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Four important federal tax incentives driving critical energy-saving gains unfortunately expired at the end of 2013. It is essential that Congress extend the energy efficiency incentives created under the Energy Policy Act of 2005 in order to ensure continued growth of America's cheapest fuel source, energy efficiency, creating tens of thousands of new jobs throughout the country. Failure to act would increase dangerous pollution, sacrifice employment growth, and stifle U.S. innovation and competiveness.

With appropriate extensions and updates, however, the four tax incentives created to improve the energy efficiency of U.S. homes, commercial buildings, and appliances could add $8.3 billion to the nation's gross domestic product over the next 16 years and create hundreds of thousands of jobs, while averting an astonishing 16.4 quadrillion Btu of fuel use, 3.2 million gigawatt-hours of electricity, and the dangerous emissions associated with power generation.

Optimizing Efficiency Tax Policy

Tax incentives are a cost-effective way to encourage U.S. consumers and industry to overcome the market barriers to investing in approaches designed to cut energy waste. To create stability and inspire further innovation, Congress should extend these expiring incentives for multiple years while making improvements to ensure they are performance-based, technology-neutral incentives with maximum impact but minimum cost.

For optimum success, energy efficiency tax incentives should be crafted according to several basic principles:

  • They should reward energy performance or savings whenever possible, rather than a specific technology, and should be based on this performance rather than on cost. Performance-based incentives lead to increased competition and more energy savings per federal dollar spent.
  • Energy performance targets should be ambitious: If set too low, many taxpayers will claim the incentive for improvements they would have made anyway. A higher target also helps control program costs.
  • Energy savings should be verified when possible through energy audits or testing.
  • Incentives should be flexible, adapting to changes in the marketplace: Once an efficient technology gains a significant market share, the incentive should be tightened to reward less common yet more efficient technologies.
  • Incentives should be part of a suite of policies to promote innovation and the development of energy efficient products and practices, such as labels (e.g., ENERGY STAR®), utility efficiency programs, and minimum codes and standards to gradually shift all buildings and equipment toward increased energy savings.

With cogent, performance-based tax policy, clear instructions for homeowners and builders, and a flexible approach to meeting high energy-saving targets, efficiency tax incentives can continue to spur innovation, minimize costs for both the U.S. Treasury and electricity consumers, and encourage more Americans to reduce energy use. To maximize these benefits, existing efficiency tax incentives must be extended for multiple years in order to provide market and investment certainty. In addition, because the IRS often does not track the number of tax credits claimed or the corresponding amount of tax dollars saved, requiring better reporting would result in more informed decision making related to efficiency tax incentives.

We urge Congress to improve and extend these credits to ensure that the country realizes the full savings from energy efficiency as well as its other significant benefits, including the creation of new jobs and substantial progress toward our environmental and air pollution reduction goals.

last revised 12/9/2013

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