Of course, there is more to it than that. As I understand the issue, Israeli settlements are sometimes built without permission of the property owner, and equally important, they are not subject to the effective jurisdiction of the Palestinian Authority, since they are defended from the intervention with the force of the Israeli military.
It would be possible to develop an approach focused not on the issue of land use, but on the issue of legal jurisdiction.
If Israeli settlements were declared by Israeli law to be subject to the jurisdiction of the Palestinian authority and its courts, subject to appeal to the Israeli Supreme Court, and Israeli military forces only intervened when Palestinians were acting without duly authorized court process, or when Israeli settlers resisted legitmate court process and the Palestinian authority requested assistance, the result could be a federal solution, as opposed to a true "two state" solution to the Israeli-Palestinian conflict. Settlers in the territory the Palestinian Authority would control would be subject to Palestinian taxes, imposed on an uniform basis and subject to appeal to the Israeli Supreme Court on the theory that they are not uniform, as well.
Given Israel's need to defend itself militarily and the strong level of anti-Israeli sentiment in the Palestinian territories which would be signficant for the foreseable future even if it was not a majority view, ceding true sovereignty to the Palestinian territories may not be a viable option in the foreseeable future for Israel from a national defense perspective.
The Palestinian territories, in any case, probably aren't viable as a stand alone state. They are small, have few natural resources, have an anemic economy, has a thin tax base, couldn't build (and Israeli wouldn't want it to have) a fully functional modern military force, and has a civil society that is struggling to function in a workable way to use the power that it does have to run its territory as a local government. It is hard to see that giving the civilian government greater responsibility as a stand alone sovereign nation would work better.
But, acknowledging genuine Palestinian sovereignty over Israelis in its territory would give legitimacy to the Palestinian Authority that would give it a greater ability to work. It would also give Palestinians some positive incentives to recognize the legitimacy of the Israeli regime. It would create a lot of individually low stakes and decoupled opportunities to build trust while working together, between Israel and Palestine. It would allow Israel to disavow systemic land theft and unilateral expansion of its sovereign territory, without actually personally conducting court proceedings and operating bulldozers to evict Israelis from their homes in the West Bank. It would show respect.
There are religious and personal reasons, as well as economic ones, why someone in Israel might want to settle in the West Bank, and that would not be precluded. But, that decision would have to be made in a context where defiance of legitimate local political authority would not be permitted.
The sovereignty transfer deal could reserve a lot of practical legal authority to local governments in an intra-Palestinian territories federal regime, allow settlements with sufficiently large populations to set up their own local governments, and acknowledge of principle of adverse possession after a long period of time, allowing the oldest and best established Israeli settlements to establish legal title to territory that they control. It could also be part of the fig leaf that shows Palestinians gaining something in exchange for giving up land on the Israeli side of its security fence, where three quarters of Israeli settlers are located.
I don't claim that this idea is original. Hillel Halkin proposed something along the same lines in the Wall Street Journal in February of this year.
As Halkin explains:
"They," though, are hardly a monolithic group. They are a highly heterogeneous population, having in common only one thing: the fact that all live across the Israeli-Jordanian cease-fire line with which Israel's 1948-49 war of independence ended, on land wrested by Israel when it conquered Jordan's holdings west of the Jordan River in 1967. All are in "Area C," the part of the West Bank that has remained, according to the terms of the 1993 Oslo agreement, under temporary Israeli jurisdiction.
Some settlements were built on former Jordanian government-owned land that passed to Israeli jurisdiction, some on land purchased from Palestinians, some on land that was expropriated. Some are 40 years old and some were established recently. Some are isolated outposts, some small villages, some medium-sized towns with six- and eight-story apartment buildings. Some settlers are living where they are, often in the more isolated areas of the West Bank, for religious or ideological reasons; others, generally closer to the old 1967 border, because they have found well-located and pleasant surroundings at affordable prices. There are those who would willingly accept compensation in return for being evacuated as part of a peace agreement and those who would resist evacuation with all their might.
And there are settlers, roughly 225,000, who live on the "Israeli" side of the anti-terror West Bank security fence and settlers, about 75,000, who live on its "Palestinian" side. (Another 200,000 Israelis living in parts of former Jordanian Jerusalem that were annexed by Israel in 1967 are not listed by Israeli statistics as settlers at all.) Approximately 1/20th of Israel's Jewish population, the settlers' numbers have grown by over 5% a year, some three times the national average—a figure due to in-migration, mostly of young couples, and a high birth rate. . . .
Even if all the settlers living on the "Israeli" side of the security fence end up in Israel in the land swap that has come to be an assumed part of any peace deal, the 75,000 who would find themselves in a Palestinian state happen to be the very element of the settler population—the ideological and religious militants living deep in Palestinian territory—who are most committed to being where they are. What does one do with them? . . .
Clearly, these settlers do not want to be under Palestinian rule and would threaten violent resistance to it, too. But they would quickly find out that a Palestinian police force would not coddle them as Israeli governments have done, and paradoxically, because they attach a greater value to the Land of Israel than to the State of Israel, many of them might ultimately be willing, if they could have their civil and property rights safeguarded and continue to be Israeli citizens, to live in the land but outside the state. So might many of the more politically moderate ultra-Orthodox and secular Jews in the settlements, whose approach would be more pragmatic.
I suggest something somewhat more modestly than Halkin that there be two jurisdictions in a federal state, only one of which with a say in the national government, rather than two true states, because I don't think that the promises necessary to make this kind of arrangement workable could be honored by either side without the commitment of the Israeli government to honor it, and because I don't think that Israel would tolerate a complete cession of its right to enter onto Palestinian territory and its genuine agreement would be necessary to make this work.
Yes, this would be basically a colonial arrangement, with the Israeli Supreme Court functioning in much the role of the British Privy Council. But, this would still be better for Palestinians than the status quo. It is now a dependent political body without even ordinary civil law and tax jurisdiction over everyone within its boundaries.
I think that this could work. It is easier to regulate the functioning of courts and tax systems than the overall decisions of people to live in a particular area. It is easier to change someone's legal rights than to forcibly evict every single one of tens of thousands of your own citizens. It is easier to have a situation where the norm is simply to refuse to intervene militarily, and where one can count on never having sovereign opposition to one's own forces.