In 2021, Israel imported almost all its coal as well as its primary and secondary oil product needs, with almost all coal supply used to generate electricity. Despite the current dependence to imports, the share of indigenous natural gas production is expected to increase following the relatively recent discovery of one of the largest known gas reservoirs in the world (the Leviathan), with production ramping up beginning in 2013. As of 2020, the field began commercial production of gas. Production levels from this field in 2021 were around 13 434 ktoe, about seven times the amount registered in 2012. In 2021, the country’s electricity output was mainly generated from natural gas (69%) and coal (23%), while at least 7% of it is generated from renewables. In 2019, the Israeli government announced its target to phase out coal-fired power generation by the end of 2025, five years earlier than the original target. To achieve this, the government plans to convert the Ashkelon coal-fired plant to natural gas by 2024 and the other two coal-fired electricity generation units at Hadera’s Orot Rabin plant to gas by the end of 2025.
OECD Inventory of Support Measures for Fossil Fuels: Country Notes
Israel
Energy resources and market structure
Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).
Israel’s energy sector is yet to become fully competitive. Electricity generation and distribution are dominated by the state-owned Israel Electric Corporation (IEC), although the share of electricity generated by private operators is expected to increase further as the country shifts towards increasing renewable generation, which in Israel is entirely private. Coal imports for electricity generation falls under the National Coal Supply Corporation, established, and owned by the IEC. The development of offshore gas fields is conducted by the private sector, much of it by a consortium of companies headed by a US oil company (Noble Energy) and Israel’s Delek Drilling. Gas transmission, on the other hand, is carried out by the Israel Natural Gas Lines Company (INGL), a government subsidiary established in 2003.
Energy prices and taxes
Israel’s concession-based regime for taxing hydrocarbon production, dating from 1952, was revised in April 2011. The new law provides that royalties on hydrocarbon discoveries will remain at 12.5%, according to the Oil Act, and another profits levy (in addition to regular corporate tax) will begin after the developers have paid back investment outlays plus a return allowance. The rate of such levy increases gradually up to 60%.
Over the last decade, Israel has advanced reforms to deregulate its oil sector, particularly the gasoline industry. Some price controls for end users of petroleum products were eliminated and the country’s two oil refineries were privatised. Excise duties on motor fuels are relatively high in Israel, making prices reach levels comparable to several European countries. In September 2009, a five-year fuel tax reform was concluded, with excise-tax rates on diesel and gasoline almost made equal and the diesel annual car licensing fee reduced to equal that of gasoline engine cars. Excise duties are also imposed on fuels used for stationary purposes. Taxes on coal are now substantially higher than the excises on heavy oil (mazut) and natural gas, which may further encourage a shift away from coal-fired generation.
In 2022, Israel reduced duties on coal from NIS 105 to NIS 1 per tonne; reduced the tax on diesel by NIS 0.43 per litre; and reduced the tax on gasoline by between NIS 0.27 to NIS 0.87 per litre.
A Value Added Tax (VAT) applies to all energy product purchases and is currently set at 17%.
Figure 2. Total tax rebates and support for fossil fuels in Israel
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Recent developments and trends in support
The bulk of fossil fuel support measures observed in Israel can be traced to the following measures: (i) Excise Tax Exemption on Diesel Fuel, (ii) Reduced Royalty payments, and (iii) Gas Agreement Between Israel Electricity Company and the Tamar Gas Field. The exemption on diesel was stipulated in the Excise Tax on Fuel Order of 2005. This measure provides for tax rebates on diesel fuel used in buses, taxis, fishing boats, and working vehicles such as tractors. The fuel tax reform concluded in 2009 considerably increased the revenue foregone resulting from the tax rebates on diesel fuel, from ILS 2.4 million in 2011 and now stands at ILS 3.6 million in 2018.
The fiscal cost of support measures for fossil fuels in Israel was estimated at ILS 6.75 billion in 2022 (Table 1). Ninety-four per cent (94%) was directed at end user beneficiaries, as opposed to 6% directed to firms. Support was mainly given out in the form of tax expenditures (ILS 6.35 billion) accounting for 94% of the total fiscal cost of support measures. Direct transfers amounted to ILS 0.40 billion.
The fiscal cost of support measures for fossil fuels has increased by 71% since 2017. Since last year, tax expenditures have increased by 86%, from ILS 3.47 billion to ILS 6.35 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 1. Fiscal cost of support measures for fossil fuels (in billions of national currency)
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
|---|---|---|---|---|---|---|
|
Tax expenditures |
3.462 |
3.625 |
3.702 |
3.324 |
3.473 |
6.346 |
|
Direct transfers |
0.496 |
0.493 |
0.449 |
0.430 |
0.404 |
0.404 |
|
Total |
3.959 |
4.118 |
4.151 |
3.755 |
3.877 |
6.750 |
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Table 2. Selected support measures for fossil fuels with a large fiscal cost (in billions of national currency)
|
Measures associated with large fiscal cost in 2022 |
2022 |
2017 |
Variation since 2017 |
|
|---|---|---|---|---|
|
Tax expenditures |
|
|||
|
Excise Tax Exemption on Diesel Fuel |
3.835 |
3.430 |
0.405 |
|
|
Reduction in excise tax on gasoline |
1.750 |
(Started in 2022) |
1.750 |
|
|
Reduction in excise tax on diesel |
0.560 |
(Started in 2022) |
0.560 |
|
|
Direct transfers |
||||
|
Gas Agreement Between Israel Electricity Company and Tamar Gas Field |
0.404 |
0.450 |
-0.046 |
|
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 3. Description of selected support measures for fossil fuels
|
Excise Tax Exemption on Diesel Fuel |
The Excise Tax on Fuel Order of 2005 provides tax rebates on diesel fuel if used for input purposes in the following commercial vehicles: buses, taxis, fishing boats, and working vehicles such as tractors. The tax rebate for commercial vehicles varies between 45% and 50% on a capped amount of diesel equivalent to the “average consumption” for a given use. In September 2009, the excise tax on diesel was set to match the excise tax on gasoline due to a five-year government reform aiming at reducing economic distortions influencing the choice between diesel- and gasoline-powered cars. During the reform process in May 2009, the government raised the tax rate on gasoline by ILS 0.3, which created a further discrepancy between the tax rates on gasoline and diesel. However, large businesses and industries that depend on diesel fuel for income generation, can still apply for diesel tax rebates. |
|
Reduction in excise tax on gasoline |
Reduction in excise tax on gasoline varying between 0.27-0.87 NIS per litre. |
|
Reduction in excise tax on diesel |
Reduction in excise tax on diesel by 0.43 NIS per litre. |
|
Gas Agreement Between Israel Electricity Company and Tamar Gas Field |
In 2012 Tamar Gas Field (Tamar) concluded an agreement with Israel Electricity Company (IEC) for the supply of natural gas. Under the Supply Agreement, the IEC is expected to purchase natural gas from the Tamar Project in a minimum amount (Take or Pay) of 42.5 BCM (billion cubic meters), or in a minimum amount (Take or Pay) of 5 BCM per year if the IEC exercises the Option (subject to adjustments based upon the gas sales of the Tamar Project partners and the electricity production of the IEC). |
Data sources
Note on the Methodology
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.