisfy the moral principle that the polluter pays. On the other hand, however, there may be instances of harm to competitiveness and even an increase in the cost of living.

CAC Regulation sets environmental objectives. If the polluter meets these goals, he is not required to pay for the pollution he produces (i.e., the remaining pollution permitted under the same regulation). By contrast, the economic tools operate according to the principle of the polluter pays, and therefore a manufacturer that meets optimal environmental objectives will continue to pay for the balance of the pollution it creates (the assumption that even at best, pollution will be created). This situation, even if it is moral and correct, still generates incremental costs (beyond the cost of production and the cost of investment by means of reducing pollution), both in terms of the manufacturer’s competitiveness and in resulting increases to the consumer’s cost of living (because the producer will pass on part of his costs). If the cost falls on all producers in an equal and symmetrical manner, it is not expected to harm competitiveness; however, where the local producer deals with manufacturers in other countries (as an exporter or as a business that uses foreign products or provides them to the local market), local costs and rules will not apply equally.

In addition, in any case, the consumer is expected to see an increase in the price of the product. Although the increase in price is correct in terms of economic optimality, there are sometimes additional considerations for the government, such as poverty and inequality amongst its population. In order to deal with such broad effects, the government must examine all the implications of the policy and address those that have undesirable outcomes. These issues are beyond analysis in this paper but they deserve further examination.

7 Summary

Economic tools are gaining an important role as an effective tool in environmental policy to manage a wide range of environmental issues. In the past, the use of economic tools was a tiny part of environmental policy, compared to the widespread use of direct regulation in Israel. In recent years, Israel has undergone significant developments and is at the beginning of a revolution in the implementation of an extensive public environmental policy, which relates to the external influences of actions that harm the environment and the quality of life of the residents. Israel is working to expand the use of environmental taxes and other economic incentives, in part because of the process of joining the OECD.

Behind these developments was a change in approach, not only of the Ministry of the Environment but also of other government ministries, such as the Ministry of Finance, the Water Authority and the Ministry of Transportation. Direct regulation and economic tools require enforcement, since both rely on traditional enforcement mechanisms. In the test, it appears that economic tools are more conducive to internalising the external effects of the market than direct regulation. The reason for the success of the economic tools is probably because an economic system based on a market economy adopts economic tools more easily. Also, the transition to economic tools and the reduction in direct regulation is in line with the process of deregulation that the Israeli government has adopted in recent years.

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