**3. Tax incentives to promote RES for H&C**

This section shows the main tax incentives used to promote RES for H&C by EU-27 countries up to 2009. Although subsidies is the most widely used instrument to promote RES for H&C, twelve MSs have used tax incentives as deductions, exemptions and reduced tax rates (Cansino *et al*., 2011).

In addition to subsidies, RES H&C are often promoted through a range of tax incentives, although with a lower intensity compared with green electricity and biofuel promotions (Cansino *et al.,* 2011 and Uyterlinde *et al.,* 2003). The main tax incentives used by EU-27 MSs are deductions, exemptions and reduced tax rates.2 Table 2 provides an overview of the use of these tax incentives in the EU-27 MSs.

### **3.1 Deductions**

110 Sustainable Growth and Applications in Renewable Energy Sources

Fiscal incentives in indirect, pigouvian and others taxes are used to promote electricity from RES by twelve MSs. The Value Added Tax is theoretically one of the most suitable indirect tax to promote renewable energies. However, only three MSs have chosen this tax as an

A cut in the Value Added Tax rate has to follow European guidelines about state helps that favour the environment (EC, 2001) and also has to get the Commission's authorization in order to prevent disproportioned effects over competition and economic growth. France allows a 5.5% reduction when buying basic products related to improvements, changes and installation in residential buildings that incorporate technology based on solar power, wind power, hydro-electric power and biomass. Italy charges a reduced tax rate on sales and services related to wind and solar power generation. There is also a reduced tax on investments in green electricity distribution networks. Finally, Portugal allows a reduction

Electric energy excise duty exemption is the most pervasive measure to encourage the use of renewable electricity of all. Actually, six MSs use it: Germany, Denmark, Romania, Slovakia, Sweden and Poland. In general, they use this measure because produces two types of benefits, known as the double dividend (Goulder, 1995). The first is to preserve the environment and the second can be obtained in several ways, as a positive impact on employment levels (De Mooij, 1999). This measure has been also use for reducing the higher prices of production of this type of energy. In that sense, this type of exemption is being usually applied to biofuels sales (Bomb *et al*., 2007; Van Beers, C *et al.* 2007). Nevertheless, some EU countries have applied to renewable electricity with the same propose. Fossil fuels and nuclear generations' benefit of a competitive advantage with respect to RES because its lower marginal costs than new renewable technologies and they are able to cope with downward price pressure. Because of that, taxation is important for decreasing most costs of RES sector, by allowing exemptions,

In Germany the law provides exemptions to encourage the use of friendly sources of energy when the electricity is generated exclusively from renewable sources and taken for use from a power grid. In the same sense, Romania has included an exemption from the payments of excises duties for energetic products and electricity when the electricity is generated by RES. is (also) promoted in Slovak Republic renewable energy is promoted through the exemption of the excise duty on electricity. Finally, the new Polish legislation continues to exempt from

In the other hand, some countries have introduced electricity excise exemptions for renewable electricity only if they are generated by determinate technology. In Denmark, it is only exempt for excise duty, the electricity produced by wind, waterpower or solar cell systems or in a small plant. In Sweden, the electricity produced in a wind power station is not taxable if it is for own consumption although the electricity surplus might be sold. The exemption value depends on the consumption area. Also, during a transition period all wind energy production has been also entitled a tax reduction (environmental bonus). Some other tax exemptions are used to promote green electricity. In the United Kingdom, electricity from RES is exempted from the 'Climate Change Levy –CCL-', which can characterize as a typical pigouvian tax. This tax is borne by agents that generate carbon emissions because it pursues to reduce negative externalities which come from human activities (Viladrich, 2004). The CCL was forecast to cut annual emissions by 2.5 million tons

instrument to boost green electricity: France, Italy and Portugal.

in buying systems which generate green electricity.

reductions and accelerated depreciations (Di Domenico, 2006).

by 2010, and forms part of the UK's Climate Change Program.

excise duty electricity from RES.

There are six MSs that offer different direct tax deductions to encourage the use of RES H&C (Belgium, Finland, Greece, Italy, The Netherlands and Sweden), as Table 2 shows.

In Belgium, all RES H&C technologies benefit from a tax deduction from taxable profits. For all RES and CHP installations, companies can receive a tax deduction of 13.5% for all investments in equipment used to reduce energy consumption. Since January 2003, the Federal Public Service of Belgium offers tax reductions for individuals undertaking energy efficiency and certain renewable energy investments in their homes. In 2009, a tax reduction of 40% of the investment cost was introduced on personal income tax with a maximum of 2,770 € for investment in heat pumps and biomass heating, and 3,600 € for investments in solar boilers. However, for every investment, the taxpayer can only obtain the maximum support for four years.

