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Department of Energy

Washington, DC 20585

Service Report

AN ECONOMIC EVALUATION OF ENERGY CONSERVATION AND 

RENEWABLE ENERGY TAX CREDITS

Prepared by

Office of Energy Markets and End Use 

Energy Information Administration

October 1985

This report has not received complete technical review by the Energy 

Information Administration (EIA) and, therefore, should not be represented 

as an official EIA product.

PREFACE

This study was undertaken at the request of Congressman Edward J. Markey, 

U.S. House of Representatives, Chairman, Subcommittee on Energy Conservation 

and Power, Committee on Energy and Commerce. The purpose of this study is 

to assess the impact of a proposed extension and change to the current 

energy tax credits as specified in H.R. 2001 on energy consumption, revenue 

to the Treasury, and project profitability. The first part of the study 

compares the specific changes proposed in H.R. 2001 with the current law and 

the President's Tax Proposal. The next section discusses the use of the 

residential energy tax credit and analyzes the proposed changes. The 

following section presents a similar but more limited discussion of the 

business energy tax credit. The last section compares the energy tax 

credits with the incentives provided by the President's Tax Proposal to the 

oil and natural gas industry.

iii

EXECUTIVE SUMMARY

This report presents an analysis of H.R. 2001, a bill designed to extend and 

modify the present set of residential and business energy tax credits. For 

the most part, both the current law and the President's Tax Proposal allow 

the energy tax credits to expire on December 31, 1985.

 The current energy tax credit law established:

- A residential energy conservation tax credit of 15 percent with a 

maximum credit of $300 and a residential renewable energy tax 

credit of 40 percent with a maximum credit of $4,000, both of 

which expire on December 31, 1985.

- A business tax credit of 10 percent for most energy conservation 

items with no credit limit. Most of these credits have already 

expired, with the remainder ending on December 31, 1985.

 H.R. 2001 proposes to:

- Increase the residential energy conservation tax credit to 25 

percent but only allow $175 as the maximum credit. This tax 

credit would expire on December 31, 1988.

- Phase out the residential solar and renewable energy tax credit 

by 5 percentage points a year from the current 40 percent to 15 

percent by 1990, after which time the credit would expire.

- Require that the residential energy conservation tax credit be 

used only by households with incomes below $30,000.

- Modify current law to extend past December 31, 1985, the business 

tax credits at the existing rates or phased-out rates for use of 

wind, geothermal, ocean thermal, hydroelectric, and biomass.

 It is estimated that the residential energy conservation tax credit 

proposed in H.R. 2001 would cost the Treasury between $300 and $340 

million (discounted present value, 1984 dollars). This equates to a 

cost to the Treasury of between $23 and $70 per barrel of oil 

equivalent saved.
- The major reason for the relatively high cost per barrel of oil 

equivalent saved is that, based on two recently completed 

studies, only a small number of households undertake energy 

conservation measures as a result of the existence of a tax 

credit. These studies indicate that most households would have 

undertaken these types of projects even without the tax credit. 

Therefore, the Treasury effectively subsidizes a large number of 

households that would have undertaken energy conservation 

measures anyway. At the same time, those few households affected 

by the tax credit would save only a small amount of energy in the 

aggregate.

The aggregate incremental energy savings attributable to the 

proposed conservation legislation over the life of the equipment 

(12 years), would amount to about 2 1/2 days of petroleum 

imports, or 9 million barrels of oil equivalent. However, most 

of these savings would be in terms of natural gas (at least in 

the short run), as this is by far the most widely used fuel for 

home heating.

It is estimated that the residential renewable energy tax credit 

proposed in H.R. 2001 would cost the Treasury between $385 and $660 

million (present discounted value, 1984 dollars), depending on the 

number of households that undertake investments in response to the 

tax credit. This credit is estimated to result in a Treasury cost 

of between $70 and $140 per barrel of oil equivalent saved.

- The resulting high cost per barrel of oil equivalent saved

reflects the relatively high cost (to the individual and to the 

Treasury) of installing solar hot water heaters compared with the 

amount of energy saved. This analysis assumes that these units 

save about 65 percent of the energy used to heat water. However, 

the energy used for water heating accounts for less than 20 

percent of total residential energy use.

- The aggregate incremental energy savings attributable to the 

proposed renewable energy legislation over the life of the 

equipment (12 years) would amount to about 1 1/2 days of 

petroleum imports, or 5 million barrels of oil equivalent. Most 

of the savings are expected to be in terms of natural gas or 

electricity.

The proposed extension of the business energy tax credits for 

selected renewable energy projects would have a minimal impact on 

Treasury costs, as there appears to have been little use by 

businesses of these credits while they were available. As a result, 

little energy would be saved by businesses. However, limited 

partnerships make some use of these credits, which then appear on 

personal tax forms. Data are not available to determine the 

magnitude of this use.

vi
H.R. 2001 leaves Intact the current use of the alcohol fuels tax 

exemption. The President's Tax Proposal would eliminate the current 

excise tax exemption, but would grandfather the use of the alcohol 

production tax credit for those facilities currently producing 

alcohol fuels.

Energy tax credits provide an incentive for households to invest in 

conservation and renewable energy. A convenient way to measure the 

magnitude of that incentive is to calculate the energy prices that 

would be required to make energy conservation and renewable energy 

investments as profitable without H.R. 2001 (i.e., with no tax 

credit) as they would be with H.R. 2001. For residential 

conservation projects, a price increase of $10 to $15 per barrel of 

oil equivalent (in the absence of tax credits) would be required to 

provide as great an incentive for conservation as is provided by 

H.R. 2001. For residential renewable projects, the equivalent price 

increase is estimated to be $20 to $35 per barrel of oil equivalent.

In contrast, the President's Tax Proposal maintains the incentives 

for oil and gas exploration and development essentially the same, on 

balance, as those provided by current law.

vii

TABLE OF CONTENTS

Page 

Preface ........................................................... ill

Executive Summary ................................................. v

1. Description of Current Law, H.R. 2001, and the President's Tax

Proposal ...................................................... 1

2. Residential Sector Energy Tax Credits ......................... 9

Data .......................................................... 9

Analysis ...................................................... 19

3. Business Sector Energy Tax Credits ............................ 31

Data .......................................................... 31

Analysis ...................................................... 31

4. A Comparison of Tax Benefits for Conventional Energy Supply

with Tax Benefits for Conservation and Renewables ............. 37

Appendices

A. Summary of Energy Tax Credits ............................. 41

B. Detailed Assumptions and Calculations for Residential Energy

Tax Credits Under H.R. 2001 ............................... 51

C. Detailed Reports on Estimates of Incremental Energy Savings

and Treasury Losses Under H.R. 2001 ....................... 61

ix
Page

TABLES

1. Summary Comparison of Residential Conservation Tax Credits ... 4

2. Summary Comparison of Residential Renewable Energy Source

Tax Credits .................................................. 5

3. Summary Comparison of Tax Credits for Business Conservation

and Alternative Energy Sources ............................... 6

4. Residential Energy Tax Credits and Expenditures .............. 10

5. Number of Tax Returns with Residential Energy Expenditures and

Amount of Expenditures by Category, 1978-1982 ................ 12

6. Single-Family Homes Making Conservation Improvements,

1978-1982 .................................................... 14

7. Factors Related to Tax Credits Claimed for Residential Energy

Conservation Projects by Income Group, 1984 .................. 15

8. Number of Households that Make Conservation Improvements and 

Percent that Take Tax Credit by Category of Improvement and 

by Income .................................................... 17

9. Average Energy Consumption and Expenditures per Household by

Conservation Improvement Category and by Income .............. 18

10. Residential Conservation Tax Credit Analysis Under H.R. 2001:

Treasury Losses and Incremental Energy Savings ................ 23

11. Residential Conservation Tax Credit Analysis Under H.R. 2001:

Project Profitability (Energy Savings = 15 Percent) .......... 23

12. Residential Renewable Tax Credit Analysis Under H.R. 2001:

Treasury Losses and Incremental Savings ...................... 24

13. Residential Renewables Tax Credit Analysis Under H.R. 2001: 

Profitability of Solar Heaters Displacing Natural Gas and 

Electricity (Energy Savings = 65 Percent) .................... 24

14. Internal Rate of Return for Residential Conservation and

Renewables Projects Under Alternative Tax Regimes ............ 26

15. Number and Amount of Income Tax Returns for Business Energy

Tax Credits, 1978-1982 ....................................... 32

16. Gasohol Sales and Federal Excise Tax Exemptions, 1980-1984 ... 35

17. Projected Gasohol Sales and Revenue Losses, 1985-1992 ........ 36

18. Internal Rates of Return for Selected Oil and Gas Drilling

Prospects: Current Law and President's Tax Proposal ......... 38

19. Percent of Energy Tax Credit Available for Renewable Energy

Sources by Year and Type of Energy Under H.R. 2001 ........... 44

20. Percent of Energy Tax Credit Available for Wind-Energy and

Biomass Equipment by Year Under H.R. 2001 .................... 50

21. Participation Rates in Residential Conservation Energy Tax

Credit Claims Under H.R. 2001 Before Application of the Income 

Limitation ................................................... 53

22. Profile of Residential Energy Conservation Project Assumed for

Analysis of H.R. 2001 ........................................ 54

23. Participation Rates in Residential Renewable Energy Tax Credit

Claims Under H.R. 2001 ....................................... 57
Page

24. Profile of Residential Renewable Energy Project Assumed for

Analysis of H.R. 2001 ........................................ 58

25. Summary of Formulae and Variable Definitions for Residential

Energy Tax Credit Analysis ................................... 59

26. Detailed Sensitivity Cases for Incremental Energy Saved for

Residential Conservation Projects Under H.R. 2001 ............ 62

27. Detailed Sensitivity Cases for Incremental Energy Saved for 

Gas-Displacing Residential Solar Hot Water Projects Under 

H.R. 2001 .................................................... 63

28. Detailed Treasury Loss Estimates for Residential Conservation

and Renewable Projects Under H.R. 2001 ....................... 64

29. Sensitivities of Residential Conservation Project Internal

Rates of Return Under H.R. 2001 to Alternative Energy Savings

Rates ........................................................ 64

XI

1. DESCRIPTION OF THE CURRENT LAW, H.R. 2001, AND THE PRESIDENT'S 

TAX PROPOSAL

The basis of the current Energy Tax Credit law for conservation and 

renewable energy sources consists of two legislative acts, in addition to 

many interpretations by the Internal Revenue Service. The first piece of 

legislation was the Energy Tax Act of 1978, which was passed as part of a 

larger National Energy Act and amended the Internal Revenue Code of 1957. 

The second piece of legislation, the Crude Oil Windfall Profits Tax Act, was 

passed in 1980 and amended the Energy Tax Act. (Appendix A provides a 

detailed description of the provisions of these energy tax credit laws.)

Two new proposals are now under consideration: H.R. 2001, titled "Renewable 

Energy and Conservation Transition Act of 1985," which revises and extends 

the energy tax credits currently available for both businesses and 

homeowners; and "The President's Tax Proposals to the Congress for Fairness, 

Growth, and Simplicity," which would allow the energy tax credits to 

homeowners and businesses to expire and would modify the tax treatment of 

various facets of domestic energy production. This section focuses on 

energy tax credits to businesses and homeowners. Discussion of the 

President's Tax Proposal will be limited to Chapter 9 of the proposal, 

"Revisions of Energy and Natural Resource Tax Laws."

The major points of the current law and these two proposals with respect to 

energy tax credits are summarized below.

Current Law:

 Allows a credit of 15 percent of up to $2,000 of conservationrelated expenditures in the residential sector

 Allows a credit of 40 percent of up to $10,000 of expenditures 

related to the use of renewable energy sources in the residential 

sector

 Specifies no income limit on households taking the conservation and 

renewable credits

 Defines renewable energy sources as wind energy, solar energy, or 

energy from geothermal deposits

 Excludes structural or decorative components (for example, awnings, 

carpeting, drapes) from allowable conservation items. Excludes from 

renewable energy source equipment wood-burning stoves and most 

passive solar systems.
 Allows a 10-percent business tax credit for conservation property 

and between a 10-percent and 15-percent business tax credit for 

alternative energy sources (including renewables).

 Expires December 31, 1985, for the residential energy tax credits.

 Expired December 31, 1982, for the business energy tax law. although 

projects that qualify for the affirmative commitment rules can 

receive credit until December 31, 1990.

H.R. 2001:

 Increases the residential tax credit to 25 percent of conservationrelated expenditures.

 Decreases the maximum tax credit allowed to $175.

 Restricts eligibility for residential conservation credits to 

households with adjusted gross incomes of less than $30,000. No 

income ceiling is proposed for the renewable or business energy tax 

credits.

 Excludes storm doors or thermal doors from allowable conservation 

items.

 Extends residential tax credits for conservation-related 

expenditures through December 31, 1988.

 Extends residential tax credits for wind and geothermal energy to 

December 31, 1988. Extends residential credits for solar energy to 

December 31, 1990.

 Increases the current business tax credit for photovoltaics to 25 

percent.

 Includes wood-gasification equipment and anaerobic digestion 

equipment in the definition of biomass equipment.

 Extends business tax credits for geothermal energy to 1988 with 

another 2 years extension under affirmative commitment rules, 

and extends credits for wind energy and biomass to 1988.

 Extends business tax credits for ocean thermal energy to

December 31, 1990. Extends business credits for solar energy to 

1990 with another 3 years extension under affirmative commitment 

rules.

Affirmative commitment rules allow for the carry forward of deductions 

for projections requiring 2 or more years to completed.
President's Tax Proposal;

 Allows the residential energy tax credits to expire December 31, 

1985, and maintains current carryover.

 Allows the business tax credits to expire on December 31, 1985, with 

affirmative commitment rules applying only to credit for hydro 

electric generation.

 Terminates the excise tax exemption on alcohol mixtures and alcohol 

fuels on December 31, 1985. However, the alcohol fuels use credit 

is grandfathered for those production facilities completed before 

January 1, 1986.

