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  • Service: Tax
  • Type: Survey report
  • Date: 4/25/2013

Renewable energy & fuels 

Renewable energy and fuels is one of the policy areas where governments are most active in putting tax incentives in place and this includes the governments of developing and emerging economies. For example, Argentina, Mexico, China, India and South Africa all offer tax incentives in this area.
RENEWABLE ENERGY & FUELS
US 1
Japan 2
Canada 3
India, Ireland 4

Source: The KPMG Green Tax Index, 2013.


Tax incentives for renewable energy and fuels identified as part of this research include the full spectrum of available tools including credits, capital allowances and indirect incentives.


The US leads the Index ranking for renewable energy and fuels due to the large number of tax incentives it offers linked to this policy area. A good example of the effectiveness of tax incentives is the US wind energy production tax credit (PTC) which is widely credited with playing a key role in the development of the US wind energy industry by improving the returns for investors and enabling wind power to compete in the market.


Between 1992, when the PTC was first implemented, and the end of 2011, US wind power capacity grew 30-fold to account for 4 percent of the US total power generation capacity.1 The scheduled expiration of the PTC at the end of 2012 has been linked to a surge in installation that made 2012 a record year for wind power. Installations were up 102 percent on the previous year and wind power ended the year with a 6 percent share of overall US generation capacity.2


When it comes to tax penalties on conventional fossil fuels, the KPMG Green Tax Index demonstrates a clear difference in approaches between developed and developing or emerging economies.


Only the developed countries, among the sample analyzed for this Index, impose tax penalties on conventional fossil fuels; they include the US, Canada, Japan, Australia and the European countries. Developing or emerging economies appear to avoid taxing conventional fuel, presumably on the basis that such penalties could damage development and growth prospects.


This section of the KPMG Green Tax Index reviews which governments are most active in using their tax codes to incentivize the production, or use of, renewable and alternative fuels, and/or to penalize the use of fossil fuels.




US

The US tax code provides various tax credits including a production tax credit on renewable energy. The rate varies, but is based on the number of kilowatt (kw) hours produced and sold to an unrelated taxpayer.


An investment tax credit of 10 to 30 percent on the cost of renewable energy equipment is also available in the US which, like the production tax credit, has varying expiry dates, depending on the technology purchased, installed and used. At the time of writing, a credit is also available for companies expanding their facilities to manufacture renewable energy equipment, and biofuel producers are also provided a credit based on the amount of fuel produced.


Users of certain fuels are also provided an indirect tax credit, for example users of liquefied hydrogen are provided a credit of USD0.50 per gallon.


In addition to the various tax credits to incentivize renewable energy production and use, the US also offers tax deductions. These include a capital allowance of 50 percent of the cost of cellulosic biofuel production equipment. This incentive is not permanently within the tax code, and is scheduled to expire at the end of 2013.


In terms of penalties, fuel excise taxes are also imposed by the US federal government. Currently, the federal tax on gasoline is USD0.184 per gallon.

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Japan

Japan penalizes the use of numerous fossil fuels with taxes including an oil and gas tax, a diesel oil delivery tax and an aviation fuel tax. Furthermore, an electric power development promotion tax is levied on electric utilities at a rate of 375 Japanese yen (JPY) (USD4) per 1,000kw/h of power sold. This measure was specifically enacted in the 1970s to promote the generation of clean power as an alternative energy to oil. The tax is passed on by the utilities to end users (both households and industry). Japan also applies petroleum and coal tax to the shipment of crude petroleum, gaseous hydrocarbons or coal from extracting stations or bonded areas.


Japan provides several significant incentives specific to renewable energy and fuel. These include a special depreciation of 30 percent or 100 percent for the purchase and installation of qualified renewable energy equipment.


In addition, Japan also provides an incentive for fixed assets tax on certain renewable energy generation facilities, qualified under the Act on Purchase of Renewable Energy Sourced Electricity by Electric Utilities, and acquired during the period from 29 May 2012 to 31 March 2014 (tax base reduction by one third).


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Canada

Canada’s ecoEnergy for Biofuels initiative, which started in 2008, aims to invest 1.5 billion Canadian dollars (CAD) (USD1.47 billion) over 9 years to boost the country’s production of biofuels. The incentive offers a tax credit for every liter of biofuel produced and sold.


Canada also provides various accelerated tax deductions for renewable energy generation. The accelerated rate of write-off varies from 30 percent to 100 percent per year depending on type of equipment and/or component purchased. Certain expenses can be carried forward indefinitely for use in future tax years, or flow to investors.


Canada imposes an excise tax of CAD0.10 per liter on unleaded gasoline, ethanol and unleaded aviation fuel with a lower rate applied to diesel and biodiesel.


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India

Many incentives specific to renewable energy are available to Indian taxpayers. These tax incentives include accelerated depreciation of 80 percent of the cost of a wide range of specified renewable energy assets such as solar power generating systems, wind turbines and biogas-plant.


