Evidence on the Effectiveness of Using Tax Credits to Promote Energy Conservation

The country seems to have quickly embarked on a new energy crisis. "From Manhattan to Montana, worries are mount­ ing that skyrocketing power prices and rolling blackouts will soon spread from their epicenter in California.... Concern about the power picture extends to the top levels of the Bush Administration as it attempts to hammer out a new energy policy."i As politicians search for possible solutions to the current crisis, incentives for energy conservation are often mentioned as a possible remedy. A recent Congressional Re­ search Service Issue Brief describes several potential bills. Two create a refundable tax credit for up to 50% of increased residential energy costs, a third establishes a 15% residential tax credit for homeowners who purchase photovoltaics and solar thermal equipment. 2 Because tax incentives have been used in past crises, a logical step should be to examine the policies used to determine if they were effective and should be uti! ized in the future. This paper reports the results of a study of the Energy Tax Act of 1978's provisions relating to residential energy credits.