<sup>2</sup> In this section, in addition to the country-specific information, we have taken into account the country reports in EREC (2009) titled "Renewable Energy Policy Review", the Intelligent Energy Europe (2010) report titled "Re-Shape Renewable Energy Country Profile", the EuroACE (2009) report on tax incentives that affect buildings in Europe, the "Taxes in Europe" database published by the European Commission (2011) and the paper of Cansino *et al*. (2011).

Taxes Incentives to Promote Res Deployment: The Eu-27 Case 113

pellets, thereby dramatically reducing Sweden's dependence on oil for home heating. Among the actual fiscal measures that exist in Sweden to promote the use of alternative fuels, tax rebates for consumers to stimulate market adoption of renewable technologies should be mentioned. This measure is reinforced with a high carbon tax on fossil fuels (by applying the Polluter Pays Principle). According to the EuroACE (2009) report (related to the fiscal incentives that are applied to European buildings), since 2006, households in Sweden benefited from a 30% tax credit when converting from direct electric heating and oil-based heating to systems based on biomass or heat pumps. Solar heating support was

Seven MSs have implemented tax exemptions to promote RES H&C (Austria, Bulgaria,

Biomass fuels used for heating are also exempt from fossil fuel taxes in Austria. According to the EuroACE (2009) report, a Building Tax Exemption has been in place in Bulgaria since 2005. From 6 July 2007, the Amendment to the Local Taxes and Fees Act established that the owners of buildings, having obtained a category A certificate issued under the terms of the Energy Efficiency Act and Building Certificate Regulation, are exempt from building tax for a term of 10 years. This exemption starts from the year after the year of issue of the certificate, and is only valid if RES are used in the building's energy consumption. Under the same terms and conditions, buildings with a category B certificate are exempt from

In the case of Denmark, solar heating plants are exempt from energy tax. Meanwhile, in Germany, to promote environment-friendly sources of energy for heating, there is a tax exemption on the energy tax for all solid biofuels used for heating as stated in the Energy Duty Law. In Sweden, bioenergy solid waste and peat are tax-exempt for most energy uses

Finally, in the UK, renewable heat installations commissioned since July 2009 are due to receive a Feed-In Tariff, or the Renewable Heat Incentive of around 0.06 € per kWh. This

While the use of reduced tax rates to promote RES is an instrument largely used in RES promotions such as biofuel use (see Del Río and Gual, 2004 and Uyterlinde *et al.,* 2003), only three MSs (France, Italy and the UK) have introduced reduced value-added tax (VAT) rates on components and materials required for eligible heating and cooling systems (EuroACE, 2009). In France, a reduced VAT of 5.5% is applied to the supply of heat if this is produced from at least 60% biomass, geothermal energy from waste, and recovered energy. Consumers in Italy can also benefit from a reduced VAT (10% instead of 20%) in the case of the refurbishment of a house when this includes the installation of solar-thermal systems. Finally, in the UK, a reduced VAT of 5% is charged on certain energy-saving materials if

The reduced VAT covers installations of solar panels, wind and water turbines; ground-source and air-

source heat pumps and micro-CHP; and wood/straw/similar vegetal matter-fuelled boilers.

income received by domestic users and other income tax payers will not be taxed.

prolonged until 2010.

Denmark, Finland, Germany, Sweden and UK).

building tax for a term of 5 years.

while taxes on fossil fuels have risen.

these are used in non-business buildings or village halls.4

Furthermore, in the case of Finland, taxes on heat are zero for RES.

**3.3 Reduced tax rates** 

 4

**3.2 Exemptions** 


Source: (Cansino *et al*., 2011)

Table 2. Member States that use tax incentives to promote RES H&C

Finish consumers can also benefit from tax deductions provided the expenses are used to promote the use of more efficient systems and RES. Since 2006, a 60% household tax deduction has been available to offset labor costs incurred in replacing, upgrading and repairing the heating systems of small residential houses. The maximum amount of the tax deduction per household is 6,000 € (EuroACE, 2009).

Related to Greece, a 20% deduction is available on personal income tax up to 700 €, for money spent on the installation of RES, such as solar panel systems, thermal insulation and district heating. In Italy, personal income tax deductions up to a total of 55% of the investment outlaid on solar thermal systems (and any other energy efficiency investment), spread over ten years, can be obtained. This deduction decreases to 36% if the national fund set aside for each year is exhausted.

