The impact of corporate tax policy on sustainable retrofits

Abstract

PurposeThe purpose of this paper is to ascertain whether energy retrofits need to be directed by public policy intervention or can be encouraged through tax relief that harnesses profit incentives. Existing office space potentially has an economic life of 25 to 40 years. It may be operating inefficiently compared to newer buildings for many years. Designing a market-based incentive system that encourages periodic remodeling which lowers energy usage and carbon emissions would have social benefits.Design/methodology/approachAn owner/user case study is developed to test financial feasibility. The empirical study uses publicly available information to examine whether the variables modeled react as anticipated. The regression model incorporates variables of importance to an owner/user. Tax credits and energy deductions, interest rates associated with borrowing and likely electricity and natural gas rate changes are independent variables used to predict the dependent variable new non-residential private construction spending.FindingsInvestment tax credits (ITCs) coupled with lending has a positive impact on new non-residential commercial construction spending. The value of these benefits is not sufficient to encourage total building energy retrofits, but would encourage low-cost system upgrades. The interest rates associated with borrowing and the debt-service coverage ratio need to be kept low for existing building energy retrofits to be stimulated.Practical implicationsThe case study provides a template that a business can use to determine the financial feasibility of a proposed energy upgrade. It enables the comparison of the marginal cost associated with an update to the present value of the financial benefits likely to be generated. Local real estate tax reductions linked to specific energy upgrades offered by many municipalities can be added to the expected energy savings generated by doing the retrofit.Social implicationsTax systems designed to solve environmental pollution problems do not require regulators, inspections or court case decisions and are inherently less intrusive to businesses. Coupling private financial incentives with public policy goals cause energy-saving technologies to be adopted more quickly and with less public outcry.Originality/valueThe paper specifically considers the factors that influence an owner/user of the property. Rental rates and vacancy losses do not influence a property owner/user. Prior studies looked at revenue enhancements and lower-vacancy rates possibly associated with a green compared to a non-green office building. These studies did not focus on the owner/user paradigm. They reported financial benefits accruing to property owners who lease the office building. Many retrofit studies tended to use CoStar Group’s data, which are collected by a for-profit company and sold to users. The data used in this study come from survey data collected by the Federal Government of the United States of America (USA). It is publicly available to all researchers.