Time to Reform Tax Incentives to Drive More Clean Energy Innovation, New Report Recommends

December 2, 2019

WASHINGTON—As policymakers work to steer the global energy system to a low-carbon future, a new report released today by the Information Technology and Innovation Foundation (ITIF), the top-ranked think tank for science and technology policy, calls on Congress to leverage targeted tax incentives to accelerate innovation in low-carbon energy technologies.

“Market-based competition drives innovation in many sectors, but it will not drive enough clean energy innovation—or drive it fast enough—to halt climate change,” said ITIF Senior Fellow David Hart, co-author of the report. “More effective tax incentives can and should become consistently valuable tools for accomplishing a specific and important set of tasks that will accelerate clean energy innovation.”

The report examines the impact federal tax incentives have had on innovation across three major sectors: power, building, and transportation. As the report shows, proper targeting of tax incentives strongly influences their effectiveness. The report finds that tax incentives too often have rewarded well-established incumbent technologies without driving improvement, or have focused on actors that are poorly positioned to innovate.

To reform energy-technology tax-incentive policy, the report recommends that Congress:

  1. Apply tax incentives when clean energy technologies are approaching readiness for large-scale adoption—not before—and remove them after the target technology has had a fair chance to establish a strong user base.
  2. Absent a carbon price or other overarching climate policy, apply a tiered incentive system that provides next-generation, emerging clean-energy technologies with a more generous incentive than it does for already widely deployed clean-energy technologies.
  3. Reward risk-taking by targeting tax incentives toward early adopters, benefiting the innovators that offer these early adopters the most compelling products.
  4. Set the broad framework for tax incentives through the legislative process, but delegate detailed decisions about eligibility and duration to the executive branch.
  5. Use the whole policy toolbox and the right policy tool for each task to ensure low-carbon energy innovations mature as quickly as possible.

“It is time for Congress to break the cycle that has led to an increasingly flawed incentive policy,” said Elizabeth Noll, co-author of the report. “Congress should target opportunities when they are ripe, drive the market forward, and then sunset federal support as technologies mature.”

Read the report.