OECD Observer
Cleaner Dutch energy: A tax success?

Since 1997 the Netherlands has had a tax allowance scheme aimed at promoting investments in energy-saving technologies and sustainable energy production. This so-called Energy Investment Tax Allowance, or EIA to the Dutch, reduces up-front investment costs for firms investing in the newest energy-saving and sustainable energy technologies. The basic design of the EIA has remained the same over the past 15 years: firms investing in technologies listed in an annually updated “energy list” may deduct some of the investment costs from their taxable profits.

Does the scheme work? An OECD working paper, “Lessons from 15 Years of Experience with the Dutch Tax Allowance for Energy Investments for Firms”, draws four valuable lessons. First, it finds that the use of tax revenues to subsidise investment in energy-efficient technologies and renewable energy is not very different from using straight subsidies, as long as budgetary rules impose enough accountability on such tax expenditures. A second finding concerns the risk of “free riding” by firms that would have made the investments even without the tax incentive. This is found to be the policy’s main weakness, but the problem seems to be manageable. A third lesson is that the use of an annually updated energy list makes the regulation flexible, allowing policy to refocus and apply tighter standards if necessary. The list also helps match supply and demand for new technologies.

It appears that using only the technology list–without the additional benefit of receiving a subsidy–may not be sufficient for companies to switch to these new energy-saving technologies. But the subsidies do not need to be large to work. Finally, policymakers should be careful to consider how such a subsidy scheme might interact with other policy instruments when designing such tax incentives that might have complementary objectives. The report recalls a period of turbulence with the EIA from 2001 to 2007, which was primarily brought about by the presence of other instruments that were similarly aimed at boosting investments in sustainable energy production.

Ruijs, A. and H. R. Vollebergh (2013), “Lessons from 15 Years of Experience with the Dutch Tax Allowance for Energy Investments for Firms”, OECD Environment Working Papers, No. 55, OECD Publishing. www.oecd-ilibrary.org/papers

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©OECD Observer No 295, Q2 2013