Consumer Tax Incentives
How It Works
A tax incentive changes the amount of consumption by changing the price of what is being bought. A gasoline tax is an example of this, but more importantly, so are tax credits and deductions for alternative fuel sources.
Consumer tax credits can be used to encourage the demand for products that use less gasoline and emit less carbon into the atmosphere. This in turn encourages investment into these developing technologies. These credits may decrease government revenues, but a system called “feebates” (systems of government imposed fees and rebates that are used to shift market purchasing preferences toward an economically, socially or politically desired goal) has little effect upon government budgets. This system gives credits to consumers who use less energy while increasing tax rates on those who use more carbon fuel. This effectively persuades consumption in a desirable direction, yet is “revenue neutral” from a tax standpoint.
Cost of Implementation 3
The only costs of a feebate system would be administrative, but these costs are nothing to ignore especially with no historical track record.
Environmental Impact 2
Not only can certain energy sources be discouraged, but investment into new technologies and new sources can be promoted.
Foreign Energy Useage 3
New technologies are the best prospect for relieving the US from reliance on foreign energy sources.
Implementation 6
There have been many studies regarding consumer behavior in response to taxation, but very little real world experience of taxes used solely for this purpose.
Political Toxicity 6
Feebates are more palatable than a regular tax, but the public would still need some convincing.
Barriers to Future Use
- California and Maryland legislatures both approved feebate legislation in the early 1990′s, however the first Bush administration determined that only the federal government has authority to enact fuel legislation. (Langer, 2005). Therefore legislation has to be enacted at the Federal level.
- Federal politicians tend to find a cap and trade system more favorable than new tax legislation (Economist, 2007).
Pros of Use
- A byproduct of changing consumer behavior is that investors will follow market forces and spur R & D into new energy technologies (Jaffe, 2005).
- Feebates give the government a fiscal policy option that can be used solely to change consumer behavior without increasing the government deficit or increasing overall taxes (Green, 2005).
- Taxes can be phased in and incrementally adjusted to achieve a desired level of fuel and energy consumption.
Cons of Use
- As with any tax, there will be a loss in profits and consumer benefit because markets will not be able to operate as efficiently as before the tax (Nicholson, 2005).
- There has not been much experience with a feebate system to date (Langer, 2005).
Case Studies
Classic Incentives: California and Solar Powers
California’s Million Solar Roofs Program: As part of Governor Arnold Schwarzenegger’s California has set a goal to create 3,000 megawatts of new, solar-produced electricity by 2017 – moving the state toward a cleaner energy future and helping lower the cost of solar systems for consumers. Consumer tax incentives provide the drive behind this program, as the California Public Utilities Commission, through its California Solar Initiative, provides incentives over the next decade for existing residential homes and existing and new commercial, industrial, and agricultural properties. Additionally, the California Energy Commission manages a 10-year, $400 million program to encourage solar in new home construction through its New Solar Homes Partnership. Incentives start at $2.50 per watt, and additionally offer a pay-for-performance structure for high performing installations. To learn more, click here.
Most Important Fact
Consumer demand influences investment into new technologies and technological improvements. Energy efficient consumption will be become more attainable as these R&D investments bear fruit. An upward spiral between consumers and investment can result in cleaner and more efficient energy use.
Bottom Line
Consumer tax incentives can be a driving force to significant changes in energy consumption and investment. While a system of feebates is an elegant theoretical model for this change, there is little real world experience with it. This increases the political risk associated with taxes used solely to influence consumer behavior. Without significant public support the US may have to watch as others nations for provide a blueprint for such a system.
