In this Emerging Issues Commentary, Gail H. Morse and Alexandra E. Dowling of Jenner & Block’s Chicago office trace the history of federal and state tax incentives, starting with early federal tax incentives in 1916 for fossil fuel production. They note that the first federal and state income tax incentives for renewable energy production were enacted in 1978 as a reaction to the 1973 oil crisis, with no new incentives enacted until the mid-2000s when the political landscape had changed and there was greater pressure for independent, environmentally friendly fuel sources.

As reported by Ms. Morse and Ms. Dowling, the greatest recent activity with respect to renewable energy incentives has been the Energy Tax Incentives Act of 2005, under which Congress increased the tax credit for solar energy sources, established a tax credit against income tax for bondholders of clean renewable energy bonds, and provided for a business fuel cell credit and a residential energy-efficient property credit. States, too, have enacted their own specific energy credits, since the available federal credits do not flow through to the calculation of state taxable income. After looking at the downside of some of the current energy tax incentives, the authors conclude with a discussion of possible future tax legislation and provide practical advice for what practitioners, energy producers and consumers can do to help shape federal and state incentives for renewable energy.

“Federal and state tax provisions, which have historically provided important tax incentives for fossil fuel producers, could affect whether alternative energy sources become a viable and cost effective alternative to fossil fuels,” they write.  “As history has demonstrated, tax policies aimed at increasing energy production from renewable sources are more likely to be enacted when federal and state legislatures are under pressure to do so.  The current instability in the Middle East and the focus on the environmental impact of fossil fuels and their impact on climate change might be sufficient incentives for legislative action to encourage the development and use of alternative energy sources.

Ms. Morse and Ms. Downing note that despite a flurry of recent legislative activity, state and federal income tax incentives are not yet sufficient to significantly affect the decision to move to renewable energy sources.

“ For example, many of the tax credits have sunset provisions that discourage significant up-front investment.  Moreover, while some of the current renewable energy tax incentives relate to energy sources that have beneficial environmental effects, many do not. . . .  Finally, the credits might not even relate to a renewable energy source, as in the case of the tax credit for Indian coal.”

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