Impact of Europe’s new climate tax on Israeli companies

21 June, 2023

Based on the understanding that the climate crisis is marching towards us faster than ever before and that its solutions must be global in scope, various places around the world have begun suggesting ways to reduce greenhouse gas emissions supported by significant economic incentives.

The most significant advance in this field is last month’s European Union decision, which might be the harbinger for developments around the world and might bear influence on major markets and Israeli exporters.

The European Union recently approved the new Carbon Border Adjustment Mechanism (CBAM).

CBAM is a tax which is part of a broader effort to achieve an overall 55% reduction in greenhouse emissions by 2030. The Union intends to use the tax to fund part of its budget.


In 2005, the Union launched its emissions trading scheme, which allows each company to emit a fixed limit of greenhouse gases. Companies polluting less than that limit are able to trade their remaining limits to companies exceeding their allowance and in need of more.

The new tax is designed to complete the emissions trading system and impose tax on goods imported into the Union from countries without carbon taxes at the same rate.

One of the principal objectives in imposing this tax is to inspire other countries to impose a similar tax and thereby, maintain the Union manufacturer’s competitive edge with manufacturers in countries where they pay lower carbon taxes, if at all.

The problem has a name – “Carbon Leakage”. It is a term used to describe a situation in which industries in the Union are at a competitive disadvantage because of the carbon taxes they must pay. These taxes may force those industries to move manufacturing to countries with a more relaxed attitude towards carbon taxes.

The Union’s main fear is the transfer of industries to countries such as China, the U.S and Russia. However, it now seems that the tax will be imposed across the board and will influence industries in all countries with carbon taxes lower than the Union.

The industries to be affected most by the imposition of the tax are steel, cement, aluminum, fertilizers, hydrogen, electricity, chemicals and other products at the lower end of the supply chain, such as bolts and other product components. The tax is also expected to apply to indirect emissions, such as maritime transportation.

From when?

From October 23rd, Israeli companies exporting to the Union will be obliged to provide the Union with reports throughout the phase-in period. Beginning January 2026, the tax will actively apply, and exporters will have to provide CBAM certificates, stipulating their products’ inherent emission levels.

How will it affect us here?

At least partially, Israel’s excise tax mechanism constitutes a type of carbon tax in all matters pertaining to the use of fuels. However, excise taxes are not applied to all carbon emissions, and they do not reflect the entire range of external costs arising from those emissions.

In the past, the OECD advised Israel to impose a carbon tax, which Israel was also required to implement in light of the commitments Israel made by signing the Paris Agreement. It is also understood from the policy document issued by the Ministry of Environmental Protection, that it is the most appropriate action to be taken under the circumstances.

If a full carbon tax is not introduced in Israel, anyone exporting from Israel to the European Union will necessarily have to find creative ways to avoid additional costs and it is likely that trading in emissions will become the most widely used and accepted alternative under the circumstances.

Read the Article at Lexology >>

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