This document summarizes a study examining the distributional effects of US clean energy tax credits from 2006-2012. It finds that higher-income households claimed a disproportionate share of the $18 billion in credits. Specifically, the study analyzes tax return data to see who claimed credits for investments like home weatherization, solar panels, hybrid vehicles, and electric vehicles. It aims to provide insights into how the inequitable distribution may inform future program design and the debate around subsidies versus carbon taxes.

1. Introduction Background Distributional Analysis Conclusion
The Distributional Effects of
U.S. Clean Energy Tax Credits
Severin Borenstein and Lucas Davis
UC Berkeley
severinborenstein@berkeley.edu
lwdavis@berkeley.edu
September 2015
Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 1 / 33

2. Introduction Background Distributional Analysis Conclusion
Research Questions
Since 2006 U.S. households have received more than $18 billion in federal
tax credits for weatherizing their homes, installing solar panels, buying
hybrids and electric vehicles, and other “clean energy” investments.
Who claims clean energy tax credits?
How do credit receipts vary across income groups?
Does this distributional pattern provide any broader insights about
program design?
Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 2 / 33

3. Introduction Background Distributional Analysis Conclusion
Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 3 / 33

4. Introduction Background Distributional Analysis Conclusion
Motivation
Economists have long pointed out that subsidizing “green” is less efficient
than taxing “brown”.
Subsidies don’t get usage right.
Subsidies are a coarse instrument.
Many subsidy recipients are inframarginal.
Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 4 / 33

5. Introduction Background Distributional Analysis Conclusion
Motivation
Economists have long pointed out that subsidizing “green” is less efficient
than taxing “brown”.
Subsidies don’t get usage right.
Subsidies are a coarse instrument.
Many subsidy recipients are inframarginal.
Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 4 / 33

6. Introduction Background Distributional Analysis Conclusion
Motivation
Economists have long pointed out that subsidizing “green” is less efficient
than taxing “brown”.
Subsidies don’t get usage right.
Subsidies are a coarse instrument.
Many subsidy recipients are inframarginal.
Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 4 / 33

7. Introduction Background Distributional Analysis Conclusion
Motivation
Economists have long pointed out that subsidizing “green” is less efficient
than taxing “brown”.
Subsidies don’t get usage right.
Subsidies are a coarse instrument.
Many subsidy recipients are inframarginal.
Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 4 / 33

8. Introduction Background Distributional Analysis Conclusion
Motivation
The distributional effects of subsidies have received less attention.
And there seems to be a presumption that subsidies are equitable.
“... many alternatives to Pigouvian taxes involve smaller or
negligible redistributions... If distributional concerns matter and
cannot be adequately addressed, the welfare advantage of
Pigouvian policies is far from obvious.”
– Billy Pizer, “Equity versus Efficiency in Energy Regulation” (2015)
Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 5 / 33

9. Introduction Background Distributional Analysis Conclusion
Motivation
The distributional effects of subsidies have received less attention.
And there seems to be a presumption that subsidies are equitable.
“... many alternatives to Pigouvian taxes involve smaller or
negligible redistributions... If distributional concerns matter and
cannot be adequately addressed, the welfare advantage of
Pigouvian policies is far from obvious.”
– Billy Pizer, “Equity versus Efficiency in Energy Regulation” (2015)
Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 5 / 33

