Right on Energy: Responsible Policy Analysis and Responsible Tax Credits

We’re excited to launch a new blog here at CRES Forum, Right on Energy. We’ll regularly feature responsible policy solutions to timely energy and climate issues that are top of mind for us. Whether it’s novel policy proposals, recently enacted legislation, or the United States’ role in international policymaking, CRES Forum will highlight conservative policy solutions to the energy and climate challenges we face today. And we are diving right in with a series on tax credits and their role in deploying innovative clean energy technologies.

Why tax credits?

The federal government plays an important role in the development of innovative energy technologies. Basic research, for example, is not necessarily attractive to the private sector due to the lack of potential immediate returns. It can, however, yield broad economic and societal benefits in its later applications. In the later stages of a new technology’s development, surmounting the “valley of death” can prove difficult for developers who are attempting to scale up from a proven prototype to a commercial model. Deployment of energy technologies is generally capital intensive, but a technology’s novelty may be considered too risky by traditional investors, leaving room for government support.

The support offered by the federal government varies and can be important not only during research and development (R&D) but also potentially in demonstration and deployment. Tax incentives have proven to be an effective means of encouraging private sector investment. Incentives include credits, deductions, rebates, exemptions, and accelerated depreciation, and can be offered to the producer of a technology (supply-side) or to the consumer (demand-side). More specifically, incentives can include investment, production or sales tax credits. Tax credits, in particular, have been used to catalyze the adoption of energy technologies and extended to new technologies through recent legislation. In its application, a tax credit reduces the cost of deploying a technology, and thus, incents its adoption.

How are tax credits utilized?

Incentives are available to innovators throughout the development cycle of new technology and serve different needs. While grants or access to research facilities provide support in the early stages and loan guarantees allow for demonstration of first-of-its-kind facilities, tax credits are most effective when available for technologies that are ready to deploy at commercial scale.

If R&D is not complete or the necessary infrastructure or supply chain are not established, then a tax credit will be ineffective in supporting a technology’s adoption. When a commercially available technology has entered the market and established a user base, the tax credit can expire or be removed from the tax code by Congressional action. (In practice, however, this has proven difficult, with some tax credits on the books for many years. The wind production tax credit (PTC) has been in place since the 1990s, for example, and has been repeatedly extended by Congress instead of being allowed to sunset.)

Market adoption can be measured to determine if the credit is no longer necessary to support the industry’s establishment. The figure below demonstrates the adoption of a technology as a percentage of market share. Ideally, in their design, tax credits include the level of market saturation necessary to meet the policy’s goals.

Source: ITIF

What do tax credits achieve?

Commitments to reduce greenhouse gas (GHG) emissions present an opportunity to deploy innovative clean energy technology, thereby creating new markets and jobs. GHG emissions are a global issue that should be met with a global response and as a result, create markets for innovative technologies at home and abroad. Domestic policies that aim to address climate change can utilize tax credits to reduce prices for new technologies, making domestically manufactured products more affordable, and potentially leading to export abroad where emissions continue to grow.

In the coming weeks, we’ll discuss what makes certain tax credits responsible and showcase examples. While some technologies are better-suited for specific tax credits than others, some tax credit policies are better designed than others. We invite your feedback, and hope that this blog will serve as an opportunity to engage in dialogue.

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