Renewable energy is energy drawn from sources that, rather than existing in finite quantities like oil, can be indefinitely replenished. Examples of renewable energy include solar energy, wind energy and hydropower, as well as fuels made from organic material, such as ethanol and biodiesel. In many cases, the use of renewable energy results in fewer emissions of polluting chemicals and greenhouse gases. For this reason, some governments encourage the use of renewable energy through tax credits.
Tax credits are deductions applied to the amount of money an individual or business owes in taxes. Whereas a regular tax deduction is applied to taxable income, a tax credit is applied directly to a tax burden. By offering tax credits for the use and production of renewable energy, governments provide a financial incentive to adopt these new technologies to make the use of renewable energy more common.
Purchase Tax Credits
There are two main types of tax credits: purchase credits and production credits. Consumers earn purchase credits when buying a particular product. For example, as of December 2010, the United States offers taxpayers who install solar panels on their house a purchase tax credit equivalent to 30 percent of the cost of the panels. Most of the tax credits are either offered at a flat rate or as a percentage of the cost of buying a renewable energy technology.
Production Tax Credits
Businesses that produce renewable energy qualify for production tax credits. A business gains a certain credit for every unit of renewable energy it produces. For example, a biofuels company may receive a credit for every gallon of biodiesel it produces, while a solar power company may receive a credit for every kilowatt hour of electricity it produces.
Federal and state governments offer renewable energy tax credits. While credits have been offered since the 1970s, use of them rose in the 2000s as concerns about climate change and the price of crude oil increased. The exact breaks offered to households and businesses change frequently, depending on government policies.