10. Introduction Background Distributional Analysis Conclusion
Paper Overview
We review the clean energy income tax credits available since 2006
Technologies covered, eligibility requirements, important changes
Look for evidence of impacts using shipment and sales data
Use tax return data to see who has claimed these credits
Compare distributional impact to other tax credits and carbon tax
Perform ancillary analysis aimed at understanding non-refundability
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11. Introduction Background Distributional Analysis Conclusion
Related Literature
Efficiency and Cost-Effectiveness of “Clean Energy” Subsidies
(Hassett and Metcalf 1995; Sallee, 2011; Allcott and Greenstone 2012; Mian and Sufi
2012; Boomhower and Davis 2014; Davis, Fuchs, and Gertler 2014; Fowlie, Greenstone,
and Wolfram 2015; Borenstein 2015; Houde and Aldy 2015; Hughes and Podolefsky 2015)
Distributional Effects of Gasoline and Carbon Taxes
(Poterba 1989; Poterba 1991, West 2004; Bento, Goulder, Jacobsen and Von Haefen
2009; Burtraw, Sweeney, and Walls 2009; Hassett, Mathur, and Metcalf 2009; Rausch,
Metcalf, and Reilly 2011; Williams, Gordon, Burtraw, Carbone, and Morgenstern 2015)
Distributional Effects of Clean Energy Subsidies
(Dubin and Henson 1988; Crandall-Hollick and Sherlock 2014; Neveu and Sherlock,
forthcoming)
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12. Introduction Background Distributional Analysis Conclusion
Tax Expenditures By Category, 2005–2012
Category
Total
Expenditure,
in Millions
Percentage of
Total Credit
Average
Credit
Claimed
(1) (2) (3)
Panel A. Nonbusiness Energy Property Credit (NEPC)
Energy-Efficient Windows $4004 29.3% $415
Qualified Furnaces and Boilers $2440 17.8% $411
ACs, Water Heaters, etc. $2375 17.4% $512
Ceiling and Wall Insulation $2020 14.8% $239
Energy-Efficient Doors $1336 9.8% $170
Qualified Reflective Metal Roofs $1120 8.2% $710
Qualified Circulation Fans $393 2.9% $339
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13. Introduction Background Distributional Analysis Conclusion
Annual Expenditures on U.S. Clean Energy Tax Credits, in Millions
Year
Windows and
Other Energy-
Efficiency
Investments
(NEPC)
Solar Panels
and Other
Residential
Renewables
(REEPC)
Hybrids and
Other
Alternative Fuel
Vehicles
(AMVC)
Electric and
Plug-In Hybrid
Vehicles
(PEDVC)
2005 $0 $0 $0 $0
2006 $957 $43 $50 $0
2007 $938 $69 $185 $0
2008 $0 $217 $49 $0
2009 $5177 $645 $137 $129
2010 $5420 $754 $93 $1
2011 $755 $921 $14 $76
2012 $449 $818 $20 $139
Total $13696 $3467 $549 $346
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14. Introduction Background Distributional Analysis Conclusion
Residential Energy-Efficiency Investments
30% Tax Credit
Introduced in 2009
Tax Credit Decreased
to 10% in 2011
040080012001600
Units,in1000s
2005 2006 2007 2008 2009 2010 2011 2012 2013
Energy−Efficient Natural Gas Furnaces
Energy−Efficient Central Air Conditioners
Air−Source Heat Pumps
Source: U.S. Department of Energy, Energy Star Unit Shipment and Market Penetration Report, Various Years.
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15. Introduction Background Distributional Analysis Conclusion
Residential Energy-Efficiency Investments
30% Tax Credit
Introduced in 2009
Tax Credit Decreased
to 10% in 2011
050100150200
Units,in1000s
2005 2006 2007 2008 2009 2010 2011 2012 2013
Energy−Efficient Natural Gas Boilers
Energy−Efficient Heating Oil Furnaces
Source: U.S. Department of Energy, Energy Star Unit Shipment and Market Penetration Report, Various Years.
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16. Introduction Background Distributional Analysis Conclusion
Tax Expenditures By Category, 2005–2012
Category
Total
Expenditure,
in Millions
Percentage of
Total Credit
Average
Credit
Claimed
(1) (2) (3)
Panel B. Residential Energy Efficiency Property Credit (REEPC)
Photovoltaic Systems $1848 53.4% $5323
Geothermal Heat Pumps $1200 34.7% $3784
Solar Water Heating Systems $350 10.1% $1155
Wind Turbines $52 1.5% $1073
Fuel Cell Systems $12 0.3% $378
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17. Introduction Background Distributional Analysis Conclusion
Annual Expenditures on U.S. Clean Energy Tax Credits, in Millions
Year
Windows and
Other Energy-
Efficiency
Investments
(NEPC)
Solar Panels
and Other
Residential
Renewables
(REEPC)
Hybrids and
Other
Alternative Fuel
Vehicles
(AMVC)
Electric and
Plug-In Hybrid
Vehicles
(PEDVC)
2005 $0 $0 $0 $0
2006 $957 $43 $50 $0
2007 $938 $69 $185 $0
2008 $0 $217 $49 $0
2009 $5177 $645 $137 $129
2010 $5420 $754 $93 $1
2011 $755 $921 $14 $76
2012 $449 $818 $20 $139
Total $13696 $3467 $549 $346
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18. Introduction Background Distributional Analysis Conclusion
U.S. Residential Installations of Solar Panels
Tax Credit
First Introduced
in 2006
Tax Credit
Increased
in 2009
0200400600800
Installations,MW
2000 2002 2004 2006 2008 2010 2012 2014
Source: Solar Energy Industries Association, Solar Market Insight Report, Various Years.
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19. Introduction Background Distributional Analysis Conclusion
Annual Expenditures on U.S. Clean Energy Tax Credits, in Millions
Year
Windows and
Other Energy-
Efficiency
Investments
(NEPC)
Solar Panels
and Other
Residential
Renewables
(REEPC)
Hybrids and
Other
Alternative Fuel
Vehicles
(AMVC)
Electric and
Plug-In Hybrid
Vehicles
(PEDVC)
2005 $0 $0 $0 $0
2006 $957 $43 $50 $0
2007 $938 $69 $185 $0
2008 $0 $217 $49 $0
2009 $5177 $645 $137 $129
2010 $5420 $754 $93 $1
2011 $755 $921 $14 $76
2012 $449 $818 $20 $139
Total $13696 $3467 $549 $346
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20. Introduction Background Distributional Analysis Conclusion
U.S. Hybrid Vehicle Sales
Hybrid Tax Credit
Introduced in 2006
Tax Credit
Phased Out
for Toyota
During 2007
Hybrid Tax Credit
Ends for All
Manufacturers
0100200300400
Units,in1000s
1999 2001 2003 2005 2007 2009 2011 2013
Toyota (Prius, Camry, and Highlander)
All Other Manufacturers Combined
Source: U.S. Department of Energy, Alternative Fuels Data Center, U.S. Hybrid Electric Vehicle Sales By Model, 2015.
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21. Introduction Background Distributional Analysis Conclusion
Annual Expenditures on U.S. Clean Energy Tax Credits, in Millions
Year
Windows and
Other Energy-
Efficiency
Investments
(NEPC)
Solar Panels
and Other
Residential
Renewables
(REEPC)
Hybrids and
Other
Alternative Fuel
Vehicles
(AMVC)
Electric and
Plug-In Hybrid
Vehicles
(PEDVC)
2005 $0 $0 $0 $0
2006 $957 $43 $50 $0
2007 $938 $69 $185 $0
2008 $0 $217 $49 $0
2009 $5177 $645 $137 $129
2010 $5420 $754 $93 $1
2011 $755 $921 $14 $76
2012 $449 $818 $20 $139
Total $13696 $3467 $549 $346
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22. Introduction Background Distributional Analysis Conclusion
U.S. Sales of Electric and Plug-In Hybrid Vehicles
Electric Vehicle Credit
Introduced in 2010
010203040
Units,in1000s
2009 2010 2011 2012 2013
Nissan Leaf
Chevrolet Volt
Tesla Model S
All Other Models Combined
Source: U.S. Department of Energy, Alternative Fuels Data Center, U.S. Plug−in Electric Vehicle Sales By Model, 2015.
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23. Introduction Background Distributional Analysis Conclusion
Distributional Analysis
Now turn to tax return data to see who has claimed these credits.
IRS Statistics of Income, Publication 1304, Table 3.3
Public Use Microdata Accessed through Dan Feenberg at NBER
Some inherent limitations of working with tax return data
Excludes households that do not file tax returns
Annual income may be a poor proxy for lifetime income
Do not allow us to address the question of subsidy incidence
Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 19 / 33