Tables 1 and 2 compare the provisions of current law and the two proposals 

for allowable residential tax credits for renewable energy sources and 

conservation. Table 3 summarizes the differences among the current law, 

H.R. 2001, and the President's Tax Proposal with respect to business 

conservation and alternative energy source tax credits.
Table 1. Summary Comparison of Residential Conservation Tax Credits

Tax Value

Maximum Expenditures

Maximum Credit

Minimum Credit

Income Ceiling

Current Law

15 Percent

$2,000

$300

$10

None

H.R. 2001

25 Percent

$700

$175

$10

$30,000

President's 

Tax Proposal

None

Not applicable

Not applicable

Not applicable

Not applicable

Carryover of Excess Credit 

from Year to Year

Qualifying Rules

Definition of Conservation 

Items

Expiration

Through 1987

Expenditures made on or after 

1977; Dwelling located in 

United States and completed 

prior to April 20, 1977; 

Principal residence

Insulation, replacement burner 

device for modifying flue 

openings, electrical or 

mechanical furnace ignition, 

storm or thermal windows or 

doors, set-back thermostat, 

caulking, weatherstripping

12/31/85

Through 1990

Same as current law

Excludes storm or 

thermal doors

Through 1987 

Not applicable

Not applicable

12/31/88 12/31/85

Sources: Energy Tax Act of 1978, Crude Oil Windfall Profit Tax Act of 1980, Internal Revenue 

Service rulings. Tax Reform Proposals: Taxation of Capital Income, Joint Committee on Taxation, 

August 1985. H.R. 2001 Renewable Energy and Conservation Transition Act of 1985. The 

President's Tax Proposals to the Congress for Fairness, Growth, and Simplicity.
Table 2. Summary Comparison of Residential Renewable-Energy-Source Tax Credits

Current Law H.R. 2001

President's 

Tax Proposal

Tax Value

Solar

40 Percent 

40 Percent

Photovoltaics 

Wind

Geothermal

Maximum Expenditures 

Solar Hot Water 

Wind 

Other

Maximum Credit 

Solar 

Wind

Geothermal 

Other

Minimum Credit

Carryover of Excess Credit from 

Year to Year 

Solar

Wind 

Geothermal

Income Ceiling 

Qualifying Rules

Definition of Renewable Energy

Expiration

40 Percent 

40 Percent

40 Percent 

$10,000

$4,000

$10

Through 1987

None

Principal dwelling; In 

United States; Expendi 

tures in 1977 or after

Solar energy, energy from 

geothermal deposits, 

energy from other renewables (specified by 

regulations) that provide 

hot water or electricity; 

wind energy for nonbusiness residential purposes

12/31/85

Depends on energy None 

source: see below

1986—35 Percent

1987—30 Percent 

19P8—25 Percent

1989—20 Percent

1990—15 Percent

1991—+0 Percent

40 Percent

1986—35 Percent

1987—30 Percent

1988—25 Percent

1989—0 Percent

1986—40 Percent

1987—30 Percent

1988—20 Percent

$6,000

$20,000

$10,000

Depends on year 

Depends on year 

Depends on year 

$4,000

$10

Through 1987 

Through 12/92 

Through 12/90 

Through 12/90

None

Same as current law

Same, except removes 

temperature restric 

tion for geothermal 

energy

Not applicable 

Not applicable

Not applicable 

Through 1987

Not applicable 

Not applicable

Not applicable

Wind and geothermal: 12/31/85

12/31/88;

Solar:

12/31/90

Sources: • Energy Tax Act of 1975, Crude Oil Windfall Profit Tax Act of 1980, Internal Revenue 

Service rulings. • Tax Reform Proposals: Taxation of Capital Income, Joint Committee on Taxation, 

August 1985. • H.R. 2001—Renewable Energy and Conservation Transition Act of 1985. • The 

President's Tax Proposals to the Congress for Fairness, Growth, and Simplicity.
Table 3. Summary Comparison of Tax Credits for Business—Conservation and Alternative Energy Sources

Tax Value

Conservation

Renewable-Energy Sources

Solar

Low-temperature 

High-temperature 

Photovoltaics

Wind

Geothermal

Ocean thermal

Hydroelectric

Biomass

Current Law

10 Percent

15 Percent 

15 Percent 

15 Percent

15 Percent

15 Percent

15 Percent

11 Percent

10 Percent

H.R. 2001 President's Tax Proposal

None None

Not applicable

15 Percent 

25 Percent 

25 Percent

1986: 10 Percent

1987: 10 Percent

1988: 5 Percent

1989: 0 Percent

15 Percent

15 Percent

11 Percent

1986: 10 Percent

1987: 10 Percent

1988: 5 Percent

1989: 0 Percent

Maximum Expenditures 

Income Ceiling

Expiration Date and AffirmativeCommitment Rule (A-C)

Specially-defined 

Energy Property

Cogeneration Equipment

None 

None

None 

None

12/31/82, extended through 

1990 under affirmativecommitment rules

12/31/82, extended through 

1990 under affirmativecommitment rules

Same as current law

Same as current law

Not applicable 

Not applicable

12/31/82; current 

affirmative-commitment 

rules apply

12/31/82; current 

affirmative-commitment 

rules apply

Intercity Buses 12/31/85 12/31/85 12/31/85
Table 3. Summary Comparison of Tax Credits for Business—Conservation and Alternative Energy Sources 

(Continued)

Current Law H.R. 2001 President's Tax Proposal

Expiration Date and AffirmativeCommitment Rule (A-C)

Alternative Energy Property

Geothermal

Ocean Thermal 

Wind 

Solar

Biomass

Shale Oil Equipment

Equipment for Producing 

Natural Gas from 

Geopressurized Brine

Hydroelectric Generating 

Equipment

Recycling Equipment

12/31/82, extended through 

1990 under affirmativecommitment rules

12/31/85

12/31/85 

12/31/85 

12/31/85

12/31/85

12/31/82, extended through 

1990 under affirmativecommitment rules

12/31/82, extended through 

1990 under affirmativecommitment rules

12/31/82, extended through 

1988

12/31/82, extended if equip 

ment was added after 1982

Same as current law

12/31/88; extended 

to 1990 under 

affirmativecommitment rules

12/31/90 

12/31/88

12/31/90, extended 

through 1993 under 

affirmativecommitment rules

12/31/85

Same as current law

Same as current law

12/31/85, extended 

through 1990 under 

affirmativecommitment rules

Same as current law

12/31/82; current 

affirmative-commitment 

rules apply

12/31/85

12/31/85 

12/31/85 

12/31/85

12/31/85 

12/31/85

12/31/85

12/31/85, extended 

through 1988

12/31/85

Sources: • Energy Tax Act of 1975, Crude Oil Windfall Profit Tax Act of 1980, Internal Revenue Service 

rulings. • H.R. 2001—Renewable Energy and Conservation Transition Act of 1985. • The President's Tax 

Proposals to the Congress for Fairness, Growth, and Simplicity. • Tax Reform Proposals: Taxation of Capital 

Income, Joint Committee on Taxation, August 1985.

2. RESIDENTIAL SECTOR ENERGY TAX CREDITS

Data

The Energy Tax Act of 1978 provided tax credits for two kinds of residential 

energy investments. One credit is applicable to expenditures for conserva 

tion improvements made to residences built before mid-1977. The second 

credit is for investments in renewable energy sources, such as solar, wind 

or geothermal. These credits have been available to households since the 

tax year 1978.

Table 4 shows the total number of returns that have claimed a residential 

tax credit for the tax years 1978 through 1983. The data shown for 1978 

include investments for the 20-month period from April 20, 1977 through 

December 31, 1978. Table 4 also shows the total tax credits available and 

the total energy expenditures listed on the returns that were the basis for 

the tax credits. These data also are given separately for conservation 

improvements and for renewable energy investments.

The data indicate that there has been a fairly persistent decline in the 

number of returns that claim an energy tax credit, from 6.0 million in 1978 

(although this figure does include data for 8 months of 1977) and 4.8 

million in 1979 to 2.4 million in 1983.

Table 4 also shows that most of the households taking tax credits did so for 

conservation improvements. In 1978, only about 1 percent of the households 

taking credits claimed renewable energy expenditures. However, the relative 

number claiming renewable energy investments had increased to 7 percent of 

the total by 1983. The number of households claiming credits for conservation 

improvements declined consistently from 1978 to 1983, in line with the decline 

in the total number taking credits. However, the number of households taking 

credits for renewable investments climbed from 69,000 households in 1978 to 

a peak of 229,000 in 1982; this figure then dropped to 169,000 in 1983.

The total dollar amount of tax credits taken has not changed nearly as 

dramatically as has the number of households taking the credits. In 1983, 

total credits taken were $486 million, which is less than the $592 million

A very small number of returns list energy conservation or renewable 

energy expenditures for more than one housing unit. This number is 

sufficiently small that the number of returns can be considered equal to the 

number of housing units that have made conservation improvements or renew 

able energy investments.
Table 4. Residential Energy Tax Credits and Expenditures

Energy Credit

Year

1978a

1979

1980

1981

1982

1983

Number of 

Returns 

(Millions)

6.0

4.8

4.7

3.9

3.2

2.4

Credit 

Amount 

(Millions)

592

481

584

628

614

486

Energy 

Expendi 

tures 

(Millions)

4,226

3,492

3,648

3,088

2,761

2,325

Number of 

Returns 

(Millions)

5.9

4.8

4.6

3.7

3.0

2.3

Conservation

Credit 

Amount 

(Millions)

559

437

419

365

292

243

Energy 

Expendi 

tures 

(Millions)

4,101

3,302

3,200

2,440

1,956

1,687

Number of 

Returns 

(Thousands)

69

77

155

225b

229

169

Renewable

Credit 

Amount 

(Millions)

32

44

166

263b

322

242

Energy 

Expendi 

tures 

(Millions)

125

190

448

658b

805

638

bThe year "1978" covers the 20-month period from April 20, 1977 through December 31, 1978. 

In 1981, the residential solar credit was increased from 25 to 40 percent.

Source: Data for 1978-1980: Thompson and Hillelson, "Residential Energy Credit 1979-1980," 

Internal Revenue Service Statistics of Income Bulletin, Fall, 1982, various tables.

Data for 1981: Internal Revenue Service, 1981 Statistics of Income Individual Income Tax Returns, 

1984, Table 3.2.

Data for 1982, 1983: Unpublished data supplied by Internal Revenue Service, Statistics of Income 

Division, Individual Returns Analysis Section.
taken in 1978 (for a 20-month period). However, the total credits taken for 

conservation have declined by more than a factor of two, from $559 million 

in 1978 to $243 million in 1983. On the other hand, total credits for 

renewable investments have increased from $32 million in 1978 to $322 

million in 1982, followed by a decline to $242 million in 1983. In terms of 

dollar amounts, total credits for conservation were about the same as for 

renewable investments in 1983.

These data do not provide an explanation for the changes occurring over 

time. However, one important fact about the credits affecting their use 

over time is that the tax law placed a limit on the total cumulative credit 

that could be claimed per family: The maximum is $300 for conservation 

improvements and $4,000 for renewable energy sources. One likely reason for 

the decline in the use of conservation tax credits is the fact that many of 

the households most likely to benefit from the credit already may have made 

all the appropriate conservation improvements for their house or may have 

reached the maximum tax credit. Because newly constructed homes are not 

eligible, the stock of housing eligible for the tax credits is fixed (with 

the exception that a household moving into a house may take credits for new 

investments even if the previous owner also took credits). Thus, the 

eligible pool of households has declined over time, although it is not 

possible to determine the magnitude of this decline with any precision using 

the available data.

Because the tax credit for renewables has been taken by a small number of 

homes and it is not limited to those homes constructed prior to April 1977, 

most households are still eligible. However, the decline in the number 

taking this credit from 1982 to 1983 may reflect the possibility that only a 

limited number of households find investments in renewable energy feasible 

or profitable, even with the tax benefits. In this case, the pool of 

households which would consider further investments may be declining.

The growth in the number of households claiming credits for renewable energy 

investments probably was enhanced by the increase in the available credit in 

1980. In 1978 and 1979, the credit was 30 percent of the first $2,000 of 

expenditures and 20 percent of the next $8,000. In 1980, the credit was 

increased to 40 percent of qualified expenditures up to $10,000. All homes 

(not just those built before 1978) also were eligible for the credit, so the 

pool of eligible homes has increased each year as new houses are built.

Table 5 shows the total energy expenditures claimed on returns by category 

of investment for conservation and for renewable energy. Among the returns 

taking credits for conservation, most of the credits are for insulation and 

for storm windows/doors. These expenditures combined constitute about 85 

percent of the total conservation expenditures. Total expenditures for 

storm windows/doors are slightly higher than for insulation in the four 

years shown in the table. However, slightly more households take credits 

for insulation than for storm windows/doors. Smaller numbers of households 

claim credits for caulking and other relatively inexpensive items.

11
Table 5. Number of Tax Returns with Residential Energy Expenditures and Amount of Expenditures by 

Category, 1978-1981

Category

Energy Conservation

Storm Windows/

Other ..........

Total .......

Renewable Resources 

Solar ..........

W-fnrl

Total .......

1978 1979 1980 1981

Number of Number of Number of Number of 

Returns Amount Returns Amount Returns Amount Returns Amount 

(Thousands) (Millions) (Thousands) (Millions) (Thousands) (Millions) (Thousands) (Millions)

3,900

3,400 

1,600 

NA 

5,900

NA 

NA 

NA 

69

1,760

1,797 

89 

454 

4,101

120.3 

3.1 

1.6 

125.0

NA = Not available. 

Source: Data for 1978-1980: Thompson and 

Internal Revenue Service Statistics of Income 

Data for 1981: Internal Revenue Service,

2,900 1,332

2,500 1,403 

1,400 100 

NA 467 

4,800 3,302

NA 171.2 

NA 9.7 

NA 9.4 

78 190.3

2,700

2,500 

1,200 

NA 

4,600

NA 

NA 

NA 

155

1,218 2,200

1,455 2,000 

84 1,000 

444 600 

3,200 3,700

399.0 212.5 

21.2 4.8 

27.4 10.7 

447.6 225

1,116

1,432 

62 

306 

2,915

678.6 

21.9 

17.1 

718.6

Hillelson, "Residential Energy Credit 1979-1980," 

Bulletin, Fall, 1982, various tables. 

1981 Statistics of Income Individual Income Tax Returns,

1984, Table 3.2.

Data for 1982, 1983: Unpublished data supplied by Internal Revenue Service, Statistics of Income 

Division, Individual Returns Analysis Section.
Data from the Residential Energy Consumption Survey can be used to examine 

the rate at which households make conservation improvements and to estimate 

the percentage that takes the tax credit. The Residential Energy 

Consumption Survey is a national survey of residences that collects detailed 

information about the characteristics of the housing unit that are related 

to energy consumption, the characteristics of the household living in the 

unit, and the consumption and expenditures for all energy sources used in 

the home. The surveys have been conducted annually from 1978 through 1982, 

in 1984, and are scheduled to be conducted every 3 years in the future. The 

data from these surveys provide a good picture of the number and types of 

improvements made in recent years.

Table 6 shows the types of conservation improvements made in single-family 

homes from 1978 through 1982. A higher percentage of homes made the less 

expensive conservation improvements, such as caulking and weatherstripping, 

than made the more expensive improvements, such as roof or ceiling 

insulation and storm doors and windows. The peak of residential 

conservation activity appears to have occurred in 1980. In almost all 

categories there was a substantial decline between 1980 and 1982 in the 

percentage of homes that made conservation improvements.

In the 1984 Residential Energy Consumption Survey, households that made 

conservation improvements in 1983 were asked whether or not they took a tax 

credit on their 1983 returns. For those not making a claim, further 

questions probed for the reasons. For those making a claim, a further 

question sought to reveal if the conservation item would have been installed 

in the absence of a tax credit. Responses to these questions are shown in 

Table 7.

The data in Table 7 indicate that a substantial majority of all households 

that made conservation improvements claimed no tax credit for them. Also, 

there is a substantial variation by income in the percentage of households 

that claim a tax credit, even among those households that installed 

conservation items. Less than 10 percent of households with incomes under 

$15,000 who made some conservation improvement claimed a tax credit. On the 

other hand, among households with incomes over $30,000, about 26 percent 

claimed a tax credit. Of those households that claimed the credit in 1983, 

about 43 percent had incomes under $30,000.

The reasons given by households for not claiming a tax credit further 

underscore the differences between lower- and higher-income households. 

Lower-income households less often claimed tax credits for the energy 

saving improvements made to their homes because they did not know about the 

tax credit or did not file the long income tax form. Higher-income house 

holds, on the other hand, in more cases indicated they did not claim a tax 

credit because the amount was too small to bother with, although other 

reasons were also cited.

Also shown on Table 7 are the responses to the question about whether or not 

households would have made the improvements if the tax credit had not been 

available. An overwhelming majority of households said that they would have 

made the same investment without the credit. Almost all households

13
Table 6. Single-Family Homes Making Conservation Improvements, 1978-1982 

(Percent)

Conservation Improvements

Closeable Shutters, Reflective

Film, Plastic Coverings, or

Roof /Ceiling Insulation ........

