The tax treament of capital investments in renewable energy: Accelerated Depreciation

What it is: Accelerated depreciation, refers to the capacity for selected industries to claim bigger tax deductions for the cost of their investments in new equipment in the early years of a project. This increases the after-tax profit earned by investors and, in turn, the likelihood of such investments taking place.

In Australia today, mining and the airlines (both high emissions industries) are the industries receiving the most generous accelerated depreciation provisions while renewable energy industry is excluded from such concessions.

The money currently spent subsidising new investment in mining and airlines could be transferred into accelerated depreciation provisions for the renewable energy industry reducing greenhouse gas emissions and building a strong economy based around renewables.

How it works: When there is a societal goal of increasing investment in renewable energy, there is a strong case for introducing accelerated depreciation for renewable energy assets to reduce the incentive for firms to delay investing in such equipment in the hope it will be cheaper in the future. This is particularly the case when there is potential for increased sales in the short term to actually drive the cost reductions in the medium term.

Policy makers need to recognise that investors in renewable energy will be facing quite steep and unpredictable changes in the value of their assets—changes that are much larger than the expected physical life of their assets would imply. The introduction of accelerated depreciation provisions would both recognise this problem and help encourage increased investment in renewable energy sources.



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    In a submission to the Henry review the Association of Consulting Engineers recommended the implementation of green depreciation, they defined this as an aim to “Increase the adoption of energy efficient measures in the building industry. Green depreciation should be adopted for non-existing non residential buildings that meet a specific environmental standard”. (ACE 2008)

    The aim of green depreciation is to provide a strong incentive for building owners to refurbish their existing building stock and put in place measures to make the building more environmentally sustainable for the future, such as implementing renewable energy structures. “This would bring about a rapid reduction in the environment footprint of the building sector in the future” as the incentive to respect the environment would have been created. (ACE 2008)

    This removes the argument of many in the building industry that there is no incentive for introducing these practices. If this is introduced then there will be no need to delay building projects in hope that it will be cheaper in the future.

    This would be financed by the Government; the government has a proposed green depreciation scheme at the moment which “could lead to the abatement of 203 Mt CO2 emissions over the medium term (eleven years). “This is equivalent to removing 6.4 million cars from the road each year” between now and 2018 (ACE 2008)

    Friends of the earth strongly support this idea to encourage the building sector to implement efficient design and appliances, that in the future the home’s energy needs can be supplied by renewable energy. “This means our houses can be effectively emissions free and part of the climate change solution”. (FOE)

    Further reading: Friends of the Earth (FOE)

    Association of Consulting Engineers (ACE) submission to Australia’s Future Tax System 2008.

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