Today marks the end of the ARPA-E Energy Innovation Summit, wrapping up a 3-day collection of America’s best, brightest, and most innovative clean energy thinkers and companies.  The discussions varied, but the underlying theme was straightforward: how can the United States accelerate and spur clean energy innovation. During Summit a common suite of policy ideas emerged: supporting clean technology innovation through the tax code.

Broad-based tax reform has become a top issue for federal policymakers and ITIF has called out ways we can reorient the tax code to drive innovation and strengthen U.S. competitiveness economy-wide.  But can broader reforms address the need to spur the development of better and cheaper low-carbon technologies? The short answer, yes.

During his keynote panel discussion, FedEx CEO Fred Smith called out accelerated depreciation as a key tax change to spur companies to make more capital expenditures like new machinery, energy efficient technologies, and energy technologies. Under current policy, companies depreciate their capital expenditures over time, meaning they incrementally write-off expenditures over the lifespan of the technology. But because of inflation (putting benefits in present value), these tax benefits are “worth less” over time.  Accelerated depreciation allows companies to take more of the tax benefits upfront in the first year, acting as an incentive to invest more.  For companies looking to purchase electric vehicles, charging infrastructure, or more efficient machinery, this incentive would be significant.  In 2011, companies were able to depreciate 100 percent of their capital purchases, but this policy was only temporary and ended at year’s end. Thus a simple way to spur more investment in innovative technologies would be to replace the current depreciation system with permanent accelerated depreciation. 

After Fred Smith’s keynote, another business luminary – Bill Gates - took the stage and commented on his proposal (from a couple of years ago) to implement a carbon tax and use some of the revenue as a steady investment stream into public clean energy innovation programs.  Last year, ITIF proposed a similar idea: use a small, but a potentially more politically palatable price on carbon to fund programs like ARPA-E outside of the boom-and-bust cycle of Congressional budget appropriations.  Doing so recognizes that a price on carbon, by itself, would have a limited impact on spurring energy innovation, especially in the short and midterm.  But tying it to a strong innovation policy agenda, like linking it to public RD&D budgets, would have a significant impact.  If America is to realize bigger energy innovation budgets to $15- $20 billion a year, which leading energy thinkers have called for, then finding new sources of revenue is essential.

And today Senator Coons discussed his proposal to reform the R&D tax credit. The R&D tax credit is a critical way government incents private industry to invest in more R&D, thus more innovation, and ITIF has long supported ways to make the R&D tax credit better and more competitive. In addition to the need to boost U.S. innovation and economic growth, other countries are quickly providing more generous incentives to lure industrial R&D activities to their borders.  A new and important wrinkle in the debate is how to support emerging companies.  A key issue is that the R&D tax credit cannot be taken by companies that are not profitable – often emerging start-ups.  For the nascent clean economy, this is an issue as these are the companies trying to invest in R&D to move their innovative ideas forward.  Senator Coon’s offers two solutions. Tradability would allow start-ups and young companies looking to expand their R&D to take the credit and sell it to bigger companies, quickly infusing funds to perform the R&D. And refundability would allow small, research intensive firms to take the R&D credit even in the early years of growth when the company is investing all of their income on technology development.

All three broad tax reform ideas show the varied, but important role tax reform can play in spurring energy innovation. The clean energy tax debate is often solely focused on specific tax incentives, like the production tax credit for wind turbines. While important, the energy innovation debate would do well to expand and include other policy choices like those discussed at the ARPA-E Summit.

ITIF is a Designated Media Partner at this year's ARPA-E Energy Innovation Summit.