Investment in Energy Infrastructure and the Tax Code

Abstract

Executive Summary Federal tax policy provides a broad array of incentives for energy investment. I review those policies and construct estimates of marginal effective tax rates for different energy capital investments as of 2007. Effective tax rates vary widely across investment classes. I then consider investment in wind generation capital and regress investment against a user cost of capital measure along with other controls. I find that wind investment is strongly responsive to changes in tax policy. On the basis of the coefficient estimates, the elasticity of investment with respect to the user cost of capital is in the range of −1 to −2. I also demonstrate that the federal production tax credit plays a key role in driving wind investment over the past 18 years.