24. Introduction Background Distributional Analysis Conclusion
Average Credit Per Return, by Adjusted Gross Income
A: Residential Energy Credits, 2006-2012020406080
dollars
<10 10-20 20-40 40-75 75-200 >200
Nominal AGI, thousands of dollars
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25. Introduction Background Distributional Analysis Conclusion
Average Credit Per Return, by Adjusted Gross Income
B: Alternative Motor Vehicle Credit, 2007-20120.511.522.5
dollars
<10 10-20 20-40 40-75 75-200 >200
Nominal AGI, thousands of dollars
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26. Introduction Background Distributional Analysis Conclusion
Average Credit Per Return, by Adjusted Gross Income
C: Qualified Plug-in Electric Drive Motor Vehicle Credit, 2009-201202468
dollars
<10 10-20 20-40 40-75 75-200 >200
Nominal AGI, thousands of dollars
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27. Introduction Background Distributional Analysis Conclusion
Extensive Versus Intensive Margin
A: RECs, Share Claiming Credit 2006-2012, by Adjusted Gross Income0.02.04.06
fraction
<10 10-20 20-40 40-75 75-200 >200
Nominal AGI, thousands of dollars
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28. Introduction Background Distributional Analysis Conclusion
Extensive Versus Intensive Margin
B: RECs, Average Credit Amount Claimed 2006-2012, by Adjusted Gross Income050010001500
dollars
<10 10-20 20-40 40-75 75-200 >200
Nominal AGI, thousands of dollars
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29. Introduction Background Distributional Analysis Conclusion
Concentration Curves
A: Residential Energy Credits, 2006-2012
AGI
credit
45 degree line
0.2.4.6.81
CumulativefractionofcreditsandAGI
0 .2 .4 .6 .8 1
Cumulative fraction of taxpayers, ranked by AGI
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30. Introduction Background Distributional Analysis Conclusion
Concentration Curves
B: Alternative Motor Vehicle Credit, 2007-20120.2.4.6.81
CumulativefractionofcreditsandAGI
0 .2 .4 .6 .8 1
Cumulative fraction of taxpayers, ranked by AGI
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31. Introduction Background Distributional Analysis Conclusion
Concentration Curves
C: Qualified Plug-in Electric Drive Motor Vehicle Credit, 2009-20120.2.4.6.81
CumulativefractionofcreditsandAGI
0 .2 .4 .6 .8 1
Cumulative fraction of taxpayers, ranked by AGI
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32. Introduction Background Distributional Analysis Conclusion
Are They More Regressive Than Other Tax Expenditures?
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33. Introduction Background Distributional Analysis Conclusion
Are They More Regressive Than Other Credits?
Concentration Coefficients for Selected Tax Credits
Panel A. Clean Energy Tax Credits
Residential Energy Credits 0.606
Alternative Motor Vehicle Credit 0.584
Plug-in Electric Drive Vehicle Credit 0.801
Panel B. Other Major Tax Credits
Earned Income Tax Credit –0.415
Making Work Pay Credit 0.163
Child Tax Credit 0.185
First-time Home Buyer Credit 0.222
Foreign Tax Credit 0.904
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34. Introduction Background Distributional Analysis Conclusion
Does Non-Refundability Matter?
05101520
Averageresidentialenergycreditamount
0 20000 40000 60000 80000 100000
Tax liability before Residential Energy Credit
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35. Introduction Background Distributional Analysis Conclusion
Why are these credits non-refundable?
Upon reflection, the whole idea of a non-refundable credit is odd.
“It is extremely unlikely that externalities and elasticities change
in an abrupt and discontinuous fashion exactly at the point of
zero income tax liability... Yet such discontinuities are inherent in
the application of all basic forms for tax incentives...”
– Batchelder, Goldberg, and Orszag, “Efficiency and Tax Incentives: The Case for
Refundable Tax Credits” Stanford Law Review (2006)
Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 31 / 33

