Tax Credits for Energy Efficiency and Green Buildings: Opportunities for State Action
Elizabeth Brown, Patrick Quinlan, Harvey M. Sachs,
and Daniel Williams
March 2002
States play a fundamental role in addressing energy use and the adoption of energy efficiency measures at the regional and local level. States can provide tax incentives that foster technology options matched to the needs of their residents. This report describes the current status of energy efficiency and “green buildings” tax incentives that states offer. Our goal is to assist state policymakers in designing and evaluating their own programs by providing insights about current programs in other states.
A properly designed state tax incentive has both short-term and long-range benefits. In the short run, the incentive can effectively increase market share of an advanced technology or practice that otherwise would be harder for the state’s residents, businesses, and other organizations to find. By itself, the state’s action increases the visibility of the technology or practice and validates it with the state’s credibility. Greater market share launches a “virtuous circle:” As market share increases, more market actors (salespeople, specifiers, installers, etc.) become vested in the technology or practice because it can be more profitable than the status quo and can increase customer satisfaction. This vestment induces more firms to enter the market and the resulting competition can drive down prices and further increase market share. At some point, market share is large enough that the technology or practice is clearly cost-effective and has broad support from those who profit from it. By then, a state tax credit is no longer needed and building codes and other regulatory mechanisms can be revised to make use of the technology or practice mandatory.
State-funded energy efficiency incentive programs increase consumer choices by inducing innovation in the private sector. The programs thus benefit state energy, economic, and environmental objectives. The private sector needs encouragement to provide products and services that address broader energy security, system reliability, environmental, and economic goals. In particular, market failures limit private investment in cost-effective efficiency measures; for example, projected returns may be lower than for other, non-energy investments or technology deployment timeframes may be too long. Tax credits can accelerate customer acceptance and increase market share for high-efficiency products and services. Benefits accrue to the state and its residents, the United States and its citizens, and the global climate.
Both the federal government and a number of states enacted tax incentives during the 1970s. However, evidence emerged that these early tax credits had relatively little impact on consumer behavior, for several reasons: low efficiency requirements for eligibility led to large “free rider” expenditures; the credits tended to be small; they lacked promotion; and they had excessive administrative requirements. To maximize effectiveness, tax incentives should target cutting-edge, very high-efficiency technologies or practices that customers might not find otherwise. The incentives should be large enough to affect decision-making, while reporting requirements should be just stringent enough to make fraud insignificant.
This report only briefly addresses other state initiatives to promote efficiency investments. These alternatives include utility demand reduction programs, public benefits funds, direct state appropriations, and programs to assist with efficiency improvements in publicly owned buildings.
View the report for free in PDF or click to order hard copy.
76 pp., 2002,
$17.00, E021
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