Basement /Crawl Space Insulation

Automatic Set-back Thermostat

1978

18.6

7.6

8.3

5.1

4.4

4.3

2.6

2.1

1.6

0.7

1.4

0.1

1979

(a)

(a)

(a)

5.8

6.3 C

(c)

2.9

(a)

(a)

(a)

(a)

(a)

1980

19.1

13.6

9.6

6.1

5.8

4.3

3.5

1.6

2.4

2.5

2.0

0.3

1981

10.8

6.1

4.3

3.9

4.0

3.1

2.3

0.9

1.5

2.3

1.7

0.2

1982

10.7

5.8

5.0

2.6

3.8

3.0

1.7

0.9

1.6

2.3

0.7

0.3

a

.Not asked. 

This category did not include film or drapes in 1978 or film in 1980.

CStorm doors and storm windows were combined into one category in the 

1979 survey.

Note: The 1979 Screener Survey collected very limited data on conserva 

tion improvements.

Source: Energy Information Administration, 1978 through 1982 Residential 

Energy Consumption Surveys.

14
Table 7. Factors Related to Tax Credits Claimed for Residential Energy Conservation Projects by 

Income Groups, 1983 

(Percent)

Category

Less $5,000

than to

$5,000 $9,999

$10,000

to 

$14,999

$15,000

to 

$19,999

$20,000

to 

$29,999

$30,000 

and 

More

Percent of Homes Installing One or 

More Items in 1983 Who Claimed 

a Tax Credit on 1983 Return .......

Percent of Homes Claiming a Tax Credit 

Who Would Have Made Same Improve 

ments If the Tax Credit Had Not 

Been Available ....................

Homes Not Claiming a Tax Credit for 

Particular Reasons

• Didn't Know About the Credit ...

• Didn't File the Long Form ......

• Amount Too Small to Claim ......

• Too Much Trouble to File Tax

Credit Forms ...................

• Ineligible Because House was

Built After April 1977 .........

• Took the Maximum Credit in

Previous Years .................

• No 1983 Tax Filed ..............

100 100

50

45

10

27

49

20

17

15

2 

*

11

100

37

21

19

13

3

1

17

88

21

36

20

14

21

84

19

13

24

14

1

11

1

32

89

11

11

37

21

7 

*

More than one reason may have been selected.

*Less than 0.5 percent.

Source: Energy Information Administration, 1984 Residential Energy Consumption Survey.

Note: The percentages reported in this table are based on the unweighted tabulations of data 

which have not been fully edited to check for inconsistencies and other errors. The final numbers 

can be expected to differ from these numbers, although the overall pattern is not expected to 

change.
with incomes under $15,000 would have made the investment without the credit 

being available. For households with higher incomes, only 10 to 15 percent 

said they would not have made the same improvements without the tax credit.

The proportion of households making conservation improvements that takes a 

tax credit varies with the type of improvement. Table 8 indicates that 

between 30 and 40 percent of all households that added insulation to their 

homes from 1980 through 1983 claimed a tax credit. For those adding storm 

windows or doors, the percentage was higher, ranging from 40 to 50 percent. 

For caulking and other conservation items, a relatively small share of 

households (generally less than 10 percent) claimed a tax credit.

The data in Table 8 for 1980 through 1982 were calculated by combining 

Internal Revenue Service data on the number of households claiming a credit 

with Residential Energy Consumption survey data on the number of households 

that made the improvement. The 1983 data, however, are based solely on the 

Residential Energy Consumption Survey which contained a question asking 

whether or not a tax credit was taken. Since the Internal Revenue Service 

data and the Residential Energy Consumption Survey data both are based on 

samples and hence have sampling variance, these figures are uncertain and 

should be viewed as orders of magnitude rather than precise estimates.

H.R. 2001 extends the residential tax credit only for households with 

incomes under $30,000. The data in Table 8 are shown for households with 

incomes below and above this income level. In all categories, households 

making conservation improvements with higher income are more likely to take 

the credit. For most categories of improvements and for most years, the 

percentages taking a tax credit are higher by about a factor of two for the 

higher income households.

The final issue to be considered is the energy consumption of households 

making conservation improvements. Table 9 gives the average consumption and 

expenditures per household for all fuels used in the home. These data are 

given for the homes making different types of conservation improvements for 

the years 1980 through 1982, Households that make conservation improvements 

do consume more energy and pay more for it than the average household. This 

is true for households with incomes both above and below $30,000. 

Households that install insulation consume less energy on average than 

households that make other types of conservation improvements.

Because the conservation credits were designed to reduce energy use for 

space heating, the historical level of this portion of energy demand is also 

an important factor in this analysis. The average residential energy 

consumption for all major fuels used in the household in 1978 was 138 

million Btu. Sixty-six percent of this amount, or 91 million Btu, was used 

for space heating. (This figure included both primary and secondary 

heating.) By 1980, the amount of energy used for space heating had 

decreased to 63 million Btu, or 55 percent, of the average consumption per 

household. Space heating energy consumption increased slightly to 66 

million Btu in 1981, followed by a decrease in 1982 to 57 million Btu. The 

percent of households taking a residential energy tax credit for conserva 

tion items by main heating fuel in 1983 were as follows:

16
Table 8. Number of Households that Make Conservation Improvements and Percent that Take Tax Credit by 

Category of Improvement and by Income 

(Millions of Households)

Conservation 

Category/Income ]

Insulation

Total ...............

Less than $30,000 ...

$30,000 or more .....

Storm Windows/Doors

Total ...............

Less than $30,000 ...

$30,000 or more .....

Caulking

Total ...............

Less than $30,000 ...

$30,000 or more .....

Other

Total ...............

Less than $30,000 ...

$30,000 or more .....

19f

Number 

Making 

(improvement

6.4

4.9

1.4

5.1

4.1

1.0

12.0

9.3

2.6

11.4

8.8

2.6

50

Percent 

Take 

: Credit

42

33

79

49

37

100

10

8

19

NA

NA

NA

198

Number 

Making 

Improvement

6.0

4.1

2.0

4.5

3.3

1.2

8.4

5.9

2.5

7.3

5.0

2.3

1

Percent 

take 

Credit

37

29

50

44

33

75

12

8

20

8

6

13

198

Number 

Making 

Improvement

5.4

3.6

1.7

4.5

3.0

1.5

7.4

4.9

2.5

6.6

4.1

2.4

2

Percent 

Take 

Credit

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

198

Number 

Making 

Improvement

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

3

Percent 

Take 

Credit

31

22

46

44

33

60

18

12

32

19

14

28

NA = Not available.

Source: Energy Information Administration, Residential Energy Consumption Surveys for 1980, 1981, 1982, 

and 1984; special tabulations. The 1983 estimates from the 1984 Residential Energy Conservation Survey are 

based on preliminary unweighted data and are subject to change. Internal Revenue Service data from sources 

cited in Table 4.
Table 9. Average Energy Consumption and Expenditures per Household by Conservation Improvement 

Category and by Income

00

Conservation 

Category/Income

All Households 

Total ..................

Less than $30,000 ......

$30,000 or more ........

Households That Install: 

Insulation 

Total ................

Less than $30,000 ....

$30,000 or more ......

Storm Windows /Doors 

Total ................

Less than $30,000 ....

$30,000 or more ......

Caulking 

Total ................

Less than $30,000 ....

$30,000 or more ......

Other 

Total ................

Less than $30,000 ....

$30,000 or more ......

198

Consumption 

(Million Btu)

117

112

142

123

117

147

135

130

159

135

129

160

132

127

149

;o

Expenditures 

(Dollars)

924

875

1,164

991

936

1,177

1,016

974

1,186

1,051

998

1 ?A1

1,054

999

1,243

198

Consumption 

(Million Btu)

117

109

146

130

115

161

133

124

159

149

133

186

149

136

177

1

Expenditures 

(Dollars)

T cn?

960

1,283

1,136

993

1,430

1,166

1,052

1,483

1,240

1,116

1,530

1,298

1,157

1,608

198

Consumption 

(Million Btu)

106

98

129

113

104

131

130

118

155

121

111

139

130

116

155

2

Expenditures 

(Dollars)

1,060

976

1 T^A

1 1 3S

1,036 1 "Mi")

1,274

1,147

1,522

1,173

1,082

1,347

1,290

1,124

1,573

Source: Energy Information Administration, Residential Energy Consumption Surveys for 1980, 1981, and 

1982; special tabulations.
Main Heating Fuel of Households that

Took the Credit in 1983 Percent

Natural Gas ........................................ 67

Electricity ........................................ 7

Fuel Oil or Kerosene ............................... 13

LPG ................................................ 2

Wood ............................................... 11

Total ........................................... 100

Data are limited to eligible homes and households that indicated 

some conservation activity occurred in 1983, but exclude renewable 

items. The percentages are based on unweighted tabulations of data 

which have not been fully edited to check for inconsistencies and 

other errors. The final numbers can be expected to differ from 

these numbers, although the overall pattern is not expected to 

change.

Analysis

This section analyzes the extension of the energy conservation tax credit 

proposed in H.R. 2001. Current law and the President's Tax Proposal both 

allow the credits to end on December 31, 1985. The extension of the credits 

would no doubt induce some consumers to make conservation investments that 

they otherwise would not have undertaken, although the actual number of 

additional investments is highly uncertain. The following analysis attempts 

to quantify how many of these types of investments would be made and the 

loss of revenues to the Treasury from such investments.

Methodology and Assumptions

The basic methodology used to assess the effectiveness of Treasury dollars 

spent in the form of residential energy tax credits was to compare the present 

value of the Treasury revenue losses due to extension of the program with the 

(discounted) additional energy savings estimated to be forthcoming from the 

program. The critical assumptions in this analysis relate to: (1) how much 

energy is likely to be saved by a typical residential energy conservation or 

renewable project, and, (2) how many additional residential energy conserva 

tion and renewables projects are induced by the availability of the credit.

Energy savings of 15 percent of space heating energy use were assumed for a 

typical conservation project, although sensitivity cases using 10 percent 

and 20 percent savings also were examined (see Appendix C). This savings 

percentage is in the range of savings observed for households participating

19
in the Department of Energy's Low Income Weatherlzation Program. For solar 

hot water installation, energy savings were assumed to be 65 percent of hot 

water energy use.

Evidence is limited concerning the degree to which individuals actually have 

been induced by the Federal energy tax credits to undertake residential 

renewable and conservation projects. Some studies do suggest that those who 

undertake residential conservation projects are not fundamentally influenced 

by the existence of the credit. It appears that when the conservation tax 

credit was set at 15 percent of eligible expenditures, some 10 to 15 percent 

of households undertaking such projects were induced to do so by the avail 

ability of the credit. As H.R. 2001 raises the credit to 25 percent, it is 

necessary to make some assumptions about how eligible households might 

respond to the higher credit. Lacking any other information, three 

alternative assumptions are made: that 12.5 percent, 25 percent, and 37.5 

percent of eligible households will be induced to undertake conservation 

projects by the credits available under H.R. 2001. These assumptions can be 

summarized by a proportionality factor, which is the ratio between the 

fraction of eligible households which undertake conservation measures 

because of the credit and the tax credit rate. Thus, the H.R. 2001 tax 

credit of 25 percent would induce participation of 12.5 percent, 25 percent, 

and 37.5 percent, assuming proportionality factors of 0.5, 1.0, and 1.5, 

respectively. It is also assumed that each eligible household makes $700 

worth of conservation expenditures, the average expenditure in the past and 

also the maximum allowable under H.R. 2001.

See Energy Information Administration, Weatherization Program 

Evaluation, Service Report, SR-EEUD-84-1 (August 1984). For the 568 

households surveyed in the weatherization program evaluation which used 

natural gas as the primary heating fuel, an estimated 11-percent savings 

(relative to total energy use) was achieved (p. 25). Relative to space 

heating only, savings were about 14 percent on average.

2 Science Applications, Incorporated, "Comprehensive Review of Renewable

Sources of Energy, Active Solar Heating and Cooling in the United States," 

for U.S. Department of Energy, Office of Solar Heat Technologies.

3 A survey conducted by H. Craig Petersen, of Utah State University,

indicated that approximately 12 percent of the people surveyed who claimed 

conservation tax credits on their Federal income tax returns were induced to 

undertake conservation measures because of the availability of the credit. 

Data from the Residential Energy Consumption Survey provided in the 

beginning of this chapter tend to confirm the Petersen findings.

20
These assumptions result in an estimated range of 1.7 to 2.0 million 

households using the conservation tax credit between 1986 and 1990. Of 

these households, 0.2 to 0.8 million households were induced by the credit 

to undertake projects. The cost to the Treasury comprises the credits taken 

by the entire 1.7 to 2.0 million households, while the incremental energy 

savings attributed to H.R. 2001 include only savings from the 0.2 to 0.8 

million households induced to invest by the credit.

Proportionality factors of 1.0 and 2.0 were assumed for residential renewable 

projects (principally solar hot water projects) because it was assumed that 

these relatively expensive projects are more likely to require tax credits 

for significant participation. In this case, the range of participation was 

between 370,000 and 680,000 households assumed to use the residential renew 

able tax credit between 1986 and 1990. A more detailed description of these 

and other assumptions involved in this analysis is provided in Appendix B.

The calculations include the present value of Treasury costs per (discounted) 

barrel of oil equivalent of energy saved over the life of the projects under 

the various assumptions about credit-induced activity. Both the units of 

energy saved and the Treasury payments over the life of the project are 

discounted to allow the calculation of a cost per barrel of oil equivalent 

on a present value basis that can be used to compare the various tax credit 

proposals. A 4-percent real discount rate is assumed in this analysis. 

Also reported are internal rates of return for residential projects, as well 

as calculations of the value to consumers of the energy credit in terms of 

equivalent prices. The equivalent price for a project is defined as the 

expected energy price that would make the internal rate of return on the 

project without the credit as favorable as the rate calculated with the 

credit and market prices, all other assumptions remaining the same. In the 

analyses of internal rates of return, energy savings are assumed to be in 

the form of natural gas, the dominant fuel used for home heating.

Cost to the Treasury per barrel of oil equivalent saved is a measure that 

can be used to compare different energy policies in terms of their impact on 

the budget deficit. The larger the Treasury cost per barrel of oil equiva 

lent saved or produced is, the greater the loss in tax revenues (or increase 

in expenditures) required to achieve any particular reduction in demand or 

increase in supply will be. As mentioned previously, a large proportion of 

those taking energy tax credits would have made conservation investments 

even if the credits did not exist. Thus a large component of the cost to 

Treasury is transferred to households whose behavior is unaffected by the 

credit. The smaller is the proportion of households taking the credit that 

are induced to undertake conservation investments by the credit, the larger 

will be the Treasury cost per barrel of oil equivalent saved.

The equivalent price plays a role in a different kind of analysis. It is a 

measure of how great an incentive is provided for undertaking a particular 

kind of activity. A convenient way to measure the magnitude of the 

incentive provided by conservation and renewable energy tax credits is to 

calculate the energy prices that would be required to make investments in

21
energy conservation and renewables as profitable without H.R. 2001 (i.e., 

without the credits) as they would be with H.R. 2001. The equivalent price 

measure gives an indication of how the allocation of economic resources, 

rather than the size of tax collections, is affected by the credits. The 

larger is the equivalent price, the greater would be the amount of 

conservation engendered by the credit.