In the case of The Netherlands, in order to stimulate investments in RES, a scheme implemented by Senter Novem and the Dutch Tax Authorities allows Dutch companies that investment in RES (including those related to H&C) a deduction of 44% on such investments from their fiscal profit up to a national maximum of €108 million per year. The investment threshold is 2,200 € and no investment allowance is granted for investments exceeding 113 million € in a tax year.3 Among the criteria for the deduction is whether the purchased equipment is on the 'Energy List'. The allowable list of technologies included in the Energy List has varied over the years around an average of 50. The Energy List 2010 contains examples of investments that have proven, in practice, that they meet the International Energy Agency (IEA) criteria. These examples are not exclusive – all investments that meet the energy-performance criteria are eligible for IEA support. However, if investments are not listed among the examples, entrepreneurs will need to prove that they meet the IEA criteria. For example, solar-thermal systems are on this list.

Sweden sponsors innovative programs to promote the use of alternative fuels for home heating. For example, a central furnace that consumes biological fuels if it is used to provide hot water for nearby homes. Oil furnaces have been replaced by boilers that use wood-based

<sup>3</sup> A more detailed study of these measures can be found in the report for the RES-H Policy Project by Menkveld and Beurskens (2009).

pellets, thereby dramatically reducing Sweden's dependence on oil for home heating. Among the actual fiscal measures that exist in Sweden to promote the use of alternative fuels, tax rebates for consumers to stimulate market adoption of renewable technologies should be mentioned. This measure is reinforced with a high carbon tax on fossil fuels (by applying the Polluter Pays Principle). According to the EuroACE (2009) report (related to the fiscal incentives that are applied to European buildings), since 2006, households in Sweden benefited from a 30% tax credit when converting from direct electric heating and oil-based heating to systems based on biomass or heat pumps. Solar heating support was prolonged until 2010.

### **3.2 Exemptions**

112 Sustainable Growth and Applications in Renewable Energy Sources

**France** 

**Italy** 

**UK** 

Finish consumers can also benefit from tax deductions provided the expenses are used to promote the use of more efficient systems and RES. Since 2006, a 60% household tax deduction has been available to offset labor costs incurred in replacing, upgrading and repairing the heating systems of small residential houses. The maximum amount of the tax

Related to Greece, a 20% deduction is available on personal income tax up to 700 €, for money spent on the installation of RES, such as solar panel systems, thermal insulation and district heating. In Italy, personal income tax deductions up to a total of 55% of the investment outlaid on solar thermal systems (and any other energy efficiency investment), spread over ten years, can be obtained. This deduction decreases to 36% if the national fund

In the case of The Netherlands, in order to stimulate investments in RES, a scheme implemented by Senter Novem and the Dutch Tax Authorities allows Dutch companies that investment in RES (including those related to H&C) a deduction of 44% on such investments from their fiscal profit up to a national maximum of €108 million per year. The investment threshold is 2,200 € and no investment allowance is granted for investments exceeding 113 million € in a tax year.3 Among the criteria for the deduction is whether the purchased equipment is on the 'Energy List'. The allowable list of technologies included in the Energy List has varied over the years around an average of 50. The Energy List 2010 contains examples of investments that have proven, in practice, that they meet the International Energy Agency (IEA) criteria. These examples are not exclusive – all investments that meet the energy-performance criteria are eligible for IEA support. However, if investments are not listed among the examples, entrepreneurs will need to prove that they meet the IEA

Sweden sponsors innovative programs to promote the use of alternative fuels for home heating. For example, a central furnace that consumes biological fuels if it is used to provide hot water for nearby homes. Oil furnaces have been replaced by boilers that use wood-based

A more detailed study of these measures can be found in the report for the RES-H Policy Project by

Table 2. Member States that use tax incentives to promote RES H&C

**Austria Belgium Bulgaria Denmark Finland** 

**Germany Greece** 

**The Netherlands Sweden** 

deduction per household is 6,000 € (EuroACE, 2009).

criteria. For example, solar-thermal systems are on this list.

set aside for each year is exhausted.

Menkveld and Beurskens (2009).

 3

Source: (Cansino *et al*., 2011)

 **Deductions Exemptions Reduced tax rates** 

Seven MSs have implemented tax exemptions to promote RES H&C (Austria, Bulgaria, Denmark, Finland, Germany, Sweden and UK).

Biomass fuels used for heating are also exempt from fossil fuel taxes in Austria. According to the EuroACE (2009) report, a Building Tax Exemption has been in place in Bulgaria since 2005. From 6 July 2007, the Amendment to the Local Taxes and Fees Act established that the owners of buildings, having obtained a category A certificate issued under the terms of the Energy Efficiency Act and Building Certificate Regulation, are exempt from building tax for a term of 10 years. This exemption starts from the year after the year of issue of the certificate, and is only valid if RES are used in the building's energy consumption. Under the same terms and conditions, buildings with a category B certificate are exempt from building tax for a term of 5 years.

