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Investment in Energy Infrastructure and the Tax Code

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  • Gilbert E. Metcalf

Abstract

Federal tax policy provides a broad array of incentives for energy investment. I review those policies and construct estimates of marginal effective tax rates for different energy capital investments as of 2007. Effective tax rates vary widely across investment classes. I then consider investment in wind generation capital and regress investment against a user cost of capital measure along with other controls. I find that wind investment is strongly responsive to changes in tax policy. Based on the coefficient estimates the elasticity of investment with respect to the user cost of capital is in the range of -1 to -2. I also demonstrate that the federal production tax credit plays a key role in driving wind investment over the past eighteen years.

Suggested Citation

  • Gilbert E. Metcalf, 2009. "Investment in Energy Infrastructure and the Tax Code," Discussion Papers Series, Department of Economics, Tufts University 0743, Department of Economics, Tufts University.
    • Handle: RePEc:tuf:tuftec:0743
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    References listed on IDEAS

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    1. King, Mervyn A. & Fullerton, Don, 2010. "The Taxation of Income from Capital," National Bureau of Economic Research Books, University of Chicago Press, number 9780226436319.
    2. Hassett, Kevin A & Metcalf, Gilbert E, 1999. "Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment?," Economic Journal, Royal Economic Society, vol. 109(457), pages 372-393, July.
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    5. Gilbert E. Metcalf, 2007. "Federal Tax Policy Towards Energy," NBER Chapters, in: Tax Policy and the Economy, Volume 21, pages 145-184, National Bureau of Economic Research, Inc.
    6. Carlson, Curtis & Metcalf, Gilbert E., 2008. "Energy Tax Incentives and the Alternative Minimum Tax," National Tax Journal, National Tax Association;National Tax Journal, vol. 61(3), pages 477-491, September.
    7. Mulder, Arjen, 2008. "Do economic instruments matter? Wind turbine investments in the EU(15)," Energy Economics, Elsevier, vol. 30(6), pages 2980-2991, November.
    8. Kevin A. Hassett, 1999. "Tax Policy and Investment," Books, American Enterprise Institute, number 53049, September.
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    Cited by:

    1. Laurence Kotlikoff & Felix Kubler & Andrey Polbin & Jeffrey Sachs & Simon Scheidegger, 2021. "Making Carbon Taxation A Generational Win Win," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(1), pages 3-46, February.
    2. Aldy, Joseph E. & Burtraw, Dallas & Fischer, Carolyn & Fowlie, Meredith & Williams, Roberton C. & Cropper, Maureen L., 2022. "How is the U.S. Pricing Carbon? How Could We Price Carbon?," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 13(3), pages 310-334, October.
    3. Haggerty, Julia H. & Haggerty, Mark & Rasker, Ray, 2014. "Uneven Local Benefits of Renewable Energy in the U.S. West: Property Tax Policy Effects," Western Economics Forum, Western Agricultural Economics Association, vol. 13(1), pages 1-16.
    4. Evan M. Herrnstadt & Ryan Kellogg & Eric Lewis, 2020. "The Economics of Time-Limited Development Options: The Case of Oil and Gas Leases," NBER Working Papers 27165, National Bureau of Economic Research, Inc.
    5. Joseph E. Aldy & Todd D. Gerarden & Richard L. Sweeney, 2023. "Investment versus Output Subsidies: Implications of Alternative Incentives for Wind Energy," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 10(4), pages 981-1018.
    6. Qiuyun Zhao & Zeyu Li & Zuoxiang Zhao & Jinqiu Ma, 2019. "Industrial Policy and Innovation Capability of Strategic Emerging Industries: Empirical Evidence from Chinese New Energy Vehicle Industry," Sustainability, MDPI, vol. 11(10), pages 1-17, May.
    7. Jie Mao & Chunhua Wang, 2016. "Tax incentives and environmental protection: evidence from China’s taxpayer-level data," China Finance and Economic Review, Springer, vol. 4(1), pages 1-30, December.
    8. Weber, Jeremy G. & Wang, Yongsheng & Chomas, Maxwell, 2016. "A quantitative description of state-level taxation of oil and gas production in the continental U.S," Energy Policy, Elsevier, vol. 96(C), pages 289-301.
    9. Sun, Chuanwang & Zhan, Yanhong & Du, Gang, 2020. "Can value-added tax incentives of new energy industry increase firm's profitability? Evidence from financial data of China's listed companies," Energy Economics, Elsevier, vol. 86(C).
    10. Evan Herrnstadt & Ryan Kellogg & Eric Lewis, 2024. "Drilling Deadlines and Oil and Gas Development," Econometrica, Econometric Society, vol. 92(1), pages 29-60, January.
    11. Laurence J. Kotlikoff & Andrey V. ZUBAREV & Andrey POLBIN, 2021. "Will the Paris accord accelerate climate change [Ускоряет Ли Парижское Соглашение Изменение Климата?]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 8-37, February.
    12. Zhishuang Zhu & Hua Liao, 2019. "Do subsidies improve the financial performance of renewable energy companies? Evidence from China," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 95(1), pages 241-256, January.
    13. Wu, Zhanchi & Fan, Xiangjun & Zhu, Bangzhu & Xia, Jiahui & Zhang, Lin & Wang, Ping, 2022. "Do government subsidies improve innovation investment for new energy firms: A quasi-natural experiment of China's listed companies," Technological Forecasting and Social Change, Elsevier, vol. 175(C).
    14. Qian Cai & Zheng Ji & Fuxun Ma & Han Liang, 2023. "The Green Effects of Industrial Policy—Evidence from China’s New Energy Vehicle Subsidies," Energies, MDPI, vol. 16(19), pages 1-16, September.
    15. Banerjee, Rajabrata & Mishra, Vinod & Maruta, Admasu Asfaw, 2021. "Energy poverty, health and education outcomes: Evidence from the developing world," Energy Economics, Elsevier, vol. 101(C).

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    More about this item

    Keywords

    electricity; wind power; production tax credits; tax subsidies;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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    This paper has been announced in the following NEP Reports:

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