The federal tax code has provided some incentives to encourage energy efficiency since the 1970s. Currently, there are several provisions within the tax code that encourage energy efficiency in the residential and commercial sectors, and to a lesser extent, the industrial sector, but as a whole, the tax code does not prioritize investments in energy efficiency.
In recent months, the discussion of corporate tax reform has increased, suggesting that significant changes to the tax code may be on the horizon. President Obama, the Republican Presidential nominee Romney, and Congressional leadership have all been calling for fundamental tax reform. Such tax reform presents an excellent opportunity to enact new policies that support energy efficiency investments. In this report, we provide an overview of the current tax code as it relates to industrial energy efficiency and then examine recent proposals for simplification of the tax code for their potential to increase investments by the industrial sector in energy efficiency. These are contrasted with more traditional mechanisms such as specific tax incentives for energy efficiency or taxes on pollution. The report concludes with guidelines and recommendations for changes to the tax code that are likely to have the greatest impact on energy consumption by industry.