Industry Tax Incentives
How It Works
While consumer tax incentives work on the demand-side of the economy, industry tax incentives are their counter part in the supply-side of the economy. The goal here is to change producer behavior. In contrast to a straight carbon tax which is paid by both consumers and producers, an industry tax is used to change the ways in which a good or service is produced.
Investment tax credits give tax breaks to industries that invest in new energy efficient technologies. Accelerated depreciation credits allow industries to take a tax break in one lump sum when they buy new capital instead of taking it bit by bit over the lifetime of the new machinery (Gruber, 2007). These taxes may be implemented in industries that are involved in production and refining but have limited use in retail sectors because technology is not as extensively employed in, say, gasoline retail markets.
Cost of Implementation 9
Giving industries tax credits will put further pressure on an already strained government budget. An industry feebate system could avoid this but it hasn't been part of the dialogue to date.
Environmental Impact 4
In the short-run consumers may still depend on energy imports until new innovations appear on the market.
Foreign Energy Useage 3
The immediate effects on energy consumption may not be felt but industry innovation is the key to reducing long-term dependence on foreign energy.
Implementation 2
Tax credits have a long history in the US and have been thoroughly studied.
Political Toxicity 2
Consumers may not be too concerned with giving industries tax breaks that benefit the economy and our environment, and industries always welcome tax breaks.
Barriers to Future Use
- Increasing tax credits necessarily means decreasing tax revenues. There will be either objections to an increasing the budget deficit or to higher taxes to offset the loss in revenue. Raising taxes is never politically viable so in order to balance the budget funds will need to be diverted from other areas. Government sectors where this money is potentially available, such as the highway fund, health care, social security, education, and defense are all closely guarded by powerful lobbies.
Pros of Use
- Industries not only produce energy, but they use it to produce other goods. Different taxes can be used to create incentives for more efficient and clean energy use in the production of these goods (Worrell, 2001).
- Investments into large-scale technologies, such as new and innovative power plants, are extremely expensive and tax incentives are a viable policy alternative to direct government provision (Norberg-Bohm, 2000).
- For many industries the government can choose between an investment tax credit or an accelerated depreciation allowance depending upon what is ideal and what technology is to be invested in. Specific technologies can then be promoted.
Cons of Use
- About 26 % of energy production is conducted by non-utility, privately owned sources. These sources cannot be covered by most accelerated depreciation allowances under existing law. (EIA, 2000; Hill, 1995).
- Some technological investments may be so costly that direct government provision may be the only way to develop them (Norberg-Bohm, 2000).
- A system similar to feebates (a system of government imposed fees and rebates that are used to shift market purchasing preferences toward an economically, socially or politically desired goal) can be implemented for industries, but little theoretical work has been done in this area.
- Tax credits increase government budget deficits unless offset with new or higher taxes.
Case Studies
Industry Taxes and Incentives: Lessons from Northern Europe
In Denmark a carbon tax scheme for all industries was introduced in 1996, with revenues earmarked aiding in labor expenses and subsidizing investments in energy innovation. The tax burden upon Denmark's industry is thus revenue neutral while providing benefits for the companies that are energy-efficient. It further creates market incentives to those companies that have done nothing yet about emissions. Additionally, Sweden, which introduced a carbon tax system based on ton measurements in 1991 cites the tax as heavily influential in energy consumption behavior as plant owners were incentivized to switch to biofuels. For the full report on international industry taxes from the National Center for Environmental Economics, click here.
Most Important Fact
Some technologies will not be researched nor investments made without government intervention, but this intervention means either higher taxes or a budget deficit.
Bottom Line
Industry tax incentives are a great way to increase investment into new and expanded energy efficient and clean technologies, but they come at a large cost to the government. An educated society may make such a cost politically feasible and may even be willing to pay for the industry tax incentives.