Results

The results of this analysis are presented in Tables 10 through 14. Tables 

10 and 11 show the results for residential conservation credits assuming 

that the energy savings average 15 percent of space heating use. More 

detailed tables and tables assuming 10- and 20-percent energy savings are 

presented in Appendix C. Tables 12 and 13 show the results for residential 

renewable projects (assumed to be all solar hot water) at an energy savings 

of 65 percent. More detailed residential renewable tables are also 

presented in Appendix C. These results show:

o Reasonable upper estimates for total Treasury losses under the time 

horizon for H.R. 2001 range between $300 and $340 million dollars on 

a present value basis for residential conservation tax credits.

o Behind these estimates are total estimated conservation credit 

claims ranging from 1.7 million to 2.0 million households between 

1986 and 1988, depending on the responsiveness of consumers to the 

tax credit. (See Appendix B.)

o Cumulative additional energy savings attributable to the conservation tax 

credit are very sensitive to assumptions about what proportion of those 

taking the credit are induced to undertake conservation because of the 

credit. However, assuming 15 percent energy savings from "typical" 

conservation projects, a likely upper limit to total credit-induced 

savings under H.R. 2001 would be 86 trillion Btu (on a discounted 

basis), or the energy equivalent of 15 million barrels of fuel oil. 

Therefore, the treasury cost is estimated to be at least $23 per 

barrel of oil equivalent saved, although it could be as high as $70 

per barrel of oil equivalent, depending on the participation rate.

o Assuming 15 percent energy savings, the internal rate of return for 

"typical" conservation projects under H.R. 2001 is 10.4 percent with 

constant real energy prices. These rates of return are exclusive of 

consideration of any State tax credits.

o The conservation tax credit under H.R. 2001 would have the same

impact on project profitability as a one-time, permanent 33-percent 

increase in real energy prices. This is a measure of the degree to 

which conservation projects would be subsidized for those eligible 

under H.R. 2001.

22
Table 10. Residential Conservation Tax Credit Analysis Under H.R. 2001: Treasury 

Losses and Incremental Energy Savings

Assumptions

Total 

Cumulative 

Households 

Participating 

(thousands)

Present 

Value of 

Treasury 

Losses 

(millions 

of 1984 

dollars)

Discounted 

Incremental , 

Energy Saved

Million 

Trillion Barrels Oil 

Btu Equivalent

Treasury Cost 

per Barrel Oil 

Equivalent 

(dollar per 

barrel of oil 

equivalent)

Proportionality 

Factor

0.5 ......

1.0 ......

1.5 ......

1,740

1 Q?0

2,030

294

327

342

?4 fi

S4 fi

85.9

4 ?3

Q 'SQ

14.74

69.64

14 fi4

23.21

.Value in 1984 dollars discounted at 4 percent over the period 1986 to 1988.

Cumulative quantity of energy saved by conservation measures taken in 1986 through 

1988 by those induced to do so by the availability of the tax credit, discounted at 4 

percent over the period 1986 to 1999.

The discounted incremental energy saved is converted to barrels of oil equivalent 

by dividing by the number of Btu per barrels of fuel oil (5.826 million).

The proportionality factor is the assumed ratio between the proportion of total 

households claiming credits that were induced to undertake conservation measures 

because of the credit and the tax credit rate. (See Appendix B.)

Table 11. Residential Conservation Tax Credit Analysis Under H.R. 2001: Project 

Profitability (Energy Savings = 15 Percent)

Real Energy Price 

Inflation

Internal Rate 

of Return Under 

H.R. 2001

Assumed Average 

Price With Credit

Equivalent 

Price Without 

the Credit

0 Percent

Project Year 

1986-1988

(percent)

10.4

(1984 dollars per barrel of oil equivalent)

35 C

47

The average 1984 residential price of natural gas expressed in dollars per barrel 

of oil equivalent.

23
Table 12. Residential Renewable Tax Credit Analysis Under H.R. 2001: Treasury 

Losses and Incremental Energy Savings

Assumptions

Cumulative 

Households 

Participating 

(thousands)

Present 

Value of 

Treasury 

Losses 

(millions 

of 1984 

dollars)

Discounted 

Incremental , 

Energy Saved

Million 

Trillion Barrels Oil 

Btu Equivalent

Treasury Cost 

per Barrel Oil 

Equivalent 

(dollars per 

barrel of oil 

equivalent)

Proportionality 

Factor

1.0 

2.0

(results for natural gas-displacing solar units)

680 659 27.9 4.79 137.58

372 385 32.6 5.59 68.79

.Value in 1984 dollars discounted at 4 percent over the period 1986 to 1988.

Cumulative quantity of energy saved by conservation measures taken by those 

induced to do so by the availability of the tax credit, discounted at 4 percent over 

the period 1986 to end of project life, assumed to be 12 years.

The discounted incremental energy saved is converted to barrels of oil equivalent 

by dividing by the number of Btu per barrel of fuel oil (5.826 million).

The proportionality factor is the assumed ratio between the proportion of total 

households claiming tax credits that were induced to make renewable investments 

because of the credit and the tax credit rate. (See Appendix B.)

Table 13. Residential Renewable Tax Credit Analysis Under H.R. 2001: Profitability 

of Solar Heaters Displacing Natural Gas and Electricity (Energy Savings = 

65 Percent)

Real Energy Price 

Inflation

0 Percent 

Project Year

Internal Rate 

of Return Under

H.R. 2001 

Gas3 Electric

Assumed Average 

Price With Credit 

Gas3 Electric

Equivalent 

Price Without

the Credit , 

Gasa Electric

(percent) (1984 dollars per barrel of oil equivalent)

1986 .......

1987 .......

1988 .......

1989 .......

1990 .......

-7 9

..... -8.8

..... -9.5

_1 0 -3

-10 Q

5 L

U 0

2.8

1.7

0.8

35

35

35

35

35

114

114

114

114

114

55

50

47

43

41

177

163

153

140

134

Solar units displacing natural gas. 

Solar units displacing electricity.

24
• For residential solar hot water projects, Treasury losses could 

range from about $385 million to $659 depending upon the 

responsiveness to the credit.

• These estimates are based on the estimate that between 400,000 and 

700,000 households would take the renewable energy tax credit over 

the 1986 to 1990 period. (See Appendix B.)

• Assuming a 12-year project life, estimated maximum cumulative

additional energy savings would be 33 trillion Btu (on a discounted 

basis), or the energy equivalent of about 6 million barrels of oil. 

Therefore, the Treasury cost is estimated to be at least $69 per 

barrel of oil equivalent saved, although it could be as high as $148 

per barrel of oil equivalent, depending on the participation rate.

• In contrast to conservation credit rates (which increase under H.R. 

2001 relative to current law), the residential renewable credits 

(which decrease over time under H.R. 2001 relative to current law) 

will have a lesser impact on the Treasury if individuals are very 

responsive to the credits. This result stems from the assumption 

that if individuals are very responsive to the availability of the 

tax credit, the number of investments made will decline more rapidly 

as the credit decreases.

• Real internal rates of return for residential solar hot water 

projects are considerably lower than those for conservation 

projects, even with the tax credit under H.R. 2001. The calculated 

rates of return are exclusive of State tax credits.

• Rates of return and equivalent prices are shown for two kinds of 

solar hot water heaters: solar units that displace natural gas and 

solar units that displace electricity. Because of the relatively 

high price of electricity delivered to residential customers, 

internal rates of return are considerably higher for electricitydisplacing solar units. See Appendix B for project profiles for 

both the gas- and electricity-displacing residential solar hot water 

heaters.

• For residential solar projects installed in 1986 and displacing 

natural gas, the value to the consumers of the energy tax credit 

under H.R. 2001 would be equivalent to a rise in energy prices of 

more than 55 percent (to about $55 per barrel of oil equivalent) in 

1986, dropping to about $40 per barrel of oil equivalent by 1990.

Focusing on project profitability, Table 14 provides estimates of internal 

rates of return for "typical" residential conservation and renewable 

projects. Rates of return are reported for the current law 1985 case (i.e., 

with 15-percent conservation credit and 40-percent renewable credit), the 

President's Tax Proposal or current law after 1985 (i.e., no tax credit),

25
Table 14. Internal Rates of Return for Residential Conservation and Renewables a

Projects Under Alternative Tax Regimes

Conservation Project 

(Energy Savings = 15 Percent)

Solar Hot Water 

(Energy Savings = 65 Percent)

Current Law and President's Current Law and President's 

Tax Proposal H.R. 2001 Tax Proposal

Through 1985 

(15 percent 

credit)

Without 10 Percent State Credit

Constant Real Energy Prices 

Project Date: 

1986 ...................... 7.4

1987 ...................... 7.4

1988 ...................... 7.4

1989 ......................

1990 ......................

With 10 Percent State Credit

Constant Real Energy Prices 

Project Date: 

1986 ...................... 10.4

1987 ...................... 10.4

1988 ...................... 10.4

1989 ......................

1990 ......................

H.R. 2001

After 1/1/86 

(0 percent (25 percent Through 1985 After 1/1/86 (35 to 15 

credit) credit) (40 percent credit) (0 percent credit) percent credit)

Gas

3.9 10.4 -6.9 

3.9 10.4 -6.9 

3.9 10.4 -6.9 

-6.9 

-6.9

6.1 14.3 -4.6 

6.1 14.3 -4.6 

6.1 14.3 -4.6 

-4.6 

-4.6

c b Electricity Gas

6.9 

6.9 

6.9 

6.9 

6.9

10.7 

10.7 

10.7 

10.7 

10.7

-12.6 

-12.6 

-12.6 

-12.6 

-12.6

-11.5 

-11.5 

-11.5 

-11.5 

-11.5

c b Electricity Gas

-1.7 

-1.7 

-1.7 

-1.7 

-1.7

-0.1 

-0.1 

-0.1 

-0.1 

-0.1

-7.9 

-8.8 

-9.5 

-10.3 

-10.9

-5.8 

-6.9 

-7.9 

-8.8 

-9.5

c Electricity

5.4 

4.0 

2.8 

1.7 

0.8

8.7 

6.9 

5.4 

4.0 

2.8

These internal rates of return reflect computations for average households. For households with higher energy costs, greater overall 

consumption patterns, or in certain climates there may be positive or higher rates of return than shown in this table.

Solar units displacing natural gas. c Solar units displacing electricity.
and H.R. 2001. In addition, rates of return under all cases were calcu 

lated including current California State Tax Credits. This was done to 

provide a somewhat more complete picture of the profitability of these 

projects under fairly realistic conditions.

The rate of return analysis presented in Table 14 shows: 

Conservation;

• Under current law prior to 1986, a typical conservation project 

(with 15 percent energy savings assumed and constant real energy 

prices) would have yielded a 7.4-percent internal rate of return 

with no State tax credit, rising to 10.4 percent with a 10-percent 

State credit.

• The President's Tax Proposal (equivalent to current law after 1985) 

would, by removing Federal residential energy tax credits, reduce 

the rate of return on typical conservation projects by 3 to 4 

percentage points compared to current law prior to 1986, assuming 

constant energy prices.

• H.R. 2001 would increase rates of return on conservation projects by 

6 to 8 percentage points over the rates implied by the President's 

Tax Proposal and current law, assuming constant energy prices.

• The rate of energy savings assumed for the typical conservation

project is crucial in determining a probable level for the internal 

rate of return under H.R. 2001. Increasing the energy savings rate 

from 15 percent to 20 percent increases the rate of return by about 

8 percentage points, assuming no real energy price inflation (see 

Appendix B).

Renewables (Solar Hot Water):

• Assuming 65 percent energy savings, a typical residential

installation for solar hot water heating (where the solar unit is 

displacing natural gas) would not yield a positive internal rate of

Until August 1, 1985, California allowed a credit for residential 

conservation and renewable investments of 35 percent and 50 percent, 

respectively. These credits, however, were inclusive of Federal tax 

credits, the State making up the difference between the Federal contribution 

and the allowed State maximum percentage credit (subject to expenditure 

limits). As of August 1, 1985, California allows a flat 10 percent credit 

on residential conservation and renewables investment, with expenditure 

limits of $750 and $1,000, respectively. Source: California State 

Franchise Tax Board.

27
return under constant real energy prices, even if a 10-percent State 

tax credit, such as that now allowed in California, were in effect. 

This result is true for H.R. 2001 and the President's Tax Proposal, 

and would appear to have been true under current law for 1985. 

However, if the installation displaces electricity, positive internal 

rates of return are found (Table 13).

• Under H.R. 2001, the return on a typical residential solar

installation would decline by 3 to 4 percentage points between 1986 

and 1990, as the allowable credit is phased down from 35 percent in 

1986 to 15 percent in 1990.

Evidence suggests that, with regard to residential energy saving investment, 

real consumer discount rates could range from about 10 percent to over 100- 

percent, depending upon the type of investment and financing arrangements. 

For investments in homes that use natural gas for space heating, consumer 

discount rates probably range from at least 10 percent (under zero real 

energy price escalation) to about 20 percent for expectations of real energy 

price escalation of more than 4 or 5 percent.

Under either current law or the President's Tax Proposal, fewer individuals 

are likely to invest in conservation measures than would do so under H.R. 

2001. However, no attempt is made here to explicitly relate how observed 

behavior in making residential conservation retrofits has been influenced by 

changing economic conditions (i.e., energy price or regulatory environment 

effects on rates of return). It is simply noted that, under the assumptions 

of this analysis, the elimination of residential tax credits may have the 

potential of reducing the return on conservation investments below the 

hurdle rate for some consumers. However, the effect on total energy 

consumption would likely be very small.

See Dennis L. O'Neal, et al., "An Estimate of Consumer Discount Rates 

Implicit in Single-Family Housing Construction Practices," Oak Ridge, 

Tennessee (1981), ORNL/CON-62, pp. 25-30. Also see J. A. Hausman, 

"Individual Discount Rates and the Purchase and Utilization of Energy-Using 

Durables," The Bell Journal of Economics, Volume 10, No. 1, Spring 1979, 

pp. 35-54.

In O'Neal, et.al., the average real discount rate calculated for 

observed purchases of energy saving investments in new residences for 11 

cities was 9.8 percent for gas-heated homes, assuming the investment costs 

were not financed over time and assuming zero real energy price escalation. 

The same calculation assuming about 5-percent real price escalation yielded 

an average discount rate of 14 percent.

28
It is interesting to note that, while the elimination of the credit, as 

would be done under current law and the President's Tax Proposal, would 

have a significant impact on the rate of return for residential solar hot 

water projects relative to H.R. 2001, neither proposal yields a calculated 

internal rate of return that seems close to typical consumer discount rates, 

when the assumptions of this analysis are applied. This situation is 

certainly true when the solar unit is displacing natural gas. As noted 

above, rates of return for solar units displacing electricity are noticeably 

higher. There may be a number of considerations (some of them noneconomic 

in nature) that influence the type of individuals who install solar hot 

water heaters that are not taken into account using a cross-section of the 

population. This does not mean that the existence of the credit for this 

type of investments has not induced a large number of people to make the 

investment, relative to the number who would have invested anyway, but 

suggests that the potential market for these projects may be limited to 

households whose energy expenditures (and thus potential savings) are 

greater than average or to households located where costs or performance of 

the solar heating systems are better than average. The negative rates of 

return shown in Table 14 could be positive if either energy prices increased 

more rapidly than assumed (constant real prices are assumed here) or if 

equipment costs were lower. However, these factors do not affect the 

comparison between current law and H.R. 2001 in terms of the incentives 

provided for renewable energy investments, because this analysis is based on 

equalizing the rates of return given the two different tax provisions. The 

level at which the rates of return are equalized has not been found to have 

a significant effect on the results.

29

3. BUSINESS SECTOR ENERGY TAX CREDITS

The business energy tax credits effects of H.R. 2001 are much more difficult 

to assess than the residential energy credits because of the more complex 

nature of the types of investments involved and the lack of comprehensive 

data in this area.

Data

Table 15 summarizes the Internal Revenue Service data on business energy tax 

credits claimed from 1978 through 1982. These data show:

• The total tax credits claimed by businesses rose dramatically

between 1978 and 1982, reaching a total of almost $800 million in 

1982.

