Transforming Markets by Combining Federal Tax Credits with Complementary Incentives

Prepared by the Tax Incentives Assistance Project

Steven Nadel, Steve Baden, Ed Gray, Dave Hewitt, Jim Kliesch, Therese Langer, Harry Misuriello, and Anna Monis Shipley

Executive Summary

Introduction

The Energy Policy Act of 2005 contains a variety of tax incentives for energy-saving equipment and practices.  Incentives are provided for efficient new homes; residential air conditioning, heating, and water heating equipment; residential appliances; commercial buildings (new construction and lighting retrofits); building fuel cells and microturbines; light-duty vehicles; heavy-duty vehicles, and envelope improvements to existing homes. 

The intent of the tax incentives was to spur increases in measure availability and sales so that ultimately these technologies and practices can thrive in the market without federal tax incentives.  In other words, these tax incentives were designed to work in tandem with other initiatives in order to transform markets so that these products and practices become business as usual in the long term. 

This Report

This report was prepared by the Tax Incentives Assistance Project (run by a consortium of non-profit organizations and government agencies) to provide a market transformation plan for each of the areas covered by the tax incentives.  For each product and service covered, this report discusses short- and long-term objectives, market barriers, and actions needed to address barriers so that markets can be transformed.  Actions include refinements to the tax incentives as well as complementary initiatives.  This report contains a section for each major product and service, and then ends with a section discussing commonalities across measures.

Findings

Among the key commonalities across tax incentive areas, we found the following needs:

• Clarification of IRS rules
• Increased outreach, training, and technical support
• Complementary state and utility programs
• Extension of most of the tax incentives and refinement of some of them
• Work on test procedures in several cases
• Continued research, development, and deployment on specific items
• Work to bring specifications, codes and standards into alignment with the tax incentives

Conclusion

The federal tax incentives are designed to be a key element in a long-term market transformation strategy to make these products and practices “business as usual.”  But in all cases, tax incentives alone will not transform markets.  The tax incentives need to be complemented with outreach, training, and technical support for them to have significant impact.  A variety of other actions will be needed as well, including extension of most of the credits for at least another three years.  If all of these tax incentives are successful in transforming markets, U.S. energy use will be reduced by roughly 5%, reducing consumer and business energy bills by billions of dollars annually.  In order to achieve these worthwhile objectives, states, utilities, manufacturers, federal agencies, Congress, and efficiency organizations will each need to undertake significant actions outlined in this report.  While there is significant work involved, the benefits are large and the costs of inaction substantial.

View the report for free in PDF or click to order hard copy.

57 pp., August 2006, $30.00, E066