Policy Options: Tax Incentives
Since 2000, WRI has been working with ten
major U.S. commercial and industrial corporations
in the Green Power Market Development Group,
a unique partnership dedicated to building
corporate markets for green power. Through
this partnership experience, WRI has observed
that corporate energy managers recognize a
variety of beneficial environmental attributes
associated with green power such as CO2
, NOx , SO2
and mercury emissions reductions. However,
since some of these superior environmental
characteristics currently do not have monetary
value, they are not being incorporated into
energy price comparisons. As a result, corporate
energy purchasing decisions continue to be
dominated by straightforward cost comparisons
that ignore the benefits associated with renewable
energy.
World Resources Institute
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Tax incentives help individuals and corporations justify
purchasing, installing and manufacturing renewable energy
technologies. Because renewables tend to have relatively
high initial capital and installations costs, tax policies
compensate investors with tax credits, deductions and
allowances. The types of tax incentives include income,
corporate, property and sales tax incentives.
The duration the tax policy is important. The policy
should remain in place until the new technologies have
increased their economy of scale and are cost competitive
with alternatives in the sector.
Once costs for renewable technologies decline, the tax
credit level should decline.
Production Tax Credits:
Production tax credits (PTC) are policy drivers to
promote the development of electricity generated from
renewable sources. "A production tax credit provides
the generator or owner of a wind facility an annual
tax credit based on the amount of energy that particular
facility produced. For example, in the United States,
there is a production tax credit which provides a
$.015/kWh credit to all operators of renewable energy
facilities" (AWEA).
The credit is ideally set at a level that makes it
more cost effective to produce electricity from renewable
resources than from fossil fuels.
U.S.
Production Tax Credit
Emission Taxes:
Emissions taxes can internalize the costs caused by
emissions into the price of energy. Essentially they
make polluters pay for the damages caused to society
from their polluting activities.
Economists contend that "setting a tax per unit of emission
equal to the marginal value of externality damages would
lead consumers and firms to reduce emissions to where
the marginal cost of further emissions abatement equaled
the tax" (UNDP). Therefore, there is an incentive for
innovation and energy efficiency, so that when you emit
less you pay fewer taxes. Clearly, replacing fossil
fuels with renewable energy technologies reduces emissions
dramatically.
Economists prefer these taxes to mandatory emissions
reduction requirements because taxes account for the
disparity in energy plants' costs and total emissions.
Another advantage of emission taxes is that after the
tax rate is set, governments do not need to be involved.
Governments do not need to penalize polluters; rather,
each person has to pay extra fees based on the amount
they chose to emit.
Carbon taxes have the same effect: charging a tax on
the quantity of carbon in the energy resource. Renewables
are cleaner because they are not carbon based, so the
effect is that producers have an incentive to switch
to renewable energy resources.
These tax programs should be used when the desired outcome
is an overall pollution reduction and an incentive to
switch from using one technology to another. They are
less useful in immediate pollution control. Emission
taxes may not be effective when existing prices do not
reflect true costs or if costs are not an incentive
for firms' to invest in the first place. Subsidies,
which alter relative costs of products, present one
such obstacle for the effectiveness of taxes. In addition,
emission taxes are not a guarantee for emissions reductions.
Resources:
Herzog, Antonia, Timothy Lipman, Jennifer Edwards and
Daniel Kammen, "Renewable
Energy: A Viable Choice" Environment
Vol. 43 No. 10 (December 2001)
Johansson, Thomas and Jose Goldemberg. 2002. Energy
for Sustainable Development, A Policy Agenda New
York: UNDP
Energy
Tax Policy in the United States: A CRS Issue
Brief for Congress by Salvatore Lazzari
Union
of Concerned Scientists, Clean Energy Pages
Whittall, Robert. Discussion
of the Energy and Environmental Tax Credit Provisions
contained in the President's Fiscal Year 2000 Budget
Proposal. 25 Sept 1999
World Resources Institute's Position
Statement on Tax Incentives
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