• In 1979 (the latest year for which detailed data are available), the 

bulk of the credits were used for alternative energy properties and 

specially-defined energy properties.

• In 1982, credits for renewable types of investments (those mostly 

qualifying for the 11- and 15-percent credit) were very small, 

amounting to only about $20 million.

Analysis

The type of analysis undertaken for the residential tax credits was not 

possible in the business area because of the complex nature of the 

investments being considered. However, some information from the data cited 

above and other sources can be used to make some tentative conclusions about 

the impact of H.R. 2001 on business energy investments.

Most of the business energy investments appear to be made for alternative 

energy properties and specially-defined energy properties, areas where 

credits expired at the end of 1982. H.R. 2001 does not reinstitute credits 

in these areas and therefore will have little effect on business energy 

investments. There will be some impact as a result of the proposed change 

to the affirmative commitment rule, although this change is expected to be 

relatively small. However, H.R. 2001 does extend tax credits for wind, 

geothermal, ocean thermal, hydroelectric, and biomass projects which would

31
Table 15. Number and Amount of Income Tax Returns for Business Energy Tax Credits, 1978-1982

1978

Qualified 

Investment 

Energy 

Credit 

Category (million $)

10 Percent Energy Investment

Property 

Total ......................

Alternative Energy Property 

Specially-Defined Energy

Shale Oil Equipment ......

Equipment for Producing 

Natural Gas from 

Geopressurized Brine ... 

Solar and Wind ...........

11 Percent Energy Investment

15 Percent Energy Investment

Tentative Business Investment

Credit .....................

Carryover or Carry Back of

Unused Credits ..........;..

67.0 

24.8

16.5 

13.4 

.7

7.2 

.4

NA 

NA 

67.0 

NA

Number 

of Returns

1,969 

485

680 

549 

5

166

44

NA 

NA 

1,969 

NA

1979

Qualified 

Investment 

Energy 

Credit 

(million $)

280.0 

111.6

81.2 

65.8 

.9

5.7 

4.2

NA 

NA 

280.0 

NA

Nunfcer 

of Returns

5,585 

979

2,458 

1,643 

11

21 

544

NA 

NA 

5,585 

NA

1980

Qualified 

Investment 

Energy 

Credit 

(rlllion $)

386.9

NA

NA 

NA 

NA

NA 

NA

3.4 

10.1 

422.2 

21.0

Muter 

of Returns

6,590 

NA

NA 

NA 

NA

NA 

NA

24 

545 

7,748 

443

1981

Qualified 

Investment 

Energy 

Credit 

(million $)

469.5 

NA

NA 

NA

NA

NA 

NA

5.9 

6.2 

484.2 

51.9

Ninter 

of Returns

5,686

NA

NA 

NA 

NA

NA

NA

171 

1,068 

8,801 

1,482

1982

Qualified 

Investment 

Energy 

Credit 

(million $)

671.8 

NA

NA 

NA 

NA

NA 

NA

6.7 

15.1 

766.3 

64.5

Number 

of Returns

5,849 

NA

NA 

NA 

NA

NA 

NA

78 

784 

7,610 

2,341

NA - Not available.

Source: Unpublished data supplied by Internal Revenue Service, Statistics of Incone Division, Individual Returns Analysis Section.
not be extended under either the current law or the President's Tax 

Proposal. This change could likely have a major impact on the relative 

economics of these types of projects, but so little use has been made of 

these credits that the impacts on Treasury revenues and energy consumption 

are not likely to be significant.

A study completed by the Department of Energy's Office of Policy, Safety, 

and Environment on September 5, 1985, in a memorandum from Carmen Difiglio, 

calculated the internal rate of return for six typical types of business 

renewable energy projects. For wind, geothermal, small hydroelectric, and 

electricity produced from wood waste, the internal rate of return drops 

significantly when the tax credit is eliminated under current law and drops 

further under the President's Tax Proposal, due primarily to the elimination 

of the investment tax credit. Based on this information, the extension of 

the credit under H.R. 2001 would be expected to have an impact on the number 

of these types of projects undertaken. However, from the standpoint of 

Treasury losses, the effect of H.R. 2001 would likely be very small, as the 

data in Table 15 indicate that very few of these types of investments are 

undertaken by businesses. It is likely that many of these types of projects 

(in particular wind) are undertaken by limited partnerships and therefore 

are not accounted for in the business tax submissions because these tax 

credits are passed on to individuals. Because there are no known data on 

the extent of limited partnership filings, this factor is not considered in 

the analysis.

Alcohol Fuels

This section discusses the potential impact on the Treasury of the 

President's Tax Proposal with respect to its treatment of alcohol fuels, in 

comparison with current law. H.R. 2001 does not specifically address 

alcohol fuels; it can be presumed that they would be treated based on 

current law. Gasohol, a blend of ethanol and gasoline, is currently by far 

the most important segment of the alcohol fuels market, and, therefore, the 

segment with the most significant impact on Federal revenues.

Description of Tax Treatment of Alcohol Fuels. There are three major tax 

incentives provided under current law for the production and consumption of 

alcohol fuels:

(1) Excise tax exemptions for motor fuel blends : A 6-cent per gallon 

exemption on the Federal motor fuel excise tax is provided for 

gasohol (at least a 10-percent alcohol content). This provision 

requires that the alcohol be derived from a source other than 

petroleum, natural gas, or coal. The provision terminates after 

December 31, 1992.

(2) Alcohol fuel use tax credit: An income tax credit of 60 cents per 

gallon is allowed for alcohol used in gasohol mixtures. The 

credit drops to 45 cents per gallon for alcohol between 150 and 

190 proof. As with the excise tax exemption, the alcohol must be 

derived from a source other than petroleum, natural gas, or coal.

33
This provision also terminates after December 31, 1992, but may be 

carried forward for up to 15 years, but not to a tax year 

beginning after December 31, 1994. If the credit is taken, the 

excise tax exemption is not allowed.

(3) Motor fuel excise tax exemption: Special motor fuels consisting 

of at least 85 percent alcohol, derived from a source other than 

petroleum, natural gas, or coal, are eligible for a 9-cent-pergallon exemption from the Federal excise tax. Alcohol derived 

from natural gas (methanol) is eligible for a 4.5-cent-per-gallon 

exemption.

Under the President's Tax Proposal, the excise tax exemption on alcohol 

mixtures and alcohol fuels would terminate on December 31, 1985. However, 

the alcohol fuels use credit would be "grandfathered" for those production 

facilities completed before January 1, 1986, and for alcohol fuel sold 

before January 1, 1993. Facilities planned under the assumption of a tax 

exemption or credit would therefore not be penalized, but additional 

alcohol-production or blending plants would not receive a subsidy.

No specific mention is made of alcohol fuels in H.R. 2001. Consequently, 

this legislation would not affect current provisions if enacted.

Analysis of Proposed Tax Changes

This section concentrates on current law compared with the President's Tax 

Proposal. Enactment of H.R. 2001 is assumed to result in continuation of 

current law provisions as related to alcohol fuels.

From January 1, 1978, through March 31, 1983, gasohol was exempt from the 

4-cent-per-gallon motor fuels excise tax. From April 1, 1983, through 

December 31, 1984, gasohol was exempt from 5 cents of the 9-cent-per-gallon 

motor fuels excise tax. On January 1, 1985, the exemption was increased to 

6 cents per gallon. Table 16 shows annual gasohol sales from 1980 through 

1984, together with estimated losses to the highway trust fund as a result 

of the exemptions. The Federal Highway Administration, the source for the 

sales data in this table, only began publishing gasohol information in 1980. 

As the table shows, gasohol sales have increased substantially over the last 

5 years. Some of the increase may be attributed to improved reporting, as 

more States are separating gasohol sales from total gasoline in their 

submissions to the Federal Highway Administration. Nevertheless, the market 

for gasohol over this period was viable and growing, given the Federal 

subsidy (and the subsidies provided by the States).

Currently, nearly all gasohol marketers have chosen to take the excise tax 

exemption as opposed to the fuel use credit. This is probably due to the 

fact that the exemption is an immediate source of revenue, subtracted 

directly from excise taxes otherwise due, while the income tax credit is not 

available until the filing of income tax returns and must then be netted 

against taxes due (if any). Thus, the impact of the President's Tax

34
Proposal would be to transfer revenue losses due to alcohol fuels from the 

highway trust fund (recipient of motor fuels excise tax revenues) to the 

Treasury (recipient of income tax revenues). This transfer would occur 

because the President's Tax Proposal eliminates the excise tax exemption but 

does not eliminate the fuel use credit.

Table 16. Gasohol Sales and Federal Excise Tax Exemptions, 1980-1984

Federal Excise

Sales Tax Exemptions 

Year__________________(million gallons)_______(million dollars)

1980 .................... 497 20

1981 .................... 713 29

1982 .................... 2,259 90

1983 .................... 4,134 197

1984 .................... 5,178 259

Source: Sales—Federal Highway Administration.

Exemptions—Energy Information Administration estimates.

Even with the phaseout of favorable tax treatment, alcohol-blend use may 

rise in the future. Additional impetus for growth is the Environmental 

Protection Agency lead-phasedown regulations, which have increased the 

demand for alcohol as an octane-enhancer. Given the high price of alcohol 

(currently about $1.48 per gallon), its use is dependent upon the amount of 

its subsidy. However, as the demand for nonlead octane additives grows, the 

spread between alcohol and such other octane boosters as MTBE (methyl 

tertiary butyl ether) and toluene may decrease. How much the price of these 

substitutes will increase is not yet known, but to the extent that they do 

increase, the market for ethanol could improve even with reduced subsidies.

Future projections of gasohol sales are highly uncertain, given the limited 

nature of the data and the uncertainty surrounding future subsidies. 

However, based on several assumptions, a comparison of the losses under 

current law and the President's Tax Proposal can be made. Given the 

speculative nature of the projections, this comparison is considered 

preliminary at best. Table 17 gives estimated gasohol sales through 1992 

under both current law and the President's Tax Proposal. Under current law, 

two scenarios are provided: a low-growth and a high-growth scenario. The 

low-growth scenario assumes that gasohol sales increase at the same rate as 

motor gasoline consumption, or by about 1 percent a year through 1992. 

Under the high-growth assumption, gasohol sales are assumed to grow by 10 

percent per year.

35
Table 17. Projected Gasohol Sales and Revenue Losses, 1985-1992

Current Law

Low-Growth

Year

1986

1987

1988

1989

1990

1991

1992

Sales

(million

gallons)

5,230

5,282

5,335

5,388

5,442

5,497

5,552

Revenue

Losses

(million

dollars)

314

317

320

324

327

330

333

President's Tax Proposal

High-Growth

Sales

(million

gallons)

5,696

6,265

6,892

7,581

8,339

9,173

10,090

Revenue

Losses

(million

dollars)

342

376

414

455

500

550

605

Sales

(million

gallons)

5,500

5,500

5,500

5,500

5,500

5,500

5,500

Revenue

Losses

(million

dollars)

330

330

330

330

330

330

330

Highway trust fund losses. These losses reflect excise tax losses 

only. Net revenue losses could be lower because of increased income taxes 

due, to higher taxable income stemming from the reduction in excise taxes.

Treasury general revenue losses. These losses represent maximum losses 

in that all companies are assumed to be able to take the production credit 

in the years shown.

Under the President's Tax Proposal, gasohol sales are assumed to be flat at 

just above their 1985 levels through 1992. This is due to the elimination 

of the excise tax exemption, and of the alcohol fuel use credit, except for 

those facilities in operation before January 1, 1986. A factor for slightly 

increased utilization of existing capacity is included, together with 

assumed additional capacity brought on line in 1985.

As Table 17 indicates, under the current law, losses to the highway trust 

fund could be as high as $605 million by 1992, assuming 10-percent annual 

growth in gasohol sales and continuation of the 6-cent per gallon Federal 

excise tax exemption. This amount compares to general revenue losses of 

about $330 million under the President's Tax Proposal, assuming full 

utilization of the 60-cent per gallon ethanol tax credit and relatively flat 

sales of gasohol. These estimates do not take into account State tax 

treatment of gasohol, which could have effects opposite those of the Federal 

tax proposals. In the agricultural states of the Midwest, for instance, 

substantial pressure exists to offset any losses in the Federal subsidy to 

avoid adverse impact on farmers.

36
4. A COMPARISON OF TAX BENEFITS FOR CONVENTIONAL ENERGY SUPPLY 

WITH TAX BENEFITS FOR CONSERVATION AND RENEWABLES

This chapter compares the effects of H.R. 2001 on investments in energy 

conservation and renewable resource investments with the effects of the 

President's Tax Proposal on conventional oil and gas investments. This 

comparison is made because H.R. 2001 explicitly provides tax incentives for 

investments in energy conservation, while the President's Tax Proposal 

provides tax incentives for conventional oil and gas development. This 

chapter attempts to quantify the relative magnitude of these tax incentives. 

The method used to quantify the relative size of the subsidy consists of 

computing the change in the price of oil (or its equivalent) that would be 

necessary to make the energy investment without the subsidy as profitable as 

it would be with the subsidy. Table 18 summarizes the impacts on internal 

rates of return for "typical" oil and gas drilling prospects, comparing the 

profitability of each prospect under current law to that obtainable under 

the President's Tax Proposal.

Real internal rates of return on "typical" drilling prospects in the 

Williston Basin and Permian Basin would improve under the President's Tax 

Proposal, compared to current law, for most oil companies. The improved 

profitability would not be very substantial and would not extend to small 

independents. The latter group of companies currently benefits relatively 

more from provisions allowing write-offs for depleteable oil and gas 

investments (i.e., lease acquisition and other related costs). Because the 

President's Tax Proposal includes a phasing out of these provisions (with 

some exceptions), small independents would find drilling prospects like 

those depicted in Table 18 less attractive.

That the outcome of oil and gas projects under the President's Tax Proposal 

is generally a positive one is the net result of a number of changes implied 

in the President's Tax proposal, some of which tend to increase the profita 

bility of drilling prospects and some of which decrease profitability.

The source of the results provided on oil and natural gas projects is 

the Energy Information Administration, Analysis of the Impacts of the 

President's Tax Proposal on Major Sectors of the Energy Industry (August 

1985), Service Report), Chapter 2. The cited report was prepared in 

response to a request by Congressman John D. Dingell, U.S. House of 

Representatives, Chairman, Subcommittee on Oversight and Investigations of 

the Committee on Energy and Commerce.

37
Details on the impacts of particular proposals on oil and gas drilling can 

be found in an earlier tax study prepared by the Energy Information 

Administration. In general, however, it is the combined effect of lower 

corporate tax rates and certain indexing provisions relating to depreciation 

and depletion of oil and gas assets that more than compensates for tax 

increasing provisions, particularly the loss of the investment tax credit.

Table 18. Internal Rates of Return for Selected Oil and Gas Drilling 

Prospects: Current Law and President's Tax Proposal 

(Percent)

Current 

Law

President's

Tax 

Proposal

Assumed 

Average 

Wellhead 

Oil Price*

Equivalent 

Price Under 

The President's 

Tax Proposal

Williston Basin Project

Maj ors , 

Large Independents 

Small Independents

Permian Basin Project

8.2

8.5

11.9

8.8 

9.1 

9.1

27.00

27.00

27.00

27.64

27.54

24.64

Maj ors ,

Large Independents

Small Independents

11.7

12.0

15.2

13.2

14.2

14.2

27.00

27.00

27.00

27.90

28.33

26.41

This is the (constant) real oil price assumed in calculating the 

internal rates of return shown.