In addition, India provides a tax holiday of 10 years within the first 15 years of operations for renewable energy facilities that began to generate and transmit power before 31 March 2013. India has proposed to extend this benefit to facilities which will begin to generate and transmit power before 31 March 2014.


Exemptions from indirect taxes include an outright exemption from excise duty on the manufacture of specified alternative energy devices, machinery and systems related to renewable power generation, and on parts used in the manufacture of wind turbine blades.


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Ireland

Ireland offers an accelerated capital allowance (100 percent in the year of expenditure) for purchases of solar, wind and biomass equipment.


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Other renewable energy and fuel incentives and penalties

Like many other countries, the UK imposes a duty on certain fuels. The UK imposes a heavy duty on fuel at GBP0.5795 per liter of unleaded gasoline or diesel (USD3.40 per gallon) compared with a duty of only USD0.184 per gallon in the US. The fuel duty was frozen by the government in 2013 until at least September 2014. Together with VAT, the total tax take on gasoline and diesel in the UK is around 60 percent of the pump price.


China has an accelerated depreciation policy for domestic enterprises that purchase listed renewable energy equipment. It also provides 3 years corporate income tax exemption and 3 years 50 percent reduction for income derived from certain renewable power projects, as well as tax credits for the purchase of renewable power generation equipment.


Argentina also provides tax deduction and indirect incentives specific to biofuel and renewable energy production.


South Korea provides a tax credit for the purchase and installation of renewable energy equipment. A 10 percent credit of the investment amount for geothermal, solar, fuel cell, wind energy, biomass, municipal solid waste and hydropower equipment applies to investments made before 31 December 2013.


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Non-tax incentives

In Australia, the Australian Renewable Energy Agency (ARENA) administers AUD3.2 billion (USD3.34 billion) of funding with the aim of improving the competitiveness of renewable energy technologies and increasing the supply of renewable energy in Australia. ARENA oversees previously allocated funding under a number of programs, with current funding initiatives being Regional Australia's Renewables, Emerging Renewables Program, Advanced Biofuels Investment Readiness Program and the Renewable Energy Venture Capital Fund.


Australia’s Clean Energy Finance Corporation is an AUD10 billion (USD10.5 billion) commercially-oriented loan organization established by the national government. Its objective is to overcome capital market barriers that hinder the financing, commercialization and deployment of renewable energy as well as energy efficiency and low-emissions technology.


In Canada, the Canadian Sustainable Development Tech Canada Fund has CAD1.1billion (USD1.1 billion) in government funding, and manages various programs, including the Next Generation Biofuels Fund of CAD500 million (USD490 million). This fund supports up to 40 percent of eligible costs for first-of-kind large scale demonstration facilities for next-generation renewable fuels. The contribution will be repayable at a rate based on the company’s free cash flow over a period of 10 years after project completion.


Various government agencies in Finland provide grants and loans to support renewable energy. They include Energy Aid which provides subsidies to businesses, municipalities and corporations for investment in renewable energy as well as energy efficiency and diversification of the energy supply. Energy Aid provides up to 25 percent of project costs. Finland’s Tekes program also provides many different grants to encourage the development and growth of renewable energy.


India provides capital subsidies for solar thermal technology of up to INR6,000 (USD111) per square meter of collector area, or 30 percent of project cost, whichever is less. For projects in rural areas that lack electricity and in certain 'special category' Indian states, subsidies for up to 60 percent of project costs are available.


In addition, soft loans may also be available for up to 80 percent of project costs at a rate of 5 percent.


Various grant programs are available in Singapore to encourage the use of renewable energy technology. Examples include the Solar Capability Scheme which provides grants of up to 30 percent for solar technology, capped at SGD1 million (USD800,000) per project. The scheme’s objective is to encourage the integration of solar technologies into energy efficient buildings and build the capabilities of companies engaged in engineering, architecture and system integration.


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Feed-in tariffs

Of the 21 countries analyzed for this Index, over half (12) have a national feed-in tariff program to support the generation of renewable energy, namely a fixed price paid for renewable energy over the fixed term. The total number of countries with feed-in tariffs globally is over 50. The recent trend has been for feed-in tariff rates to drop as costs of solar equipment, especially photovoltaic modules, fall and some cash-strapped governments look to cut spending.


The KPMG Green Tax Index does not cover feed-in tariffs in detail because it focuses on tax-based penalties and incentives. Further information on feed-in tariffs and other incentives specific to renewables can be found in a sister publication from KPMG International: Taxes and Incentives for Renewable Energy (PDF 2.16 MB).3


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1 http://www.eia.gov/todayinenergy/detail.cfm?id=8870. Accessed 14 April 2013.

2 http://about.bnef.com/press-releases/burst-of-construction-in-december-delivers-record-year-for-us-wind/. Accessed 14 April 2013.

3 http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/taxes-incentives-renewable-energy-2012.pdf. (PDF 2.16 MB)

 

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