Beyond Tax Credits – Smarter Tax Policy for a Cleaner, More Democratic Energy Future

58 Pages Posted: 15 Dec 2013 Last revised: 6 Aug 2014

See all articles by Felix Mormann

Felix Mormann

Texas A&M University School of Law; Stanford Law School

Date Written: October 1, 2013


Solar, wind, and other renewable energy technologies have the potential to mitigate climate change, secure America’s energy independence, and create millions of green jobs. In the absence of a price on carbon emissions, however, these long-term benefits will not be realized without near-term policy support for renewables. This Article assesses the efficiency of federal tax incentives for renewables and proposes policy reform to more cost-effectively promote renewable energy through capital markets and crowdfunding.

Federal support for renewable energy projects today comes primarily in the form of tax incentives such as accelerated depreciation and, critically, tax credits. Empirical evidence reveals that only a fraction of the subsidy value of tax credits may actually go to fund new renewable power projects. Why are tax credits for renewables so inefficient? And where do the remaining tax dollars go?

Qualitative analysis suggests that the answer to both questions hinges on the mismatch between the profitability requirements of tax credits and the revenue profile of renewable energy projects. The value of tax credits lies in their capacity to reduce tax liability and lower tax bills. Most renewable power projects, however, require ten years or more to recover their up-front capital expenditures before they begin to generate taxable profits and, hence, tax liability to reduce. Bringing in investors with tax liability from other sources to monetize a project’s tax credits provides only partial relief. Such tax equity investment drives up a project’s financing charges and transaction costs, limits investment liquidity, and restricts growth in the renewable energy marketplace.

Federal policymakers should give renewable energy access to master limited partnerships (MLPs) and real estate investment trusts (REITs) – two tax-privileged investment structures with a proven track record of promoting oil, gas, and other conventional energy. Merging the tax benefits of a partnership with the fundraising advantages of a corporation, MLPs and REITs could significantly reduce the cost of capital for renewable energy projects, broaden their investor appeal, and move renewables closer to subsidy independence. Most importantly, MLPs and REITs have the potential to deliver these and more benefits to renewable energy at considerably lower cost to taxpayers than the current regime of tax credits.

Keywords: energy, renewable, MLP, REIT, wind, solar, PTC, ITC, geothermal, tax, investment, market, capital, development, market, power, electricity, renewables, green, security, environment, tax credit, climate change, independence, carbon, greenhouse, gas, mitigation, policy, finance, investment, tax equity

JEL Classification: D40, D62, E60, F01, H30, H51, H60, H70, K23, K32, L10, M13, O10, O32, O38, Q20, Q28, Q40, Q42, Q48

Suggested Citation

Mormann, Felix, Beyond Tax Credits – Smarter Tax Policy for a Cleaner, More Democratic Energy Future (October 1, 2013). 31 Yale Journal on Regulation, 303 (2014), Stanford Public Law Working Paper No. 2367780, University of Miami Legal Studies Research Paper No. 2014-1, Available at SSRN:

Felix Mormann (Contact Author)

Texas A&M University School of Law ( email )

1515 Commerce St.
Fort Worth, TX Tarrant County 76102
United States

Stanford Law School ( email )

Steyer-Taylor Center for Energy Policy and Finance
559 Nathan Abbott Way
Stanford, CA 94305-8610
United States

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