Is Tax Reform the Road to a More Energy-Efficient Industrial Sector?

Blog Post | November 20, 2012 - 10:59 am
By Ethan Rogers , Program Director, Industry

As the nation begins to ponder tax reform next year, we have an opportunity to create a new corporate tax structure that encourages investments that benefit society, such as energy efficiency, as well as the businesses that make these investments. In the report Industrial Energy Efficiency and Tax Reform, released today, ACEEE analyzes current tax reform proposals with the purpose of understanding the potential each has to encourage investments in the industrial sector in general and in energy efficiency in particular. Encouraging industrial modernization is important to energy efficiency because the energy intensity of manufacturing correlates directly to the vintage of the equipment. As older, less efficient equipment is replaced with newer, more efficient equipment, we can anticipate the energy needed to produce a good or service will decrease. Therefore, in addition to encouraging energy efficiency outright, it also makes sense to encourage industrial modernization.

So although none of the corporate tax reforms currently under consideration prioritize energy efficiency, we wanted to know how each might potentially influence investments that might reduce the energy intensity of the industrial sector. The most commonly discussed proposal is that of reducing the corporate tax rate and broadening the base [PDF] (eliminating deductions). But of course this proposal contains no requirements that corporations invest, let alone that they invest in energy efficiency. Energy efficiency is a possible benefit, but only at the margins. Another proposal to boost investment is to allow expensing, or the ability to fully depreciate in one or two years, the cost of capital assets. This is likely to be appealing to companies struggling with cash flow. And by the same logic as mentioned above, newer equipment equals more efficient equipment equals energy savings. But again, the mechanism is passive rather than active.

The report contrasts these proposals with each other and with other proposals from years gone by—and ones that (to this writer’s surprise) are now re-emerging in discussions as potential pathways to address the budget deficit—a pollution or energy tax. Either of these would have a more profound effect on energy use in all sectors of the economy, though to be sure their political viability is much less than the other, more embraced proposals. Lastly we ponder a grand bargain that combines parts of several proposals. In such a compromise, there could be space to encourage energy efficiency.

A key goal of this report was to answer the question, “Could corporate tax reform be good for energy efficiency?” The answer is a qualified “yes.” Tax reform could and should result in more efficient use of energy in all sectors of the country. The devil will most certainly be in the details.