The equivalent price is the change in oil prices under current law that 

would have the same impact on rates of return as a change to the President's 

Tax Proposal.

°The term "Majors" refers to major integrated oil companies, which are 

for certain cost items allowed a less generous schedule of write-offs in oil 

and gas exploration and development.

Nonmajor oil companies with greater than 1,000 barrels per day average 

production of oil (and gas equivalents).

Nonmajor oil companies with less than 1,000 barrels per day of oil (and 

gas equivalents).

Op. cit.

38
In terms of equivalent prices, going from current law to the President's Tax 

Proposal would be the equivalent of an increase in real oil prices received 

by producers of $1 to $2 per barrel for oil companies other than small 

independents, depending on the project being considered. For small 

independents, the President's Tax Proposal is equivalent to a price 

reduction of about $0.50 to $2.50 per barrel. However, it is important to 

note that both the current law and the President's Tax Proposal have 

additional write-offs and taxes affecting oil and gas exploration and 

development that the energy conservation and renewable resource industries 

do not face. These additional write-offs mainly consist of intangible 

drilling costs and resource depletion, while the additional taxes consist of 

the Windfall Profit Tax and Federal and State taxes on petroleum products 

such as gasoline and diesel fuel. These factors have not been considered in 

the above analysis because they are unaffected by the proposals being 

analyzed, although they are nevertheless significant.

In Chapter 2, it was shown that the effect on typical conservation 

projections of going from a situation in which no conservation credit was 

allowed (i.e., current law after 1985 and President's Tax Proposal) to one 

in which a 25-percent credit was allowed (i.e., H.R. 2001) was equivalent to 

an increase in "avoided costs" (i.e., price of energy saved) to the 

consumer of about $12 per barrel of oil equivalent. In the case of the 

residential renewable energy tax credit, these figures are between $6 and 

$20 per barrel of oil equivalent, depending on when the project is started.

From Chapter 3, it was evident that the impact on business sector renewable 

energy investments of moving from current law to the President's Tax 

Proposal was decidedly negative. It was not possible to quantify the extent 

to which these types of changes would retard the development of renewable 

energy resources because of the lack of personal tax data. As mentioned 

earlier, many of these projects are undertaken by limited partnerships, with 

the tax credits being passed to individuals.

39

APPENDIX A. SUMMARY OF ENERGY TAX CREDITS

The Energy Tax Credits are divided into two main parts: (1) Residential 

Energy tax credits and (2) Business energy tax credits. Within each main 

part a comparison is made among current tax credit law, a congressional tax 

credit proposal to revise and extend the energy tax credit, and the 

President's Tax Proposal as it pertains to energy tax credits.

The first three sections describe the residential energy tax credits under 

current law, under H.R. 2001, and under the President's Tax Proposal, 

respectively. The last three sections discuss the energy tax credits for 

business under the same three sets of tax laws.

Residential Energy Tax Credit—Current Law

For the residential sector, there are two kinds of energy tax credits:

(1) credits for expenditures for conservation, and (2) credits for using 

renewable energy sources. These residential tax credits are discussed 

below.

Conservation. Current energy tax law allows a credit of 15 percent for up 

to a limit of $2,000 worth of conservation-related expenditures. Thus, the 

maximum credit that can be claimed for conservation expenditures is $300. 

Current law allows a minimum credit of $10.

The law defines energy-conservation expenditures as expenditures the taxpayer 

incurs on or after April 20, 1977, for installing or adding either insulation 

or other energy-conserving items in or on a dwelling. The dwelling must 

fulfill two requirements: (1) it must be a principal residence of the 

taxpayer, and (2) it must have been constructed before April 20, 1977. The 

energy-conservation equipment must also fulfill two conditions: (1) it must 

be new, and (2) it must have a minimum useful life expectancy of 5 years.

Conservation items are categorized in one of two forms: (1) insulation and

(2) other energy-conserving components. As defined by the Internal Revenue 

Service, insulation can be composed of any of the following materials: 

fiberglass, rock wool, cellulose, foam materials, urethane, vermiculite, 

perlite, and polystyrene. For tax purposes, the list of allowable 

conservation items excludes structural and decorative items like awnings, 

exterior siding, carpeting, and drapes. The category "other

U.S. Library of Congress, Congressional Research Service, 1982. An 

Economic Evaluation of Federal Tax Credits for Residential Energy 

Conservation. Washington, DC., p. 17.

41
energy-conserving components" includes devices such as replacement burners 

for furnaces; devices for modifying flue openings; electrical or mechanical 

ignition systems designed to replace a gas pilot light in furnaces; exterior 

storm windows and doors or thermal windows and doors; automatic-setback 

thermostats; caulking or weatherstripping for exterior windows or doors; 

meters that display the cost of energy usage; and energy-efficiency items 

that are specified by regulations.

Renewable Energy Sources. Current tax law allows a tax credit of 40 percent 

for up to $10,000 of expenditures related to the use of renewable energy 

sources. Under this law, the maximum energy credit that can be claimed is 

$4,000; the minimum credit allowed is $10. The term "renewable-energysource expenditures" refers to any expenditures a taxpayer made on or after 

April 20, 1977, for renewable-energy-source property installed for a 

dwelling that (1) is located in the United States, and (2) is the taxpayer's 

principal residence. This credit is not limited to houses built before 

1977.

Credit for renewable energy sources includes not only the cost of equipment 

but also (1) labor; (2) other costs of preparing, assembling, or installing 

for the first time the renewable-energy-source property; and (3) expendi 

tures for an onsite well drilled to tap geothermal deposits. Excluded from 

the list of allowable expenditures are costs for storage mediums not 

primarily used to store energy (e.g., swimming pools).

Under current law, renewable-energy-source property is defined as equipment 

or technologies, installed for a dwelling, that transmit or use any of the 

following types of energy: wind energy, solar energy, energy from 

geothermal deposits, or other forms of renewable energy specified by 

regulations to provide space heating, space cooling, hot water, or elec 

tricity. The Energy Tax Act originally allowed credits only for providing 

hot water. The Crude Oil Windfall Profits Tax Act broadened the provision 

to include the generation of electricity, thus allowing photovoltaics to be 

included under the category of solar equipment.

Properties that do not qualify for the renewable-energy tax credit are: 

(1) most passive solar systems, which usually either (a) have a dual 

function, or (b) are structural components of a dwelling (solar roof panels 

included under the Crude Oil Windfall Profits Tax Act amendment are the only 

exception); and (2) wood-burning stoves.

Parts of current law apply to energy credits for both conservation and 

renewable sources. Year-to-year carryover is one of these aspects. If all 

of the allowable credit is not taken in a particular year, the excess credit 

may be carried over to the next taxable year. If the maximum allowable 

credit has not yet been used, such excess credit may be claimed through 

December 31, 1987.

Another aspect of the law that applies to expenditures for both conservation 

and renewable-energy sources consists of four limitations on the amount of 

available credit. First, the amount of credit is reduced by other tax

42
credits that the taxpayer must claim before claiming the residential energy 

tax credit. Second, the amount of credit available under the Energy Tax Act 

is limited by the availability and amount of alternative governmental 

subsidies for conservation-related home improvements. Third, credit can be 

claimed only for residence in one dwelling (although a taxpayer can claim 

maximum credit if he moves to a new dwelling that he then retrofits). 

Fourth, credit refunds are precluded because the credit is limited to the 

extent of the taxpayers' tax liability. Under the current law, the tax 

credits for conservation and renewable energy sources for residences are 

scheduled to expire on December 31, 1985.

Residential Energy Tax Credit—H.R. 2001

The treatment of tax credits for residential energy in H.R. 2001 is 

subdivided into a discussion of its provisions on conservation and its 

provisions on renewable-energy sources.

Conservation. This bill would increase the energy-conservation credit 

available for conservation-related expenditures from 15 percent to 25 

percent. However, maximum expenditures allowed for these improvements would 

decrease from $2,000 to $700. Under this bill, the maximum allowable tax 

credit would decrease from the current $300 to $175. The minimum tax credit 

would remain at $10. H.R. 2001 also introduces an income ceiling: The 

energy-conservation tax credit could not be claimed by any taxpayer with an 

adjusted gross income of more than $30,000 for the taxable year.

Most of the equipment classified as allowable conservation items in the 

current law is also included in H.R. 2001. The one point of divergence is 

that in H.R. 2001, storm doors or thermal doors are removed from the list of 

allowable items.

Renewable-Energy Sources. Under H.R. 2001, the primary changes in 

residential energy credits for renewable energy sources would be in the 

areas of tax-credit percentage, the carryover limitations, and the 

expiration dates.

(a) Tax-Credit Percentage—The proposed credit percentages for

renewable energy sources differ by type of energy source and by 

taxable year. Table 18 shows the percent of energy tax credit 

available for renewable energy sources by year and by type of 

energy. The bill proposes 35 percent of solar-energy expendi 

tures as the initial allowable amount of credit, beginning in 

1986. This credit then decreases by 5 percent a year to 15 

percent in 1990 and is phased out the following year. Credit for 

wind-energy expenditures begins at 35 percent in 1986 and 

decreases by 5 percent a year to 25 percent in 1988, after which 

time, it would be phased out. Credit for geothermal-energy 

expenditures begins at 40 percent in 1986 and decreases by 

10 percent each year to 20 percent in 1988. (The bill does not 

specify when the geothermal credit would be phased out.)

43
H.R. 2001 would exclude solar energy from photovoltaics from the 

phaseout schedule shown in Table 19. Under the House bill, the 

credit available for photovoltaics would remain at 40 percent. 

Most expenditures for renewables would not be allowed to exceed 

$10,000. Two forms of renewable energy deviate from this 

ceiling: solar hot-water systems and wind property. For wind 

property, credit would be allowed for up to $20,000 of expendi 

tures. However, for heating water by solar energy, credit would 

be allowed only up to $6,000 of expenditures.

(b) Carryover Limitations—Another area in which H.R. 2001 differs 

from current law is in the number of years a taxpayer can carry 

over excess credit. After December 31, 1990, excess credit for 

expenditures attributable to wind renewable-energy resources, 

geothermal renewable-energy resources, and energy conservation 

may not be carried over to the next taxable year. Excess credit 

for expenditures attributable to solar renewable-energy resources 

may not be carried over to any taxable year after December 31, 

1992.

(c) Expiration Dates—Under H.R. 2001, credits for conservation 

expenditures and for wind and geothermal expenditures would 

expire December 31, 1988. Credits for solar energy would expire 

December 31, 1990.

Table 19. Percent of Energy Tax Credit Available for Renewable Energy 

Sources by Year and Type of Energy Under H.R. 2001

For Taxable 

Year Beginning

1986 .............

1987 .............

1988 .............

1989 .............

1990 .............

Post-1990 ........

Solar Energy

35

30

25

20

15

0

Wind Energy

35

30

25

*o

Geothermal 

Energy

40

30

20

*For 1989 and thereafter.

A new requirement of H.R. 2001 is that solar-energy systems providing space 

heating, space cooling, or hot water would have to meet the quality 

standards of a recognized organization. The bill also removes the restric 

tions on the geothermal temperature of systems that may qualify.

Similar to current law, parts of H.R. 2001 apply to both conservation and 

renewable-energy sources. For example, the dwelling must be located in the 

United States, it must be the taxpayer's principal residence, and the

44
expenditures associated with either conservation or renewables must have 

occurred on or after April 30, 1977. Other limitations cited in the 

section, "Current Law," remain the same in H.R. 2001, except for the 

income-ceiling limitation discussed under the H.R. 2001 subsection 

"Conservation," above.

Residential Energy Tax Credit; "The President's Tax Proposals to the 

Congress for Fairness, Growth, and Simplicity"

Under the President's proposal for tax simplification, the residential 

energy tax credits for conservation and renewable energy sources would be 

allowed to expire on December 31, 1985. They would not be renewed, although 

carryover of any unused credits would continue through 1987, as under 

current law.

Business Energy Tax Credits—Current Law

Under current law, energy property can qualify for the Business Energy 

Investment Tax Credit by meeting certain requirements set forth in the 

Energy Tax Act of 1978 and the Crude Oil Windfall Profit Tax Act of 1980. 

There are two major classes of property: (1) property that conserves energy, 

and (2) property that uses alternative energy sources (including renewable 

energy) and property that uses alternative technologies. Each class has its 

own regulations, expiration dates, and allowable extensions for projects 

that qualify under the affirmative commitment rules. Affirmative commitment 

rules apply to projects requiring 2 or more years for completion, if: (1) 

all the engineering studies for a project are completed and all the 

necessary permits are filed prior to January 1, 1983; (2) binding contracts 

for 50 percent of specially designed equipment occur before 1986; and (3) 

the project is completed and operating prior to 1991.

Conservation. Current law includes three types of energy-conservation 

property for the Business Energy Investment Tax Credit: (1) specially 

defined energy property; (2) cogeneration equipment; and (3) intercity 

buses. The existing law allows a 10-percent business tax credit for each of 

the three types of conservation property.

"Specially defined energy property" includes: recuperators, heating wheels, 

heat exchangers, waste-heat boilers, heat pipes, automatic energy-control 

systems, turbulators, and preheaters, combustible-gas recovery systems, 

economizers, modifications to alumina electrolytic cells and to chloralkali 

electrolytic cells, and any property specified by the Secretary of the 

Treasury by regulations that, when installed in an existing industrial or 

commercial facility, would reduce the amount of energy consumed in the 

industrial or commercial process. (Energy Tax Act, Crude Oil Windfall 

Profits Tax Act) Any items or parts of an item of the above list that the 

taxpayer can prove to be necessary are also eligible for the Business Energy 

Investment Tax Credit. Current law stipulates that specially defined energy 

property must be used in connection with an industrial or a commercial 

process only. This stipulation restricts using the tax credit for a 

business activity or facility that does not include some type of process.

45
Hence, conservation items used in retrofitting a building are usually 

excluded from the Business Energy Investment Tax Credit. The expiration 

date for tax credits for specially defined energy property was December 31, 

1982; however, under the affirmative-commitment rules, all items (except 

chloralkali electrolytic cells) included in the list can qualify for credit 

through December 31, 1990, if they are part of a long-term project.

The second category of energy-conservation property—cogeneration equipment— 

is defined by the Crude Oil Windfall Profits Tax Act amendment as any 

industrial or commercial property that is an integral part of a system that 

uses the same fuel to simultaneously produce both electricity and steam heat 

or other forms of energy besides electricity. To qualify for the credit, an 

industrial or commercial facility has to meet two requirements: (1) it had 

to produce either electricity or a qualified form of energy as of January 1, 

1980, and (2) it has to increase its capacity to produce either electricity 

or a qualified form of energy through cogeneration. Under current law, 

cogeneration equipment excludes (1) property that is part of a system using 

oil or natural gas (or a product of the two) as a fuel for any purpose other 

than startup, flame control, or backup, and (2) property that derives more 

than 20 percent of its yearly energy for such a system from oil or natural 

gas (or a product of the two). (Crude Oil Windfall Profits Tax Act)

The expiration date for credits for cogeneration equipment was December 31, 

1982. Under the affirmative-commitment rules, this credit can be extended 

through 1990.

The third type of conservation property that can qualify for a business tax 

credit is intercity buses. The expiration date for this credit is December 

31, 1985. There is no extension for intercity buses under the affirmativecommitment rules.

Alternative Energy Sources (Including Renewables) and Alternative 

Technologies. This classification is subdivided into several types of 

property and technology. Current energy tax laws provide businesses with a 

series of tax credits designed to stimulate the use of alternative energy 

sources and technologies. Included in the definition of "alternative energy 

sources" are renewable energy sources. The following types of alternative 

energy sources or energy technologies are included and described in current 

energy tax law: (a) alternative-energy property; (b) solar and wind-energy 

property; (c) hydroelectric generating property; (d) biomass property; and 

(e) recycling equipment, shale-oil equipment, and equipment for producing 

natural gas from geopressurized brine.

