As we heard repeatedly from COP26, it’s all about the money.
How can we carve channels of capital to finance climate transition and reduce greenhouse gas emissions? The challenge facing us is how to deliver cuts in emissions and simultaneously deliver economic incentives for our citizens, neighbors and future partners so we can change behavior and decarbonize in the transition window we have left.
This closing window over the next decades has important implications – for policy decisions and funding mechanisms – for the natural gas markets of the Eastern Med. A recent study of these markets concludes that suppliers must focus on domestic, regional and European markets – including the Middle East and North Africa. And we must invest in a “sustainable market that supports a combination of gas and renewables.” In fact, the International Energy Association recognizes the importance of incorporating natural gas with renewables as part of a strategy to transition to net-zero in our part of the world.
Clearly, Israel cannot be left sitting on what will eventually become obsolete, non-performing, stranded assets. But the remaining window for monetizing our gas reserves coincides largely with their current lifespan, estimated at between 18 and 25 years. We will need a laser focus for both industrial policy and market strategy if we’re going to accelerate emissions reduction and keep economic growth alive. We need to direct that focus as well on extending green, clean and agricultural technologies to other aspiring start-up nations that want to move into the mainstream global economy.
There is no “one size fits all” solution for energy transition, but the optimization of a portfolio of solutions has implications for our long-awaited Israel Citizens Fund (ICF), and for finally getting it right under conditions that have ripened since the inception of these ideas a decade ago. In 2011, when we began work designing the fund, there were 56 sovereign wealth funds worldwide; today there are 134. And their investment strategies are changing with the times. Some of the world’s largest sovereign wealth funds reported a total investment of $2.3 billion in 2020 in climate-change investments, more than double their 2019 investments.
If Israel wants our own sovereign wealth fund to have greater influence, and greater capacity for diversity and growth, we should follow the successful strategies of SWFs in Singapore, Saudi Arabia, the UAE, China, Italy, and Morocco among others. This means we must update the decade-old ICF mandate. That original model of traditional commodity revenue sources is outdated and insufficient to meet the climate crisis.
The fund must enlarge its available capital allocation by including, as do those funds, surplus foreign exchange reserves, revenues from privatizations, budgeting excesses, governmental transfer payments, unclaimed assets in banks and the Finance Ministry, Diaspora bonds, IP rents, and funds raised in the international capital markets.
In short, if we launch the ICF as a permanent capital vehicle that includes new strategic climate investment, we can self-finance our energy transition by optimizing the short-term natural resource development (our gas reserves) to fuel the larger regional energy transition. Halting coal and diesel imports immediately and accelerating near-term use of natural gas would: 1) eliminate the risk of stranded assets because we would be depleting reserves sooner at higher prices; 2) increase sovereign wealth fund revenues that could be invested in new energy systems and hybrid technologies; and 3) increase revenues and growth through increased energy technology exports.
This kind of expanded investment portfolio aligns well with carbon-neutrality goals because its managers can design investment portfolios that reduce the fund’s carbon footprint. Already, the Finance Ministry has proposed a carbon pricing scheme, and the fund could dedicate some of those tax receipts and leverage sustainability bonds for project finance to help subsidize the next generation of renewable technologies and other zero-carbon technologies for export.
In 2021, already 20 countries (including France, Germany, UK, Colombia, Spain and others) have raised over $100b. in sovereign green and sustainability bonds to accelerate energy transitions.
The government, Israel Citizens Fund and Development Corporation of Israel (Israel Bonds) could raise low-cost funds under the International Capital Market Association’s Green and Sustainability Bonds principles (just as Bank Hapoalim raised $1b. in contingent convertible green bonds last month) for energy transition projects and technology development through sustainability bonds, and outcomes-based, sustainability-linked corporate bonds to fund energy transition at home and abroad.
This would further leverage the fund as an investment vehicle to address the UN’s sustainable development goals, and it would highlight Israel’s catalytic role as, what the prime minister has called, a “climate innovation nation.” When Israel helps finance green projects and pipeline development through its own capital markets, it reaps the benefits of being the leader that develops, field-tests and amplifies those high-value technologies for export.
We can also monetize natural gas assets into the ICF (not relying on government budgets) to channel returns into investments in technologies that can, for example, address marine protection zones and conservation, and stop Mediterranean Sea acidification; enable low-carbon energy transitions; build cultural heritage tourism; promote desert and sustainable development technologies; and drive economic growth.
And increasing Eastern Mediterranean regional cooperation (through the Eastern Mediterranean Gas Forum including Greece, Cyprus, Egypt, Jordan, the Palestinian Authority and Israel) can help end energy poverty in the Middle East and North Africa, where more than 65 million people have no access to electricity and another 60 million live with prolonged power outages and undersupply.
Looking outward, the larger region also has sufficient natural gas reserves to help fund broader cooperation with us on the growing energy needs of coastal states, and to monetize natural surplus and reserves via Egypt’s LNG facilities for various sovereign wealth funds (including the ICF, Egypt, Cyprus, Greece, Jordan and the Palestinian Investment Fund). These sovereign wealth funds can also finance technologies that promote low-carbon energy production for electrification and simultaneously expand renewable energy technology and cogeneration, thereby reducing carbon transition risk.
They could engage in programs that affect electricity generation and transition costs and address energy reliability by reducing intermittency. They can invest in the replacement of coal and diesel without causing carbon lock-in that might limit renewables. Cooperation enables a faster adaption of cleaner energy systems later because it will help us avoid the destabilization of power grids from overuse once a flexible generation and energy storage become widely commercially viable and available.
With our Eastern Mediterranean neighbors, we can use that generated revenue from natural gas and other natural resources to finance new energy systems, improve performance, and reconfigure and shape new markets. Through these investments, we can build a sustainable national and regionally integrated economy.
The writer is senior director of the Milken Innovation Center and Blum Lab for Developing Economies at the Jerusalem Institute of Policy Research and a senior fellow at the Milken Institute. He teaches at the Hebrew University Business School and the University of California-Berkeley.