In the case of Denmark, solar heating plants are exempt from energy tax. Meanwhile, in Germany, to promote environment-friendly sources of energy for heating, there is a tax exemption on the energy tax for all solid biofuels used for heating as stated in the Energy Duty Law. In Sweden, bioenergy solid waste and peat are tax-exempt for most energy uses while taxes on fossil fuels have risen.

Finally, in the UK, renewable heat installations commissioned since July 2009 are due to receive a Feed-In Tariff, or the Renewable Heat Incentive of around 0.06 € per kWh. This income received by domestic users and other income tax payers will not be taxed.

### **3.3 Reduced tax rates**

While the use of reduced tax rates to promote RES is an instrument largely used in RES promotions such as biofuel use (see Del Río and Gual, 2004 and Uyterlinde *et al.,* 2003), only three MSs (France, Italy and the UK) have introduced reduced value-added tax (VAT) rates on components and materials required for eligible heating and cooling systems (EuroACE, 2009). In France, a reduced VAT of 5.5% is applied to the supply of heat if this is produced from at least 60% biomass, geothermal energy from waste, and recovered energy. Consumers in Italy can also benefit from a reduced VAT (10% instead of 20%) in the case of the refurbishment of a house when this includes the installation of solar-thermal systems.

Finally, in the UK, a reduced VAT of 5% is charged on certain energy-saving materials if

these are used in non-business buildings or village halls.4 Furthermore, in the case of Finland, taxes on heat are zero for RES.

 4 The reduced VAT covers installations of solar panels, wind and water turbines; ground-source and airsource heat pumps and micro-CHP; and wood/straw/similar vegetal matter-fuelled boilers.

Taxes Incentives to Promote Res Deployment: The Eu-27 Case 115

A correct overview of tax measures to support biofuels in transport must divide incentives into three main groups. Firstly tax incentive measures have been implemented as tax exemptions included in national mineral oil tax. Secondly, others taxes on GHG emissions have been also used to implemented these types of measures. Thirdly, some incentives were

Related with the first group of measures and following Pelkmans *et al.* (2008), since 1993 until 2003, the German fiscal authority determined that pure biofuels were exempted from the national mineral oil tax although mixed biofuel components fall under full taxation like traditional fossil fuels. However, an amendment of the Mineral Oil Tax Act up to 2004 established that not only pure biofuels, but also mixed biofuels were exempted from the excise tax on mineral oils in proportion to the amount of biofuel that they contain. In 2006 the government switched from the tax exemption policy to obligation schemes. The

Since 1991 pure biodiesel enjoys a full tax exemption in the Austria's mineral tax and since 2007 there is a tax reduction also for gasoline blended with bioethanol. Tax exemption for ethanol is also allowed in Sweden since 1992 but for all of biofuels full tax exemption is only

The France incentive system is particularly conductive to the development of biofuels. Since 1992 biodiesel enjoys a total exemption from the internal tax on petroleum products (TIPP). In the case of bioethanol incorporated as ETBE in gasoline the exemption is a partial one (80 %). An interesting tax reform was implemented in France up to 2005. In order to raise the share of biofuels in the market, the French Parliament introduced a general tax on polluting activities (TGAP) for fuel resellers. TGAP is zero if an annual target percentage biofuels is

Joint with France, the Spanish incentive system is particularly conductive to the development of biofuels as they enjoy total exemption from the hydrocarbons tax until 31 December 2012. This special rate is applied to the biofuel volume contained in the

In 1992 Czech Republic established a zero excessive duty on produced biodiesel. This incentive was valid until 2007 when national government decided to change to a compulsory system (mandatory quotas). Different form Czech Republic, the Poland government maintains the tax exemption introduced in 1993. Incentives also remain valid in the United Kingdom where a duty incentive of 0.30 euro per liter for biodiesel is allowed since July 2002 and for bioethanol since January 2005. Incentives also remain valid in

Over the past 4 years, a number of MSs have moved towards obligation or mixed systems to lower the revenue losses. Belgium is a significant case of mixed system where since 2006

If we considered now taxes on GHG emissions –the second group of tax incentives-, since 2002 CO2 neutral fuels are exempted from the Sweden CO2 tax. This is also the case of

 A similar scheme was introduced in Germany since 2006 when the government switched from the tax exemption policy to obligation schemes. Then the Germany authorities introduced penalties in case of non-compliance the annual targets for biofuels consumptions. Penalties for non-compliance were been set rather high (> 0.50 euros/litre). As Pelkmans *et al.* (2008) pointed out this gave a good motivation for

exist a quota system for biodiesel (2007 for bioethanol) with tax reduction.

introduced to reduce taxation on ecological cars and biofuel industry.

Netherlands authorities have followed a similar path.

permit for pilot projects since 1995.

reached8.

mixture.

Denmark.

 8

Lithuania (since 2005).

fuel distributors to fulfil the obligation.
