• Alliance to Save Energy

Extend the Federal Energy-Efficiency Tax Incentives

One of the most important measures in The Energy Policy Act of 2005 is the first comprehensive set of tax incentives for energy-efficient buildings, equipment, and vehicles. These incentives were intended to encourage investment in hi-efficiency technologies and lower energy bills in the face of record-high natural gas and oil prices. However, these incentives may not have the desired impact on our energy situation unless they are given more time to work.

Energy Efficiency Tax Incentive in EPAct 2005

In August of 2005, the President signed The Energy Policy Act of 2005 (EPAct 2005), including important tax incentives for highly efficient commercial buildings, new homes, home improvements, heating and cooling equipment, appliances, fuel cells, and hybrid and advanced diesel vehicles (see below). These tax incentives will help niche products with new efficient technologies to overcome steep market barriers and move into the mainstream, enabling them to better flourish in the market when the tax incentive end.

ACEEE estimates that over the 2006-2020 period, these tax incentives can reduce U. S. natural gas use by 1.6 trillion cubic feet, reduce peak electric demand by more than 6,000 MW (equivalent to about 20 power plants of 300 MW each), reduce consumer energy bills by $27 billion, and prevent more than 1 million metric tons of carbon emissions. Based on scoring by the Joint Committee on Taxation, we estimate that these provisions will have a ten-year cost to the Treasury of about $2.1 billion (just 14 percent of the energy tax package).

Short Availability Will Limit Impact

However, most of these incentives were limited to two years, expiring on December 31, 2007. Although late last year two of the incentives, commercial buildings and new homes, were extended one year (expiring now at the end of 2008), an extension of multiple years is imperative to allow enough time for the planning and construction of these buildings. Because of the per-manufacturer cap on the hybrid and diesel vehicles credit, that credit for Toyota vehicles has already been cut in half, and will end in September, 2007. This short window of opportunity causes a number of problems that may limits the impact of the incentives:

This period may be too short to cause lasting change in some markets. The public education, ramp-up in production, development of distribution channels, and other changes needed to increase availability and lower prices of efficient products so they can achieve widespread use, may take more than two years.

For some buildings, the time constraints are even worse. Even with a firm commitment today, it would be difficult to design and build a large new commercial building before the end of 2008. New home builders face similar difficulties in learning new technologies and techniques, changing their design, and building and selling homes in new developments in two years. Thus, the one year extension has not helped as much as intended.

The effective period was shortened by the failure of the Treasury Department to issue needed rules in a timely fashion. Some of the Treasury guidance for the efficiency tax incentives took close to a year, and some has never been issued, further cutting into the short time frame of the incentives.

Congress Should Extend Tax Incentives Now

We need to extend these tax incentives now (in some cases with adjustments), so that businesses and consumers can plan longer-term investments. If we continue to wait until the tax incentives are about to expire, and then extend eligibility for one or two years, the same difficulties will persist.

By making new energy-efficient technologies more affordable, these tax incentives not only can lower energy prices by reducing demand, but also can develop innovative new industries with new jobs, reduce air pollution and greenhouse gas emissions, and improve the reliability of the electric system. But they only will have these benefits if given enough time.

The Alliance supports the Extend the Energy Efficiency Tax Incentives Act of 2007 (S. 822 / H.R. 1385) and the Super-Efficient Appliances Incentives and Market Transformation Act of 2007 (H.R. 2137 / S. 1525). The first bill would extend and improve the tax incentives for energy-efficient new homes, home improvements, and commercial buildings, and would add tax incentives for while-home retrofits, building energy certifiers, and small commercial heating and cooling equipment. The second bill would modify and extend the appliances tax credit. Many of the provisions also are in the House energy bill, H. R. 3221, and the Senate Finance Committee package, S. Amdt. 1704, as indicated below.

New Energy-Efficient Tax Incentives

Commercial Buildings: Provides a deduction up to $1.80/square foot for buildings designed to use 50% less energy than required by the model commercial building energy code. Applies 2006-2008. H.R. 3221 extends this incentive through 2013; S. Amdt. 1704 also increases the deduction to $2.25/ sq. ft.

New Homes: Provides builders a credit up to $2,000 for a home that saves at least 50% compared to the model residential code, and $1,000 for an Energy Star manufactured home. Applies 2006-2008. S, Amdt. 1704 extends this incentive through 2011.

Home Improvements: Provides homeowners a credit for 10% of the cost of installing new windows, insulation, and doors. Also provides credits of $300 for efficient central air conditioners, eater heaters, and heat pumps, $150 for furnaces and boilers, and $50 for fans in furnaces. Capped at $500, of which only $200 may be for windows. Applies 2006-2007. S. Amdt. 1704 extends this incentive through 2009.

Appliances: Provides manufacturers $50-$200 credits for increased production of efficient refrigerators, clothes washers, and dishwashers. Applies 2006-2007. H.R. 3221 and S. Amdt. 1704 modify this incentive and extend it through 2010.

Stationary Fuel Cells: Provides a 30% credit up to $500 per 0.5kW. Applies 2006-2007. H.R. 3221 and S. Amdt. 1704 extend and increase this incentive.

Hybrid and Diesel Vehicles: Provides purchasers of hybrid and lean burn diesel vehicles a credit of $250-$3,400 based on fuel economy and gas savings, and a larger credit for heavy-duty vehicles ($7,500-$30,000), capped for each manufacturer starting at 60,000 vehicles. Applies 2006-2010 (2009 for heavy-duty vehicles). H.R. 3221 and S. Amdt. 1704 add larger credits for plug-in hybrids.

Thank you to the Alliance to Save Energy for the preparation of this fact sheet. For more information please contact Alliance policy staff at Alliance to Save Energy.

The Alliance to Save Energy is a coalition of prominent business, government, environmental and consumer leaders who promote the efficient use of energy worldwide to benefit consumers, the environment, the economy, and national security.