The European experience with tax relief for energy efficient equipment in industry – all bad or just second best?

Panel: 6. The role of financing to improve industrial efficiency, global perspective

This is a peer-reviewed paper.

Authors:
Lisa Ryan, UCD, Ireland
Vida Rozite, International Energy Agency, France
Emilie Jessula, International Energy Agency, France

Abstract

Improvements in energy efficiency in industry are crucial to achieving not only environmental and energy security objectives, but also to improving productivity and competitiveness at enterprise level. Notwithstanding this, a reluctance to finance energy efficiency improvements is prevalent in many organisations. A range of policy measures are put in place by governments to overcome the market failures preventing increased investment in energy efficiency measures. Although not a first-best policy instrument on a number of levels, tax relief for energy efficient equipment in the industrial and commercial sectors is one mechanism utilised by policymakers in many countries to encourage the increased investment of energy efficient equipment by companies.

This paper examines the evidence from three such programmes in the Netherlands, UK and Ireland using evaluation criteria grouped under effectiveness and efficiency headings. The case studies suggest that these kinds of programmes appear to be quite effective in encouraging greater market uptake of energy efficient equipment at quite low cost to the public purse. However there is significant free-ridership and overlap with other policies that reduce the efficiency of this policy instrument. Nevertheless, the experiences of these three countries suggest that these programmes have led to increased awareness of energy efficiency in industry and leverage of private finance and therefore there may be non-quantifiable multiplier effects that justify such programmes.