Dear clients and friends,

1.We would like to inform you that on January 15, 2024, the government approved the state budget for 2024, based on a proposal that includes a range of issues in all areas (hereinafter: the Government Decision). As part of the Government Decision, a proposal was approved for pricing local pollutants and greenhouse gas emissions (on pages 4-3 of the Government Decision), which is to be implemented through an amendment to the Fuel Tax Ordinance (imposition of fuel tax), 2004, applicable to fuel producers and the Customs Tariff and Exemptions and Purchase Tax on Goods Ordinance, 2017, applicable to fuel importers (hereinafter: the Fuel Tax Ordinances).

For the Government Decision (the proposal that was approved by the government) dated January 15, 2024 >> click here.

2. According to the Government Decision, the Fuel Tax Ordinances implement a gradual increase in fuel tax and purchase tax rates starting from 2025 until the beginning of 2030, when the aforementioned tax rates will fully internalize the external cost of consuming the fuels.

3. We recall that the issue of imposing a greenhouse gas tax on fuel production through amendments to the Fuel Tax Ordinances was already discussed approximately two years ago (hereinafter: the Previous Drafts), and as we mentioned in our September 2021 update, in the Previous Drafts, the Ministry of Finance intended to only incorporate the external cost of greenhouse gas emissions at a gradual rate for the years 2023 to 2028. However, unlike the Previous Drafts, the new Government Decision seeks to incorporate into the Fuel Tax Ordinances, in addition to the external cost of carbon emissions, also the external cost of local pollutants. This means that the tax rates to be levied on each type of fuel are higher than the rates proposed two years ago.

4. Below, we present the excise and purchase tax rates (in New Israeli Shekels per metric ton) for each type of fuel, as determined by the Government Decision:

5. The Government Decision stipulates that the aforementioned tax rates will be published on the Israel Tax Authority website as a direct carbon tax. The purpose of this provision is likely to facilitate Israeli industries in demonstrating proof of carbon tax payment within their country of origin (Israel), thereby reducing or eliminating the need to pay carbon border adjustment taxes under the EU’s CBAM (Carbon Border Adjustment Mechanism) regulation.

6. As can be inferred from the Government Decision, the taxes to be collected are expected to increase government revenue and will not be directly allocated to incentives for reducing emissions, developing new technologies, or protecting domestic industry. However, as complementary measures, the Government Decision includes several additional statements, the implementation of which is expected to help achieve those goals:

• Within 6 months of the Government Decision, a framework will be established for determining a procedure for providing budgetary support to fuel-consuming plants. If the plan is not published, the tax increase will be delayed by one year.
• According to the Government Decision, the proposed framework allows for exemptions similar to those that European producers are entitled to under the EU ETS (European Union Emissions Trading System), while maintaining incentives for increased efficiency and taking into account the characteristics of the Israeli market and the proposed tax structure.
• The principles of the mechanism to the Israeli market are detailed in the Government Decision and include, among other things: support for industries exposed to competition from industries in countries without a carbon tax and a method for calculating emission targets to support existing or new plants (Section 2(a)).
• A procedure will be established to assist with achieving the increased efficiency required to adapt to the aforementioned tax, in an amount of up to 450 million shekels between 2024 and 2027 (Section 2(b)).
• A plan will be implemented to accelerate the deployment of the natural gas network by the Natural Gas Authority (Section 2(c)).
• A budget from the Cleanliness Fund will be allocated to support fuel conversion (Section 3).

7. To alleviate concerns that the aforementioned tax will lead to an increase in electricity prices, it was determined that if, in any year until the end of 2029, the average price of electricity for a household consumer increases due to a change in indices, the tax on natural gas will be suspended or reduced for one year, in a manner that will prevent an increase in electricity prices beyond the rate of increase in the consumer price index (Section 4).

8. Technological developments that will enable a reduction in greenhouse gas emissions from the use of the aforementioned fuels will be examined in the future by the relevant government ministries (Section 7).

9. The Government Decision also instructs the Minister of Finance to issue legislative memoranda that will impose a road tax on electric vehicles, but also reduce the purchase tax (pages 5-7 of the Government Decision).

We are at your disposal for any questions or clarifications on the matter.

Hoping for calmer days,

The Environment and Climate Change Practice

The above is intended to present the main issues and does not constitute legal opinion or advice.