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Investment in Energy Infrastructure and the Tax Code

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  • Gilbert E. Metcalf

Abstract

Federal tax policy provides a broad array of incentives for energy investment. I review those policies and construct estimates of marginal effective tax rates for different energy capital investments as of 2007. Effective tax rates vary widely across investment classes. I then consider investment in wind generation capital and regress investment against a user cost of capital measure along with other controls. I find that wind investment is strongly responsive to changes in tax policy. Based on the coefficient estimates the elasticity of investment with respect to the user cost of capital is in the range of -1 to -2. I also demonstrate that the federal production tax credit plays a key role in driving wind investment over the past eighteen years.

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Paper provided by Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research in its series Working Papers with number 0920.

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Date of creation: Oct 2009
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Handle: RePEc:mee:wpaper:0920

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  1. Kevin A. Hassett & Gilbert E. Metcalf, 1998. "Investment With Uncertain Tax Policy: Does Random Tax Policy Discourage Investment?," Discussion Papers Series, Department of Economics, Tufts University 9823, Department of Economics, Tufts University.
  2. Gilbert E. Metcalf, 2006. "Federal Tax Policy Towards Energy," Discussion Papers Series, Department of Economics, Tufts University 0612, Department of Economics, Tufts University.
  3. Curtis Carlson & Gilbert Metcalf, 2008. "Energy Tax Incentives and the Alternative Minimum Tax," Discussion Papers Series, Department of Economics, Tufts University 0722, Department of Economics, Tufts University.
  4. King, Mervyn A. & Fullerton, Don, 2010. "The Taxation of Income from Capital," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226436319.
  5. Kahn, Edward & Goldman, Charles A., 1987. "Impact of tax reform on renewable energy and cogeneration projects," Energy Economics, Elsevier, vol. 9(4), pages 215-226, October.
  6. Mulder, Arjen, 2008. "Do economic instruments matter? Wind turbine investments in the EU(15)," Energy Economics, Elsevier, vol. 30(6), pages 2980-2991, November.
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