2 Library of Congress, Congressional Research Service, 1985, An Explanation

of the Business Energy Investment Tax, Washington, DC, p.28.

46
Under current law, the percent of tax credit allowed and the time period of 

eligibility vary by the type of alternative energy and the category of 

renewable energy.

(a) Alternative-Energy Property—Current law allows a 15-percent tax 

credit for geothermal and ocean thermal properties and a 

10-percent credit for all other types of alternative-energy 

properties. Alternative-energy property is defined as equipment 

designed to produce alternative types of energy. Equipment 

qualifies if it uses or converts an alternative substance (i.e., 

coal, wood, peat, wastes, landfill, sewage, sludge, agricultural 

crops, and crop residues) into synthetic fuel or feedstocks. 

Other types of qualifying equipment are coke-ovens, pollutioncontrol equipment, and collateral equipment. For geothermal and 

ocean thermal properties, the expiration date is December 31, 

1985. There is no extension under the affirmative-commitment 

rules for these two types of property. Credit for other types of 

alternative energy-source equipment can be extended from 

December 31, 1982, to 1990 by the affirmative-commitment rules.

(b) Solar and Wind Energy Property—Current law allows a 15-percent 

credit for expenditures for energy-producing equipment that uses 

solar or wind power. Such equipment is defined as any equipment 

that uses solar or wind energy to generate electricity, to provide 

space heating or space cooling in a structure, to provide hot 

water for use in a structure, or to provide solar process heat. 

(Energy Tax Act, Crude Oil Windfall Profits Tax Act) Under this 

definition, photovoltaic equipment can qualify for the tax credit. 

Current energy law limits the type of solar equipment that can 

qualify for the credit: the equipment must be used in active 

(rather than passive) solar systems, and the equipment can not use 

another source of energy as well as solar power.

Wind-energy equipment is equipment that generates electricity, 

that provides hot water, or that is used for heating or cooling a 

structure. Business tax credits for wind or solar energy expire 

December 31, 1985, with no extensions through 

affirmative-commitment rules.

(c) Hydroelectric Generating Property—Current tax law specifies an 

11-percent energy credit for hydroelectric generating equipment 

that yields up to 25 megawatts of power. However, if the 25 

megawatt limit is exceeded, only a portion of the 11 percent 

credit can be claimed. As the generating capacity increases to 

125 megawatts, the amount of credit available decreases to zero. 

Hydroelectric property is defined as either (1) equipment that

3 Ibid p.12.

47
increases the capacity to generate electricity by means of water 

at a qualified hydroelectric site or, (2) a structure that houses 

the equipment. (Crude Oil Windfall Profits Tax Act) Although 

credit for hydroelectric power expires December 31, 1985, if a 

business applied for long-term investments before 1986, the credit 

could be extended through December 31, 1988.

(d) Biomass Property—Biomass is defined as any organic substance

except oil, natural gas, and coal or their products. Current tax 

law allows a 10-percent energy credit for any equipment 

(including equipment used in preparing and transferring biomass 

and in storing synfuels) that either uses biomass or converts 

biomass into a synfuel or alcohol fuel. The credit for biomass 

property expires December 31, 1985. Under the current tax law, 

no extension is available.

(e) Recycling Equipment, Shale-Oil Equipment, and Equipment for 

Producing Natural Gas from Geopressurized Brine—Recycling 

equipment is any equipment used exclusively for sorting and 

preparing solid waste for recycling, any equipment used in 

recycling solid waste, or any equipment used in converting solid 

waste into a fuel, into a usable form of energy such as steam and 

electricity, or into hot water. Recycling equipment does not 

include any equipment used in a process after the first 

marketable product is produced or any equipment used to reduce 

waste from iron or steel to the molten state. Current law 

excludes equipment that uses more than 10 percent virgin material 

in the recycling process. (Energy Tax Act)

Shale-oil equipment is restricted to equipment for producing or extracting 

oil from oil-bearing shale. (Energy Tax Act) Equipment for producing 

natural gas from geopressured brine includes equipment used in separating 

the natural methane gas from the brines and purifying the gas. To receive 

credit for equipment used for producing natural gas from brine, (1) a 

business must meet verification guidelines of the Natural Gas Policy Act of 

1978, and (2) a well must have been drilled between September 30, 1978 and 

January 1, 1984.

A 10-percent tax credit is now available for recycling equipment, shale-oil 

equipment, and equipment for producing natural gas from geopressurized 

brine.

The expiration date for recycling equipment, shale-oil equipment, and 

equipment for producing natural gas from geopressurized brine was 

December 31, 1982. For long-term projects, the expiration date can be 

extended to 1990 if the equipment is used either to produce natural gas from

4 Ibid. pp 20-21.

48
geopressurized brine or to extract oil from shale. The expiration date for 

recycling equipment can be extended for long-term projects if the equipment 

was added after 1982.

The total amount of energy tax credit available for both conservation and 

alternative fuels is the sum of credit allowed under the Business Energy 

Investment Tax Credit plus a 10-percent investment credit available to all 

businesses, as well as a 0.75-percent credit if an employer contributes to 

an employee stock-ownership plan.

The amount of excess energy credit a business can carry over from one year 

to the next is determined by adding the amounts of five credits: the energy 

tax credit, the investment tax credit, an alcohol-fuel credit, an employee 

stock-ownership plan credit, and a targeted-jobs credit. The total 

carryover is limited to 100 percent of the first $25,000 and 85 percent of 

the remaining tax liability of the business.

To qualify for energy tax credits, businesses must comply with more 

regulations and limitations than those required for residences. These 

limitations include affirmative-commitment rules, at-risk rules, 

double-dipping rules, recapture rules, utility regulations, and Internal 

Revenue Service statutes. (For a discussion of the specific limitations, 

see: Library of Congress, Congressional Research Service, 1985. An 

Explanation of the Business Energy Investment Tax Credits.)

Business Energy Tax Credit—H.R. 2001

This section discusses the changes in the current business energy tax 

credits proposed in H.R. 2001. These changes have only a minimal affect on 

the energy tax credit that businesses can receive for using conservationrelated equipment. However, the regulations do affect the tax credit for 

renewable energy sources. H.R. 2001 proposes to (1) change the amount of 

credit that can be claimed, (2) further define some renewable energy 

sources, and (3) extend the expiration date.

Under H.R. 2001, the amount of credit that can be claimed by businesses for 

renewable energy sources varies by the type of renewable energy, by the year 

and by the type of equipment. For example, the allowable tax credit would 

depend on whether the solar equipment was low-temperature (below 300 degrees 

Fahrenheit) or high-temperature. The tax value for low-temperature solar 

property would remain at 15 percent. However, for high-temperature solar 

equipment and photovoltaics, the tax value would increase from 15 percent of 

expenditures to 25 percent of expenditures.

The available amount of credit for wind-energy equipment or for equipment 

pertaining to biomass varies by year, as shown in Table 20.

49
Table 20. Percent of Energy Tax Credit Available for Wind-Energy and 

Biomass Equipment by Year Under H.R. 2001

Year Beginning___________________________________Percent

1986 ................................................. 10

1987 ................................................. 10

1988 ................................................. 5

Post-1988 ............................................ 0

Available credit for geothermal or ocean thermal energy, or for 

hydroelectric generation, would remain at the current level of 10 percent, 

10 percent, and 11 percent, respectively. H.R. 2001 would amend current tax 

law to include wood-gasification equipment and anaerobic-digestion equipment 

among types eligible for the credits.

Under H.R. 2001, the expiration date for credit is extended through 1988 for 

the following renewables: geothermal, wind, and biomass. Credit could be 

extended through 1990 by the affirmative-commitment rules only for 

geothermal-energy property. Credit for hydroelectric generating equipment 

could be extended through 1990 instead of expiring December 31, 1985, if an 

application for a permit, license, or license exemption is filed with the 

Federal Energy Regulatory Commission before January 1, 1986. Credit for 

ocean thermal property would expire in 1990, with no extensions. Credit for 

solar-energy property (including photovoltaics) would expire in 1990 but 

could be extended to 1993 under the affirmative-commitment rules.

Business Energy Tax Credit—The President's Tax Proposals to the Congress 

for Fairness, Growth, and Simplicity

The President's tax proposal would allow all renewable-energy investment tax 

credits for businesses to expire in 1985, with the affirmative-commitment 

rules applying only to credit available for hydroelectric generation. Tax 

credits for conservation and other alternative energy sources would expire 

on December 31, 1985, although the current extensions under the 

affirmative-commitment rules would continue to apply.

50
APPENDIX B. DETAILED ASSUMPTIONS AND CALCULATIONS FOR RESIDENTIAL 

ENERGY TAX CREDITS UNDER H.R. 2001

Residential Conservation Projects

Participation: It was assumed that some proportion of those who would take 

the conservation tax credit would undertake conservation measures because of 

the availability of the tax credit. Survey results indicate that for 

conservation projects, this proportion may have been on the order of 15 

percent in the past. For simplicity, it was assumed that the proportion of 

tax credit claims representing credit-induced conservation is proportional 

to the effective credit rate (i.e., average credit taken divided by average 

project cost). Although the cited survey results seem to suggest a 

proportionality factor of about 1.0 for conservation projects, no particular 

significance is attributed to this. Rather, it is assumed that some 

reasonable range for the proportionality factor brackets the degree of 

consumer responsiveness to the tax credit with an acceptably high 

probability. Values of 0.5, 1.0, and 1.5 are assumed for low, medium, and 

high responsiveness cases for residential conservation projects.

For each assumption about incremental participation (i.e., for each of the 

three assumed proportionality factors), a baseline number of individuals who 

claimed the conservation tax credit, but who would have made the associated 

conservation investments anyway, was calculated for 1979 through 1983 from 

the Internal Revenue Service data. These baseline numbers were trended 

through 1988 at the rate of decline derived from the values calculated 

between 1979 and 1983. The reasons for the underlying downward trend are 

presumed to be that:

(1) As more and more retrofits are made, fewer of the eligible

residences (i.e., built prior to 1978) would need retrofits and 

more individuals would have used up the maximum credit

See H. Craig Petersen, "Survey Analysis of the Impact of Conservation 

and Solar Tax Credits" (draft), Utah State University, Logan, Utah, 1982. 

Results from the Energy Information Administration's Residential Energy 

Consumption Survey indicate that between 10 and 20 percent of individuals 

claiming residential conservation tax credits were apparently induced to 

undertake conservation measures because of the tax credit in 1983. (See 

Table 7 in Chapter 2 of this report).

51
(2) Falling real fuel prices in recent years have changed the expected 

return on conservation investments.

The following summarizes the method for calculating baseline participation 

and credit-induced participation (termed incremental participation):

IP = k x TP (1) 

TP = BP + IP (2)

Thus:

IP = kxBP/(l-k) (1)' 

k = PxR (3)

where:

IP = Incremental participation

BP = Baseline participation (calculated for three assumed

proportionality factors for 1979-1983; then, based on these 

calculations, trended through 1988) 

TP = Total participation

P = Proportionality factor (0.5, 1.0, 1.5) 

R = Effective credit rate (15 percent currently).

For the period 1979 through 1983, during which total participation was 

known, IP was calculated using formula (1). Baseline participation (BP) was 

then calculated for this period by subtraction. These baseline numbers were 

trended, at the 1979 to 1983 rate, through 1988.

Given the trended numbers for BP for the period 1984 to 1988, equations (l) f 

and (2) were used to calculate IP (needed to calculate incremental energy 

savings) and TP (needed to calculate total Treasury losses due to the 

credit) for 1986 to 1988. The period of greatest interest here is the years 

1986 through 1988, during which time H.R. 2001 would be in effect.

Table 21 summarizes the data and calculated values for participation 

(households) in residential conservation tax credit claims under H.R. 2001. 

The results in Table 21 yield ranges for assumed participation rates (credit 

claims) for residential conservation prior to accounting for the income 

limitation (maximum of $30,000 per year gross income for eligibility). It 

was assumed (based on 1983 Internal Revenue Service data) that 50 percent of 

the households otherwise eligible for and inclined to use the conservation 

tax credit would become ineligible under the income limitation. This 

assumption was applied for all 3 years (1986, 1987, and 1988) of the credit 

extension under H.R. 2001. Therefore, the number of households claiming 

credits for residential conservation measures shown in Table 20 for 1986 to 

1988 was cut in half for the analysis. Thus, for the calculations in 

Chapter 2, a cumulative range of 1.7 million to 2.0 million total claims 

was assumed for the period 1986 through 1988.

52
Table 21. Participation Rates in Residential Conservation Energy Tax Credit Claims 

Under H.R. 2001 Before Application of the Income Limitation 

(Millions of Claims)

Year

Total Participation 

P=0.5 P=1.0 P=1.5

Assumed Baseline

Participation 

P=0.5 P=1.0 P=1.5

Assumed Incremental

Participation 

P=0.5 P=1.0 P=1.5

(percent)

1979

1980

1981

1982

1983

15

15

15

15

15

4.8

4.6

3.7

3.0

2.3

(actual)

4.8

4.6

3.7

3.0

2.3

(calculated)

4.8

4.6

3.7

3.0

2.3

4.4

4.3

3.4

2.8

2.1

4.1

3.9

3.1

2.6

2.0

3.7

3.6

2.9

2.3

1.8

(calculated)

0.4

0.3

0.3

0.2

0.2

0.7

0.7

0.6

0.4

0.3

1.1

1.0

0.8

0.7

0.5

(calculated)

1984

1985

15

15

1.9

1.6

1.9

1.6

1.9

1.6

(trended)

1.7

1.5

1.7

1.4

1.5

1.2

(calculated)

0.2

0.1

0.2

0.2

0.4

0.4

Ul

(calculated)

1986 25 1.38 1.53 1.65

1987 25 1.14 1.26 1.38

1988 25 0.95 1.05 1.04

(trended)

1.21 1.15 1.03 

1.00 0.95 0.86 

0.83 0.79 0.71

(calculated) 

0.17 0.38 0.62 

0.14 0.31 0.52 

0.12 0.26 0.43

For the period 1979 through 1983, incremental participation was calculated by the formula 

IP = kxTP, where TP = total participation, IP = incremental participation, and k=PxR, where 

R = credit rate, and P = proportionality factor (assumed). Baseline participation (BP) was 

calculated by subtraction.

Baseline participation under the various proportionality assumptions was trended through 

1988 at the compound rate of change derived from the 1979 to 1983 calculated values for BP. 

Total participation and incremental participation were then calculated for the period 1984 

through 1988 as follows: IP = kxBP/(l-k), IP = incremental participation, BP = baseline 

participation, and k=PxR, where R = credit rate, and P = proportionality factor (assumed). 

Total participation was then calculated by adding the resultant IP to the trended values of 

BP.
Project Profile

Table 22 summarizes the assumptions about the "typical" project undertaken 

for residential conservation during the period 1986 to 1988. In the 

analysis, everyone is assumed to undertake a "typical" project and spends 

the same amount on installation. Thus, since relatively little is known 

about the actual distribution (i.e., variance) in project expenditures, the 

variance in expenditures per household is assumed to be zero. Furthermore, 

everyone is assumed to enjoy the maximum effective credit rate on the 

conservation project, which is 25 percent under H.R. 2001. Because the 

average project costs are assumed to be $700 in 1984 dollars (approximately 

the observed average, based on Internal Revenue Service data from 1978 to 

1983), and because the maximum expenditure allowed under H.R. 2001 is $700 

(nominal) for 1986, the effective rate is very likely an overestimate. 

