Energy Efficiency: Can Tax Incentives Reduce Consumption?

Additional tax incentives, such as tax credits, probably could reduce U.S. energy consumption modestly. However, narrow incentives complicate the tax code, create distortions that reduce growth, and move down the slippery slope of widespread social engineering through the tax system. On the other hand, Congress should reform tax provisions that hinder new investments in energy production and conservation. Current business depreciation rules for energy and conservation investments are unfavorable compared to the rules in other countries. Congress should reform those rules, and it should pursue broader tax reforms to spur more rapid replacement of older structures and equipment with newer, more energy efficient infrastructure throughout the economy.

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