Carbon credit offsetting: what Israeli companies must know before they sign

Have you received a demand to report emissions? Are you thinking of buying carbon credits to meet ESG targets? Stop. Israel has no dedicated legislation on trading credits. But there are reporting duties, there is liability for greenwashing, and there are purchase contracts that can expose you twice: to the regulators and to the shareholders. The legal framework exists; you just need to know where to look.

What is a carbon credit, and what does Israeli law say about it?

A carbon credit is an accounting unit that represents a reduction of one tonne of carbon dioxide (CO₂ equivalent) from the atmosphere. In Israeli law, this concept is not defined in dedicated legislation. So carbon credit deals are governed mainly by the general law of contracts: the Contracts (General Part) Law, 5733-1973, and the Contracts (Remedies for Breach of Contract) Law, 5731-1970.

A carbon offset purchase is a deal in which a business buys a right to a credit for an emission reduction carried out by another project, in Israel or abroad, in order to “offset” its own emissions. It is a compliance mechanism for businesses that need to meet regulatory or voluntary carbon reduction targets.

Which laws already apply to us today?

The main law regulating air emissions in Israel is the Clean Air Law, 5768-2008 (חוק אוויר נקי, התשס״ח-2008). It regulates emission permits and emission values for large emission sources. The duty to report emissions every year, including carbon dioxide above a threshold quantity, is set in the Environmental Protection (Emissions and Transfers to the Environment – Reporting Obligations and Register) Law, 5772-2012 (חוק הגנת הסביבה (פליטות והעברות לסביבה – חובות דיווח ומרשם), התשע״ב-2012) (the PRTR register). Under it, a plant owner reports to the registrar by 31 March each year. The threshold quantity for carbon dioxide released into the air is 1,000,000 kg (1,000 tonnes) a year (item 19 of the First Schedule to the Law). The regulator under both laws is the Ministry of Environmental Protection.

Internationally, Israel has signed the Paris Agreement. It is committed to cutting its greenhouse gas emissions by 27% by 2030 compared with 2015 levels, under the national commitment it submitted (NDC). This commitment creates an economic and legal incentive for companies to consider buying carbon credits as part of a compliance strategy, before local legislation becomes stricter.

Which credits are safe to buy?

Several standards for carbon credits are recognized in the international market. Verra’s VCS standard (Verified Carbon Standard) is the most common in the voluntary market; it requires independent verification of the emission reduction. The Gold Standard, developed together with international environmental organizations, is considered one of the strictest and also stresses social impacts. The CDM (Clean Development Mechanism) was developed under the Kyoto Protocol and is meant for projects in developing countries.

Legally, every credit must be unique and cannot be sold twice. Without a dedicated arrangement, a deal in which a defective or fake credit, or a credit sold twice, was bought is subject to the principles of the general law: contract law and the Torts Ordinance [New Version].

What must a public company report, and what happens if it doesn’t?

Public companies in Israel supervised by the Israel Securities Authority (ISA) are subject to the general duty to disclose all information that is material to the reasonable investor. The Israel Securities Authority has published positions and recommendations on disclosure of climate risks and on corporate responsibility (ESG) reporting. When buying carbon credits is a material part of the climate strategy the company presents, the disclosure should reflect it faithfully.

Accepted climate reporting (under the GHG Protocol, which the Ministry of Environmental Protection’s voluntary reporting system also relies on) includes: the emission sources classified as Scope 1 (direct emissions), Scope 2 (purchased electricity) and Scope 3 (the supply chain); a calculation in tonnes of CO₂e; a reduction plan; and the carbon credits bought and retired in the reporting year. Misleading reporting to investors exposes the company and its officers to liability under securities law.

Greenwashing: when does green advertising become a legal liability?

Greenwashing is the misleading presentation of a business activity as “carbon neutral” or “green” without real data to support it. In Israel, such a false presentation could be a breach of the Consumer Protection Law, 5741-1981, section 2 (prohibition of misleading), and of the Unjust Enrichment Law, 5739-1979. Because the field is not regulated by dedicated legislation, all the protection is in the wording of the agreement. That is why a commercial contracts lawyer is part of the deal itself.

Beyond Israeli law, a company that addresses investors or consumers abroad is also subject to the disclosure and advertising rules of those countries. So it is worth presenting credits as a complement to actual emission reductions “at source” (in-house), not as a complete answer.

What must a contract for buying carbon credits include?

Under the principles of Israeli contract law, a contract for buying carbon credits should include: exact identification of the credits (standard, serial number, source project and country); an express statement by the seller that the credits were not sold before and will not be used for double reporting; a compensation mechanism if the credit is canceled after the fact (reversal risk); and conditions for canceling the contract if it turns out that the credits are based on a project that does not exist.

The principle of good faith in section 12 of the Contracts (General Part) Law, 5733-1973 applies to every stage of the negotiations. A seller who failed to disclose material information about the state of the credits, for example that it knew the underlying project was canceled, could be liable for compensation under section 12(b). The buyer might also be entitled to rescission of the contract for misleading, which also includes not disclosing facts that the seller should have disclosed (section 15 of the same Law).

How do you spot fake credits, and what do you do if you are harmed?

In recent years many cases of fake carbon credits have come to light in the international market: producers that reported forest projects that were never going to be cut down anyway, so no real emission was avoided; projects declared as reducing emissions, whose reduction was partial or fictitious; and credits sold twice to several buyers. Companies that bought such credits found themselves exposed twice: to the regulators (wrong reporting) and to the shareholders (loss of value).

Israeli companies that want to buy carbon credits should carry out full due diligence: verify the credit in the official registry of Verra, Gold Standard or the UNFCCC; get independent third-party confirmations; and read the project’s annual reports to make sure the emission reduction is really continuing.

4 practical steps: what to do now?

1. Measure emissions. Without reliable measurement you cannot plan a reduction, or buy credits in the right amount. This is the first step, before any other question.
2. Reduce at source before you buy credits. Change processes, move to renewable energy, choose suppliers with a low carbon footprint. Credits are a last tool, not a first one.
3. Choose credits with a recognized standard. Prefer VCS or the Gold Standard. Keep all the verification certificates. Make sure the credits were “retired” in the official registry for the company’s reporting, so that no other body will use them.
4. Public companies: get advice before any report to the Israel Securities Authority. Wrong ESG reporting is not just a marketing problem. It exposes officers to personal liability.