Inflation and the existence of an "upper tail" in the distribution of 

expenditures would tend to make the effective rate less than 25 percent. 

Estimates indicate that, assuming a uniform distribution of expenditures, 

the effective rate would be approximately 20 percent under H.R. 2001. 

However, the higher estimates for the effective value (and the related 

assumption of zero variance) serve to produce estimates of Treasury losses 

that tend to be upper limits, given all other assumptions.

Table 22. Profile of Residential Energy Conservation Project Assumed 

for Analysis of H.R. 2001

Assumptions____________________________________________Values

Pre-Retrofit Energy

Consumption for Heating

(MMBtu/Household) ................................... 80

Project Costs

(1984 dollars) ....................................... 700

Energy Price—Constant 

Real Price Case 

(1984 dollars per million Btu) ....................... 6.00

Energy Savings Rate

(percent of pre-retrofit total) ........................ 10,15,20

Project Life (Years) ................................... 12

It should be noted that the typical conservation project assumed for this 

analysis is a household which uses natural gas for space heating. The 

pre-retrofit energy consumption figure of 80 million Btu per year is derived 

from Energy Information Administration estimates for gas use in space

54
2 heating prior to 1980. Thus, although many of those households that would

make conservation investments under H.R. 2001 would not have gas-fired heat, 

for this analysis it is assumed that all use gas. This assumption avoids 

the problem of aggregating across fuels explicitly in deriving an aggregate 

fuel-savings number. Moreover, the project evaluations are not complicated 

by the problem of delivered prices for different fuels, partially reflecting 

different end-use efficiencies. In addition, this approach avoids the 

rather difficult problem of converting electricity into equivalent barrels 

of oil in a meaningful way.

The $700 project cost is approximately the average price observed between 

1978 and 1983 using IRS data on conservation credit claims. The energy 

savings rate of 10 to 20 percent was taken from results found in an 

evaluation by the Energy Information Administration of the Department of 

Energy's Low-income Weatherization Program.

In that study, the average energy savings for surveyed households installing 

insulation and storm windows was 12 percent of total energy consumed. The 

average gas-heated house under the weatherization program experienced 11- 

percent savings. Assuming that energy for space heating is two-thirds of 

total energy consumed, these figures translate into a saving of 15 or 16 

percent.

It should be noted that potential savings for space cooling are not 

accounted for in this analysis. Typically, this would involve taking into 

account electricity used for compressors and fans in air conditioning units. 

However, where significant fuel use for space heating is found, as in the 

typical project for this analysis, relatively little energy is used for air 

conditioning. In any case, the high energy savings case might be thought of 

as a possible means for looking at the effect of including space cooling 

energy savings in the analysis.

2 See Energy Information Administration, Residential Energy Consumption

and Expenditures by End Use for 1978. 1980, and 1981, DOE/EIA-0458 (1984), 

Tables 3, 15, and 27. The average for gas-heated houses built prior to 1978 

was about 85 million Btu per year. Because of somewhat higher gas prices 

since 1980, 80 million Btu was assumed to be the appropriate consumption 

level in 1986.

3 See Energy Information Administration, Weatherization Program

Evaluation, Service Report SR-EEUD-84-1 (August 1984), pp. 21-25. The 

percentage energy savings reported in this report were based on total energy 

consumption, and were adjusted to space-heating savings only by assuming a 

share in total energy of from 50 to 67 percent for space heating.

55
Residential Renewable Projects

Participation. A method completely analogous to that for conservation 

projects was employed to estimate incremental participation in residential 

renewable projects. Although no evidence was available as to past 

responsiveness to the residential renewable credit per se, it was assumed 

that, in general, the credit probably plays a larger role in inducing 

individuals to undergo such projects. This assumption is related to the 

fact that very high capital costs are involved in installing residential 

solar units, relative to the value of potential energy savings. Therefore, 

a range for the proportionality factor for residential renewable projects of 

1.0 to 2.0 was assumed. (For this analysis, all residential renewable 

projects are assumed to be installation of solar hot water heating units).

Internal Revenue Service data show that, from the beginning of the 

residential renewable credit program in 1978 to 1981, credit claims 

increased rapidly (Table 23). However, by 1982, claims leveled off and 

dropped significantly in 1983. For this analysis, it was assumed that 

baseline participation in residential renewable credit claims will remain at 

the 1983 level through 1990. Table 22 summarizes the participation 

assumptions for residential renewable credits through 1990 under H.R. 2001.

Project Profile

Table 24 summarizes the assumptions about the "typical" project undertaken 

for residential renewables utilized in this analysis. As was the case for 

conservation, everyone is assumed to undertake a typical project, spending 

the same amount on the investment and all receiving the maximum allowable 

credit. Since the average project cost is assumed to be $4,000 (1984 

dollars) and the maximum expenditure allowed is $6,000 under H.R. 2001, it 

is relatively safe to assume that everyone receives the maximum credit. 

Although the analysis mainly examines the case of a solar unit displacing 

natural gas, an alternative profile is provided in Table 23 for a solar unit 

displacing electricity.

Calculations

Table 25 summarizes the nature of the key calculations made in the 

residential energy credit analysis. Internal rates of return were 

calculated using the INTRR function contained in the Statistical Analysis 

System (SAS) software package available at the computer installation of the 

Energy Information Administration. The information in Table 24 applies 

generically to both conservation and renewables projects.

56
Table 23. Participation Rates in Residential Renewable Energy Tax Credit 

Claims Under H.R. 2001 

(Thousands of Claims)

Year R

Total

Part ic ipat ion 

P=1.0 P=2.0

Assumed 

Baseline 

Participation 

P=1.0 P=2.0

Assumed

Incremental

Participation

P=1.0 P=2.0

1979

1980

1981

1982

1983

(percent)

40

40

40

40

40

(actual)

77

155

225

229

169

77

155

225

229

169

gi (calculated)

46

93

135

137

101

15

31

45

46

34

a

(calculated)

31

62

90

92

68

62

124

180

137

135

(calculated)

1984

1985

40

40

169

169

169

169

(assumed)

101

101

34

34

(calculated)

68

68

135

135

1986

1987

1988

1989

1990

35

30

25

20

15

(calculated) 

156 113 

144 85 

134 68 

126 57 

119 49

(assumed) 

101 34 

101 34 

101 34 

101 34 

101 34

(calculated) 

55 79 

43 51 

33 34 

25 23 

18 15

For the period 1979 through 1983, incremental participation was 

calculated by the formula IP=kxTP, where TP = total participation, IP = 

incremental participation, and k=PxR, where R = credit rate and P = 

proportionality factor (assumed). Baseline participation (BP) was 

calculated by subtraction.

Baseline participation under the various proportionality assumptions 

was held constant for 1984 through 1988 at the calculated 1983 levels. 

Total participation and incremental participation were then calculated for 

the period 1984 through 1988 as follows: IP = kxBP/(l-k), IP = incremental 

participation, BP = baseline participation, and k=PxR, where R = credit 

rate, and P = proportionality factor (assumed). Total participation was 

then calculated by adding the resultant IP to the assumed values of BP.

57
Table 24. Profile of Residential Renewable Energy Project Assumed 

for Analysis of H.R. 2001 

(Solar Hot Water Heater)

Values

Assumptions____________________________________Gas____Electricity

Expected Energy Consumption 

Without Solar Installation 

(MMBtu/Household) ............................. 26.7 20.0

Project Costs

(1984 dollars) ................................. 4,000 4,000

Energy Price—Constant 

Real Price Case 

(1984 dollars per million Btu) ................. 6.00 19.62

Energy Savings Rate

(percent of expected consumption

without solar installation) ................... 65 65

Projet Life (Years) .............................. 12 12

a

^Refers to solar units that displace natural gas. 

Refers to solar units that displace electric.

58
Table 25. Summary of Formulae and Variable Definitions for Residential 

Energy Tax Credit Analysis

Calculations

t+T (H xdxpxExs)

DES;: 

^ 

= ______ 

/ ^ i~r\ n /* \ £ 

V

_j (t-1986) ^ (j-t) 

(1+r) j-t (1+r)

i

° (total) = /_ f DES°

t=1986

n Y (H x C. x d) 

PVRU (total) = ——

(t-1986) 

t=1986 (1+r)

Variable and Parameters

H = Number of households using a particular conservation credit, period t

C = Assumed average investment cost of a particular conservation measure, 

period t

p = Assumed value (range) of proportionality factor for participation

s = Assumed value (range) of percentage(s) for energy savings for a 

particular conservation activity

E = Average baseline per-household energy consumption for those claiming 

the energy tax credit

d = Credit taken as a percent of total investment cost

r = Discount rate

T = Average project life

t = Year tax credit is taken

Y = Final year credit is available

DES = Discounted value in 1986 of cumulative incremental energy savings 

due to credit extension for conservation renewable measures taken 

in year t

DES = Discounted value in 1986 of total cumulative energy savings due to 

credit extension

PVR = Present value in 1986 of Treasury losses incurred due to credit 

extension.

59

APPENDIX C. DETAILED REPORTS ON ESTIMATES OF INCREMENTAL ENERGY 

SAVINGS AND TREASURY LOSSES UNDER H.R. 2001

This appendix provides detailed reports of incremental energy savings 

estimates and treasury losses for residential conservation and renewable 

projects undertaken under H.R. 2001. Tables 26 and 27 give year-by-year and 

summary estimates for incremental energy savings for conservation and 

renewable projects, respectively. Table 28 provides year-by-year and 

summary estimates of Treasury losses for the residential conservation and 

renewable projects under H.R. 2001. Table 29 shows the sensitivities for 

project rates of return for conservation projects, where the energy savings 

percentage varies from 10 to 20 percent.

The energy savings estimates are discounted because it is assumed that the 

economy (or society) as a whole is better off having all of the benefits of 

energy conservation (increased productivity, lower energy prices, etc.) now 

rather than later.

Note that, under each joint assumption about savings percentage and 

proportionality factor, incremental energy savings by year increase until 

savings from the last project year comes on-line (1988 for conservation, 

1990 for renewables). These incremental savings then remain steady and 

decline as the ends of project lives are reached.

61
Table 26. Detailed Sensitivity Cases for Incremental Energy Saved' 

Residential Conservation Projects under H.R. 2001

for

Cumulative Incremental Energy Saved

Discounted 

Value

1986 .....

1987 .....

1988 .....

1989 .....

1990 .....

1991 .....

1992 .....

1993 .....

1994 .....

1995 .....

1996 .....

1997 .....

1998 .....

1999 .....

S=

P=0.5

16.42

0.69 

1.26 

1.74 

1.74 

1.74 

1.74 

1.74 

1.74 

1.74 

1.74 

1.74 

1.74 

1.05 

0.48

10 Percent

P=1.0

36.42

1.54 

2.80 

3.86 

3.86 

3.86 

3.86 

3.86 

3.86 

3.86 

3.86 

3.86 

3.86 

2.32 

1.06

P=1.5

57.3

2.49 

4.56 

6.06 

6.06 

6.06 

6.06 

6.06 

6.06 

6.06 

6.06 

6.06 

6.06 

3.57 

1.50

S=15 Percent

P=0.5 P-1.0 P=1.5

(trillion Btu) 

24.62 54.63 85.90

1.04 2.31 3.74 

1.89 4.20 6.84 

2.61 5.79 9.09 

2.61 5.79 9.09 

2.61 5.79 9.09 

2.61 5.79 9.09 

2.61 5.79 9.09 

2.61 5.79 9.09 

2.61 5.79 9.09 

2.61 5.79 9.09 

2.61 5.79 9.09 

2.61 5.79 9.09 

1.58 3.48 5.36 

0.72 1.59 2.25

S=

P=0.5

32.83

1.38 

2.52 

3.48 

3.48 

3.48 

3.48 

3.48 

3.48 

3.48 

3.48 

3.48 

3.48 

2.10 

0.96

20 Percent

P-1.0

72.84

3.08 

5.60 

7.72 

7.72 

7.72 

7.72 

7.72 

7.72 

7.72 

7.72 

7.72 

7.72 

4.64 

2.12

P-1.5

114.53

4.98 

9.12 

12.12 

12.12 

12.12 

12.12 

12.12 

12.12 

12.12 

12.12 

12.12 

12.12 

7.14 

3.00

Average household consumption of energy for space heating (without 

conservation) assumed to be 80 million Btu per year.

Quantities discounted at 4 percent over the period 1986 to 1999. 

S = Percentage of space heating energy saved from conservation measures. 

P = Credit rate proportionality factor used to determine incremental 

credit-induced conservation.

Note: • Average project cost assumed to be $700 (in 1984 dollars).

62
Table 27. Detailed Sensitivity Cases for Incremental Energy Saved for 

Gas-Displacing Residential Solar Hot Water Projects Under 

H.R. 2001 

(Energy Savings Assumed = 65 Percent)

Cumulative Incremental Energy Saved 

________________________________P=1.0_______P=2.0_______

(billion Btu) 

Discounted Valueb .................. 27.89 32.59

1986 ..................

1987 ..................

1988 ..................

1989 ..................

1990 ..................

1991 ..................

1992 ..................

1993 ..................

1994 ..................

1995 ..................

1996 ..................

1997 ..................

1998 ..................

1999 ..................

2000 ..................

2001 ..................

.............. 0.94

.............. 1.69

.............. 2.28

.............. 2.71

.............. 3.02

.............. 3.02

.............. 3.02

.............. 3.02

.............. 3.02

.............. 3.02

.............. 3.02

.............. 3.02

.............. 2.08

.............. 1.33

.............. 0.75

.............. 0.31

1.37

2.26

2.85

3.24

3.50

3.50

3.50

3.50

3.50

3.50

3.50

3.50

2.13

1.24

0.65

0.26

Average household consumption of energy for space heating (without 

solar hot water heater) assumed to be 26.7 million Btu per year.

Quantities discounted at 4 percent over the period 1986 to 2001. 

P = Credit rate proportionality factor used to determine incremental 

credit-induced installation of solar hot water heaters.

Note: Average project costs assumed to be $4,000 in 1984 dollars.

63
Table 28. Detailed Treasury Loss Estimates for Residential Conservation 

and Renewable3 Projects under H.R. 2001 

(Millions of 1984 Dollars)

Conservation Projects Renewable Projects

1986 .................

1987 .................

1988 .................

1989 .................

1990 .................

P= 0.5 P=1.0

(solar units 

294.3 326.5

120.8 134.8

99.8 110.2

84.0 92.8

P=1.5

displacing 

342.3 

145.2 

120.8 

87.5

P=1.0

gas only) 

658.6 

217.0 

172.8 

135.0 

100.8 

71.4

P=2.0

384.8 

158.2 

102.0 

68.0 

45.6 

29.4

a

Renewable projects assumed all solar hot water projects displacing 

natural gas.

Values in 1984 dollars discounted at 4 percent over the relevant 

periods.

P = Credit rate proportionality factor used in determine incremental 

credit-induced conservation.

Table 29. Sensitivity of Residential Conservation Project3 Internal Rates 

of Return under H.R. 2001 to Alternative Energy Savings Rates

____________Internal Rates of Return___________________

Energy Savings Real Energy Price Inflation Real Energy Price Inflation 

Rate___________= 0 percent per year________= 10 percent per year_____

10 percent .............. 1.5 14.4

15 percent .............. 10.4 25.0

20 percent .............. 18.8 35.1

aProject cost assumed to be $700 in 1984 dollars. Energy use for space 

heating assumed to be 80 million Btu per household (without conservation 

measure).

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*U.S. GOVERNMENT PRINTING OFFICE:1985-491-163.20051

66