Investment and production tax credits
Investment tax credits can cover just the cost of a system or the full costs of installation. They can be helpful early in the diffusion of a technology, when costs are still high, and/or to encourage their installation in off-grid, remote locations. They directly reduce the cost of investing in renewable energy systems and reduce the level of risk. Production tax credits provide tax benefits against the amount of energy actually produced and fed into the electric grid, or the amount of biofuels produced, for example. They increase the rate of return and reduce the payback period, while rewarding producers for actual generation of energy, but must be designed carefully to avoid abuse.
To encourage investment in renewables in the early 1980s the US government and the state of California offered investors credit against their income tax. In combination with standard, long-term contracts, the credits helped to create a wind boom that many people called California's second gold rush. The lessons learned and economies of scale gained through this experience advanced wind technology and reduced its costs. But the combination of enormous tax breaks and a lack of technology standards encouraged fraud and the use of substandard equipment (in India, too, while investment subsidies for wind energy led to large investments in the 1990s, there was limited concern about maintenance and long-term performance due to a lack of standards). Inexperienced financial companies and former shopping centre developers flocked to the wind business in California, and untested designs were rushed into production — all to take advantage of credits that enabled wealthy investors to recoup anywhere from 66 to 95
per cent of their investment over the first few years, in some cases without ever generating a kilowatt-hour of power. While these early tax credits helped to jump-start the wind industry, once the credits and fixed prices expired, the industry collapsed, with ripple effects felt as far away as Denmark, and numerous wind energy firms going bankrupt (Sawin, 2001; Lauber, 2004).
One of the largest production tax credit programmes is in the US. On and off since 1994, the US government has offered a production tax credit (PTC) that reduces the income tax liability for people who supply wind-generated electricity to the grid. The PTC has encouraged wind energy development and has been credited with driving significant capacity increases in the late 1990s and early 2000s. At the same time, the PTC encouraged significant development only in those states with additional incentives (Sawin, 2001).
In general, production incentives are preferable to investment incentives because they promote the desired outcome: generation of energy. Although investment subsidies encourage installation at the optimal level for individuals or businesses, they do not necessarily result in installation at the optimal level for the society or community as a whole. Further, they do not necessarily encourage investors to purchase the most reliable systems available or to maintain them and produce as much energy with them as possible. In addition, once the credits expire, investment in the technologies they are designed to support generally declines unless costs have fallen sufficiently or other support mechanisms are in place. Production incentives, on the other hand, are most likely to encourage optimum performance and a sustained industry.
However, policies must be tailored to particular technologies and stages of maturation. Investment subsidies can be helpful when a technology is still maturing and relatively expensive, as has been the case with PVs in Japan — although rebates (to be discussed later) are a preferable means for subsidizing investment (Sawin, 2001). Further, investment support is often more appropriate for small-scale RETs such as heat pumps or small-scale PV because administrative costs are lower — with a one-time payment rather than annual payments based on metered data (comments by Robert Kleiburg, 2003), or because it may be impossible to measure output. Performance problems associated with investment subsidies can be overcome by tying investment incentives to equipment and performance standards, as long as these requirements are enforced. And if investment credits are adjustable and/or decline gradually over time and are phased out as technology costs fall, it might be possible to avoid the sudden decline in investment that often occurs when these subsidies expire.
It is also important to note that tax incentives tend to favour one type of entity over another, and they provide greater benefit to people or corporations with higher income levels and tax loads. In addition, they are often used as tax loopholes. Investment tax credits, in particular, can affect the timing of installation by encouraging investments toward the end of a tax cycle, which can negatively affect renewables industries. As with investment credits, production tax credits should decline over time and eventually be phased out.
Other tax-related incentives can promote renewable energy development by reducing the costs of investment, or by accounting for the external benefits of renewable energy. The latter include eco- or carbon-tax exemptions. The former include accelerated depreciation, relief from taxes on sales and property, value added tax (VAT) exemptions, and reduction or elimination of import duties on RETs or components. It is important to note that import duties increase the upfront costs of renewable energy projects, and should be reduced, if not eliminated, until a strong domestic manufacturing industry can be established.
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Do we really want the one thing that gives us its resources unconditionally to suffer even more than it is suffering now? Nature, is a part of our being from the earliest human days. We respect Nature and it gives us its bounty, but in the recent past greedy money hungry corporations have made us all so destructive, so wasteful.