Equitable Renewable Energy Tax Credits for Industry

Abstract

Without tax credits, the federal tax treatment of industrial investments in conservation and solar technologies (CSTs) places them at a disadvantage with respect to conventional fuels. The costs of conventional fuel use lie mainly in the cost of the fuel itself and can be deducted from the tax base of the industrial investor at the time of the expense. However the costs of energy supplied or saved by CSTs occur primarily in the form of initial investment costs, for which the tax deductions must be spread out over several years according to a depreciation schedule. The time value of money reduces the worth of these depreciation deductions below their face value and below the value of comparable conventional fuel costs deductions. There are two obvious ways to correct this inequality: (i) allow total depreciation of CST investments in the first year (1), or (ii) grant a tax credit to CST investors. This paper addresses the issue of the size of the tax credit necessary to compensate for the delay in depreciation deductions.