Tax

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.

Source: https://www.tai.org.au/file.php?file=web_papers/WP118.pdf

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Idea No. 6