The Israeli perspective is probably clearer. The Kerry initiative starts with the acceptance of a modified version of the 2002 Arab Peace Plan. That plan was based on the idea that if Israel fulfilled a series of requirements, the Arab world was willing to recognize Israel's right to exist and consider all conflict resolved; the Arab countries would have followed with the establishment of full diplomatic relations. The requirements were:
1)Complete withdrawal from the occupied Arab territories, including the Syrian Golan Heights, to the 4 June 1967 line and the territories still occupied in Southern Lebanon.
2) Attain a just solution to the problem of Palestinian refugees to be agreed upon in accordance with the UN General Assembly Resolution 194
3) Accept the establishment of an independent and sovereign Palestinian state on the Palestinian territories occupied since 4 June 1967 in the West Bank and Gaza Strip with East Jerusalem as its capital.
In exchange, the Arabs offered:
1) To consider the Arab-Israeli conflict over, signs a peace agreement with Israel, and achieve peace for all states in the region
2) To establish normal relations with Israel within the framework of this comprehensive peace.
The reasons Israel rejected this original offer were multiple. First, “Resolution 194” is Arab short hand for return of all refugees to Israel. Second, the implication that Israel was still holding to Lebanese territory (the so called “Shebaa Farms”) legitimized Hezbollah's aggression against Israel and ignored the UN decision that Israel had fulfilled the complete withdrawal from Lebanon. Third, Israel was not ready to accept complete withdrawal from the territories of Judea and Samaria. Fourth, this proposal came days after the Passover Massacre, making it impossible for any Israeli government to show weakness.
The new, revised version of the proposal that Kerry is using as the basis for his efforts revised the idea of return to Israel of all Palestinian refugees by establishing a mechanism of compensation and redefining return as return to the Palestinian State. These changes, from Israel's perspective come only part way to resolve the differences at a time when Hezbollah is intent in reopening confrontation with Israel, this time from the Golan Heights.
The Palestinian reluctance is in a way easier and in a way more difficult to understand. It is easier because accepting it mean to give up the right of return to Israel proper, a point considered central in the Palestinian narrative and it is a central issue for the Palestinian Diaspora. Accepting the plan would mean undermining the power of the Palestinian Authority.
It is more difficult to understand because under the current conditions, the Palestinians are loosing the attention and the sympathy of countries that only six months ago supported them in their bid for UN upgrading of status. By showing unwillingness to compromise they are playing against their own goals.
On the other hand, since the world is becoming very tired of the ongoing Israeli Palestinian conflict, the Palestinian leadership might be betting that in the absence of formal peace, they might still get away with gaining recognition for a State of Palestine not through negotiation and compromise but because the world might decide that enough is enough. In this case, however, Israel might end up determining the borders of the future State of Palestine unilaterally, thus providing a rational for an ongoing conflict. The Palestinian leadership, however, could avoid in this way the need to compromise.
As with so many other initiatives in the past, the main problem in this case is one of timing. When Clinton tried to force a solution in 2000 at Camp David Arafat was not ready to concede in any point, so the attempt to achieve peace resulted in the beginning of Arafat's War, also known as the Second Intifadah. And at this point, with a new Prime Minister of the Palestinian Authority being sworn in, the Palestinians are very unlikely to buy a major commitment to the Peace process.
Forcing the initiative on the players at this point might provoke a flare up of the Hezbollah-Israel conflict as well as worsen the separation between the Gaza Strip controlled by Hamas and the West Bank controlled by Fatah, and maybe a Hezbollah takeover of the Syrian revolt.
Over the years, Israelis and Palestinians have agreed many times on most of the nuts-and-bolts issues such as where the border will run, how they are going to handle the water and power supplies, etc. They have got always stuck when they tried to resolve some of the not-so-rational parts of the Conflict such as mutual respect and recognition of national rights, Jerusalem, and the issue of the refugees (both Arab and Jewish) – and for that agreement, the leaders must have the backing of their people...So timing is not just important; it is everything. As the presentation of the original Arab Peace initiative on the wake of the Passover massacre didn't work, the current timing is also lousy. Good idea, but at the wrong time...