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Tax hikes in Israel will make electric cars too expensive for most

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Last week at the Globes Israel Business Conference, Deputy Director of the State Budget of the Ministry of Finance Ilya Katz explained why Israel is doubling the tax on the purchase of electric cars from 10% to 20% in January 2023. The main reason is that electric cars are much cheaper to maintain than petrol cars, which are subject to 83% purchase tax, and this favors car travel. Katz said, “Our goal is not to fill the roads, but to encourage public transportation.”

All this confused us. Not because “electric cars cause traffic jams”, which we have already heard from many officials of the Ministry of Finance, but because only a month ago the chief accountant representing the Ministry of Finance committed to convert the state fleet to electric cars. The ad said: “The government fleet has 15,000 vehicles, including the Israel Police, Prison and Fire Services and various government ministries. The State Automobile Administration is already committed to purchasing only electric vehicles for the government fleet from 2025.”

The ad quotes the chief accountant. “This measure has and will have international consequences.” The Assets Director added: “We are proud to be standing alongside leading and parallel government bodies in tackling the climate crisis in government vehicles.”

So what are we to take from all this? That private electric cars create traffic jams and public vehicles don’t? Or that the government’s 2018 goal of switching the entire Israeli car market to electric cars by 2030 was a mistake.

But what’s really upsetting about the justification for charging electric cars isn’t what’s really upsetting, but the fact that the Treasury Department’s taxing policy on electric cars is creating a socio-economic distortion. In other words, the government turns the “right” to own an economical electric car or a modern vehicle in general into a privilege of the upper classes of the population and owners of official cars. All this while most people have to pay dearly for vehicles that waste fuel and pollute the environment, or for public transport.

“Market forces will push the market towards electric cars even after the tax increase,” added a budget department official at Israel’s Globes business conference. This is no longer an excuse, but simply a detachment from what is happening in the world, an attitude that is quite detached from what is happening on the ground. In practice, over the past two years, market forces have mostly made electric cars and new vehicles more expensive and kept them out of the reach of most people’s pockets.




An energy crisis is coming

The cost of energy is an integral part of the cost of manufacturing cars in the world, from the production stage of raw materials such as aluminum and steel, to the production and transportation stages. In previous years, the relative weight of this component in the cost price of car production was insignificant. However, last year, energy prices in Europe skyrocketed – the wholesale price of gas for industry rose 13 times, and the weight of the energy component in the cost of car production jumped.

According to a report from S&P Global published earlier this month, the price of the energy needed to produce a car rose by an average of around €50 to more than €700 today, and this may just be the beginning. The report also says that in the upcoming winter, which is expected to be particularly cold, the energy crisis in Europe will worsen and will lead to the loss of production of almost one and a half million cars from the planned level.

The situation could lead to a major disruption of car supply capacity to the European car industry, which has yet to recover from many other disruptions over the past two years, chief among them the chip shortage and the Corona crisis. The European car industry also includes leading manufacturers from Japan and Korea, such as Toyota, Hyundai and Kia, which supply Israel with tens of thousands of cars from European factories.

The bottom line is that there will be fewer cars at higher prices, and especially electric cars.

Lithium prices are breaking records

Last week, the price of lithium, the main raw material for the production of batteries for electric vehicles, continued to break records in global markets. The price of lithium carbonate for batteries is currently at $77,000 per tonne, up 188% over the past 12 months and nearly sixfold since the start of 2021.

The main reason is the growing demand for electric cars and the mad race by the giants of the car industry and governments around the world to ensure their supply. The good news is that analysts expect global lithium production to grow significantly over the next two quarters, pushing the price down to $50,000. On the other hand, the bad news is that due to the high demand for electric vehicles, even a drop in the production price, if it happens at all, will not be able to stop the further increase in the price of lithium batteries, which account for almost 50% of the total cost of an electric vehicle.

This process is already underway. In the last few days alone, popular Chinese models in Israel and new European models such as the Volkswagen ID4 have gone up in price. All this before the planned increase in sales tax in January.

War in the chip market

At the beginning of the summer, it appeared that the chip shortage that had seriously hit the world’s car industry was coming to an end. It was expected that in 2023 the scale of production would begin to return to normal and, along with the recession, the gap between demand and supply would narrow. But then the US and China entered into a new trade war, and the deck was reshuffled. In early October, the US government published a series of restrictions on the export of technology to China for the production of core chips, some of which are also used in the automotive industry.

The restrictions, which in the first phase mainly concerned areas such as AI, encryption and data centers, are now also focused on chip-making equipment, which is also used in the automotive industry. This includes 16 nanometer and smaller logic chips, DRAM chips smaller than 18 nanometers, and larger 28 nanometer chips, except those approved for export.

Major chip makers and suppliers around the world are rushing to adapt to the US guidelines, and the process is expected to be felt on two levels. In the short term, the Chinese government and industry are expected to try to obtain very large stocks of chips from all possible sources. In the long term, there may be a new shortage of chips in the Chinese auto industry, especially in the electric vehicle segment, in which the country is a leader. Both of these processes could push up chip prices and create supply difficulties again.

In fact, the market situation completely contradicts the assumption of the Israeli government, which led in 2018 to develop a multi-year tax plan to increase the tax on electric cars in the coming years. That is, the assumption that “market forces” will lead to a sharp drop in prices for electric cars in the world and the need for tax benefits will decrease. The upcoming tax hike in January will only give electric vehicle prices another significant push in the wrong direction.

Posted by Globes, Israel Business News – en.globes.co.il – October 31, 2022.

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