Policy Options: Tax Incentives
World Resources Institute
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
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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