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The Failure of Solar Tax Incentives: A Dynamic Analysis

Abstract:
In recent years we have witnessed governmental attempts to acceler-ate the stock demand for energy-saving durables with financial incentives implemented through the tax mechanism. At the federal level, income tax credits for the purchase of energy-saving durable stocks were introduced through the Energy Tax Act of 1978 (Public Law 95-618). In addition, many states have enacted their own energy-saving tax incentive legislation. A substantial body of this tax legislation has been aimed at accelerating substitution of solar-produced energy for conventional, nonrenewable energy resources in the residential and commercial building sectors. Along these lines, the bulk of engineering (so-called life-cycle) cost studies accompanying much of this legislation predicted that solar tax incentives would generate widespread market penetration with little or no delay.' However, casual observation reveals that tax-induced solar energy substitutions have not been widespread.This paper presents a dynamic model of investment decisions in solar processes-a model that captures the effect of tax legislation aimed at accelerating market penetration of solar energy.

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Energy Specializations: Renewables – Solar ; Renewables – Policy and Regulation

JEL Codes:
Q51 - Valuation of Environmental Effects
Q52 - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

Keywords: Solar energy, Tax incentives, conservation, Renewable energy

DOI: 10.5547/ISSN0195-6574-EJ-Vol7-No3-4


Published in Volume 7, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.