The Failure of Solar Tax Incentives: A Dynamic Analysis

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In recent years we have witnessed governmental attempts to accelerate the stock demand for energy-saving durables with financial incentives implemented through the tax mechanism. At the federal level, income tax credits for the purchase of energy-saving durable stocks were introduced through the Energy Tax Act of 1978 (Public Law 95-618). In addition, many states have enacted their own energy-saving tax incentive legislation. A substantial body of this tax legislation has been aimed at accelerating substitution of solar-produced energy for conventional, nonrenewable energy resources in the residential and commercial building sectors. Along these lines, the bulk of engineering (so-called life-cycle) cost studies accompanying much of this legislation predicted that solar tax incentives would generate widespread market penetration with little or no delay. However, casual observation reveals that tax-induced solar energy substitutions have not been widespread.

This paper presents a dynamic model of investment decisions in solar processes - a model that captures the effect of tax legislation aimed at accelerating market penetration of solar energy. The model examines the extent to which recently enacted solar tax incentives for the residential and commercial building sectors have failed to stimulate even a weak demand for solar processes. The model is applicable to many types of energy services that solar processes are designed to produce - space heating and cooling services, industrial process heat, and hot water services. However, the most technologically feasible use of solar processes is to produce hot water services (HWS) in residential and commercial buildings. For purposes of this paper, the analysis will focus on demand for solar HWS in these two building sectors.

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