Lessons from 15 Years of Experience with the Dutch Tax Allowance for Energy Investments for Firms

Abstract

Since 1997, the Netherlands has had a tax allowance scheme that was introduced to promote investments in energy-saving technologies and sustainable energy production. This so-called Energy Investment Tax Allowance (EIA in Dutch) reduces up-front investment costs for firms investing in the newest energy-saving and sustainable energy technologies. The basic design of the EIA has remained the same over the past 15 years. Firms investing in technologies listed in the annually updated ‘Energy List’ may deduct some of the investment costs from their taxable profits in the year of the investment. Compared to investments in conventional reference technologies, the EIA decreases the payback period and reduces the need of financing the investments in energy-saving technologies. The EIA may also reduce search costs made by investors to find particular technologies, because entry on the Energy List equals eligibility for the subsidy. The Energy List contains generic technologies that meet a certain energy-saving standard or a selection of novel, but proven, technologies with a higher energy-saving potential than conventional technologies. Therefore, the list itself is also likely to have an attention value that may contribute to reduce information failures in the market for technology adoption. Over the past 15 years, the EIA has been affected by a number of changes, mainly due to exogenous factors, such as interactions with other policy instruments, rising oil and gas prices, and the economic crisis since 2007. Despite this turbulence and changes in government focus, the EIA remains part of the Dutch energy policy mix. Its flexibility allowed for adaptations where necessary and its role as a subsidy for technology adoption is likely to also have contributed to its legitimacy.