Tax measures provide an incentive for investment in renewable energy and energy efficiency technologies and measures. Governments around the world have implemented a variety of tax measures to support clean energy deployment (forthcoming Solutions Center Financial Incentives Policy Brief, Lantz et al. 2010, EPA 2015, seia.org). Common types of tax incentives include:
- Corporate income tax incentives can be tax deductions or credits for on-site use of renewable energy or energy efficiency technologies or for large-scale renewable energy that is fed into the grid. In relation to renewable energy, corporate investment tax credits are based on initial cost of renewable energy systems, while production tax credits are based on actual energy produced. Production tax credits can be more effective in incentivizing maximization of energy production—a point that is true for all kW/cost-based incentives as compared to performance-based incentives.
- Personal income tax incentives are tax deductions or credits, normally based on investment or cost of an renewable energy system or energy efficiency technology.
- Property tax incentives are used when renewable energy systems (distributed or utility-scale) or energy efficiency technologies are implemented to improve a property. These incentives reduce the level of taxes associated with the property improvements (Barnes et al. 2013).
- Sales, import and/or value-added tax (VAT) incentives lessen or eliminate sales or VAT taxes, or import duties, for energy efficiency and renewable energy technologies (applied at both the distributed and utility-scale levels) for individuals and/or businesses.
- Accelerated depreciation quickens renewable energy fixed asset depreciation and thus, through reducing taxable income, defers tax liability in the early stages of renewable energy project development.
Tax incentives have been applied in various ways around the world and can be adapted to unique national circumstances. While tax incentives can be relatively simple and flexible instruments to support renewable energy and energy efficiency deployment, efficient monetization is a key design element, as tax-based incentives require a taxable liability to be utilized. It is also important to note that the use of tax measures by a project can limit the number of investors that can invest in energy projects and can therefore increase the cost of capital (CPI 2013).
Design Tax Measures to Align with Overall Policy Goals
Renewable energy tax incentives are largely focused on supporting increased renewable energy deployment. However, tax incentives can also be used to spur development of new industries, benefitting economic development more broadly, and to support other high level goals. Ensuring the measure is aligned with these goals is an important first step (Lantz et al. 2010).
Determine the Appropriate Tax Incentive Level
Market information and data, as well as evaluation of similar policies and experiences in comparable country or jurisdictional contexts, can inform the tax incentive level and impact on various technologies (Lantz et al. 2010). Tax incentives must be well-aligned with available government budgets and robust plans should be in place to fund the incentive program. Maximum incentives or credit caps can also be considered to avoid “boom and bust” scenarios (Cox et al. 2015, Wiser and Bolinger 2014; IRENA 2012; American Wind Energy Association 2014a).
Establish the Incentive Timeframe
To achieve desired outcomes of a tax measure, the incentive period should be carefully considered. In cases where the objective is to support development of a new industry, incentive periods may need to be longer to ensure market development. Supporting market certainty through sending a longer-term policy signal can be critical in attracting investment (Lantz et al. 2010). Utility-scale renewable energy projects can also require longer incentive timeframes as multiple years may be necessary for project development. If the incentive period is shorter, project developers and investors operating on a longer timeframe may not participate. If shorter incentive timeframes are necessary, incentives can be provided in earlier stages of project construction. However, in these cases, complementary mechanisms to ensure project completion (e.g., requiring ownership for a certain number of years) should be put in place (Cox et al. 2015, Wiser and Bolinger 2014, IRENA 2012, American Wind Energy Association 2014a).
Consider Inclusion of Non-taxable Entities
Non-taxable or limited tax liability entities such as non-profit organizations, schools, religious organizations, and municipal government and utilities are increasingly engaged with renewable energy deployment. To ensure their inclusion, provisions can be made to allow tax equity provider partnerships and/or complementary incentives can be put in place to support their engagement, such as low cost finance mechanisms (Lantz et al. 2010, Bipartisan Policy Center 2011, Cox et al. 2015).
American Wind Energy Association. 2014. “Federal Production Tax Credit for Wind Energy.”
Barnes, Justin, Chad Laurent, Jayson Uppal, Chelsea Barnes, Amy Heinemann. 2013. “Property Taxes and Solar PV Systems: Policies, Practices, and Issues.” U.S. Department of Energy.
Bipartisan Policy Center. 2011. “Reassessing Renewable Energy Subsidies: Issue Brief.” Washington, DC: Bipartisan Policy Center.
Cox, S., Tegen, S., Baring-Gould, I., Oteri, F., Esterly, S., Forsyth, T., Baranowski, R. “Policies to Support Wind Power Deployment.” Golden, Colorado: National Renewable Energy Laboratory.
IRENA (International Renewable Energy Agency). 2012. “30 Years of Policies for Wind Energy.”
Lantz, Eric, and Liz Doris. 2010. “State Clean Energy Policies Analysis: State Tax Incentives." Golden, CO: National Renewable Energy Laboratory.”
Nelson, D. and Brendan Pierpont. “The Challenge of Institutional Investment in Renewable Energy.” San Francisco, CA: Climate Policy Initiative.
U.S. Environmental Protection Agency (EPA). 2015. “Energy and Environment Guide to Action.” Washington, DC: EPA.
Wiser, Ryan H., and Mark Bolinger. 2014. 2013. “Wind Technologies Market Report.” Washington: U.S. Department of Energy.
KPMG International. 2013. Taxes and Incentives for Renewable Energy.