36. Introduction Background Distributional Analysis Conclusion
Why are these credits non-refundable?
Upon reflection, the whole idea of a non-refundable credit is odd.
“It is extremely unlikely that externalities and elasticities change
in an abrupt and discontinuous fashion exactly at the point of
zero income tax liability... Yet such discontinuities are inherent in
the application of all basic forms for tax incentives...”
– Batchelder, Goldberg, and Orszag, “Efficiency and Tax Incentives: The Case for
Refundable Tax Credits” Stanford Law Review (2006)
Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 31 / 33

37. Introduction Background Distributional Analysis Conclusion
How About Compared to a Carbon Tax?
Source: Williams, Gordon, Burtraw, Carbone, Morgenstern, National Tax Journal, 2015.
Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 32 / 33

38. Introduction Background Distributional Analysis Conclusion
Conclusion
Clean energy tax credits go predominantly to higher-income Americans.
Bottom three quintiles have received 10%, while top quintile has received 60%.
The most extreme are the tax credits aimed at electric vehicles, top quintile 90%.
Driven by both participation rates and size of credit claimed by recipients.
More regressive than most other tax credits and carbon tax.
We are also struck by the horizontal inequity of these programs.
40+ million U.S. households ineligible because they don’t have tax liability.
Our results suggest these households would claim credits were they eligible.
Moreover, renters/landlords ineligible, missing large part of market.
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