Beyond Tax Credits: Smarter Tax Policy for a Cleaner, More Democratic Energy FuturePDF Download
Solar, wind, and other renewable energy technologies have the potential to mitigate climate change, secure America’s energy independence, and create millions of green jobs. In the absence of a price on carbon emissions, however, these long-term benefits will not be realized without near-term policy support for renewable energy. This Article assesses the efficiency of federal tax incentives for renewables and proposes policy reform to promote renewable energy more cost-effectively through capital markets and crowdfunding.
Federal support for renewable energy today comes primarily in the form of accelerated depreciation and, critically, tax credits. Empirical evidence reveals that only a fraction of the subsidy value of tax credits may actually go to funding new renewable power projects. Why are tax credits for renewables so inefficient? And where do the remaining tax dollars go?
Qualitative analysis suggests that the answer to both questions hinges on the mismatch between the profitability requirements of tax credits and the revenue profile of renewable energy projects. The value of tax credits lies in their capacity to reduce tax liability and lower tax bills. Most renewable power projects, however, require ten years or more to recover their up-front capital expenditures before they begin to generate taxable profits and, hence, tax liability to reduce. Bringing in investors with tax liability from other sources to monetize a project’s tax credits provides only partial relief. Such tax equity investment drives up a project’s financing charges and transaction costs, limits investment liquidity, and restricts growth in the renewable energy marketplace.
Federal policymakers should give renewables access to master limited partnerships (MLPs) and real estate investment trusts (REITs)–two tax-privileged investment structures with a proven track record of promoting oil, gas, and other conventional energy infrastructure. Merging the tax benefits of a partnership with the fundraising advantages of a corporation, MLPs and REITs could significantly reduce the cost of capital for renewable energy projects, broaden their investor appeal, and move renewables closer to subsidy independence. Most importantly, MLPs and REITs have the potential to deliver these and more benefits to renewable energy at considerably lower cost to taxpayers than the current regime of tax credits.