Concerns Among Fertilizer Exporters: Will Europe Recognize Israel’s Carbon Tax?

Introduction of Carbon Tax in Israel

As the European Union prepares to implement a carbon tax on imported goods based on their production emissions, Israeli exporters face uncertainty regarding the recognition of Israel’s forthcoming carbon tax. Set to take effect in January 2025, Israel’s carbon tax will charge 223 shekels per ton of carbon emissions starting from 2030. This initiative aims to serve as a countermeasure to the EU’s impending Carbon Border Adjustment Mechanism (CBAM). However, the EU has yet to confirm whether it will recognize Israel’s local carbon tax, potentially exposing fertilizer exporters to double taxation.

Implications for Israeli Exporters

Leading Israeli fertilizer exporters, including ICL and the Haifa Group, as well as smaller aluminum manufacturers, are troubled by the prospect of incurring additional tax liabilities. Currently, the EU does not automatically accept foreign carbon tax frameworks, creating a level of unpredictability for Israeli exporters regarding whether and how much the EU will recognize the Israeli carbon tax.

The Carbon Tax Mechanism Explained

Carbon taxes are designed to account for the externalities associated with carbon dioxide emissions, which contribute to climate change. The EU has employed a carbon trading system known as “carbon allowances” for the past decade. Under this system, the EU sets a minimum pollution threshold, requiring factories that exceed this limit to purchase emissions permits. Conversely, companies that produce below the threshold can sell their surplus permits, creating a market prstart for emissions that incentivizes reduced pollution levels.

The EU reduces this threshold by 2.1% annually, driving European factories toward greater emission reductions. However, this creates competitive disparities, as foreign companies are not required to comply with carbon purchase obligations.

In an effort to level the playing field, the EU plans to extend its carbon tax to imported products starting January 2026 through CBAM. According to Yair Abidan, chairman of the advisory committee of the Arison Center for ESG and former bank supervisor, the EU will levy carbon taxes on imports based on greenhouse gas emissions incurred throughout the entire production process.

Cost Disparities and Potential Risks

The current market prstart for carbon allowances in Europe stands at approximately €90, equating to around 331 shekels per ton of emissions. Thus, even at full maturity, Israel’s carbon tax is lower than the EU’s equivalent, which raises concerns that the EU may impose additional border taxes to offset this difference.

Moreover, as part of agreements with the Manufacturers’ Association, the Israeli government has allocated 1 billion shekels in grants aimed at reducing carbon emissions from 2025 to 2030. There are concerns that the EU may interpret some of these grants as reductions in the carbon tax paid in Israel, prompting the EU to classify the Israeli carbon tax as relatively low and apply additional border taxes.

Economic Responses and Future Actions

Further complicating matters, European farmers are expressing anger over rising prstarts of imported fertilizers, pushing the European Commission to consider suspending imports altogether. The Israeli Ministry of Economy has stated that the economic attaché in Brussels is in discussions with the Ministry of Finance to ensure that double taxation is not levied on Israeli exporters, both domestically and at the EU border. However, the EU has yet to publish specific implementation guidelines for the carbon tax offset mechanism.

This evolving situation continues to present significant challenges and uncertainties for Israeli exporters in the face of tightening global environmental regulations.