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close this bookRural Energy and Development: Improving Energy Supply for Two Billion People (WB, 1996, 132 p.)
close this folderChapter five - Innovations in renewable energy
View the document(introduction...)
View the documentTechnical progress in using the solar resource
View the documentPolicies toward new renewable energy sources in rural areas
View the documentProgram development
View the documentPrices
View the documentCredit
View the documentTaxes and subsidies

Taxes and subsidies

In recognition of their positive externalities (of innovation) and their environmental advantages, one can make a good case for exempting renewable energy technologies from or at least substantially lowering taxes and duties. while at the same time taxing conventional energy industries' supplies in accordance with standard principles of tax policy. Experts have also long argued in favor of imposing corporate and sales taxes on electricity on the grounds that it is a fairly price inelastic product In practice. however. governments have typically pursued the opposite policy, namely. of not only exempting electricity from taxes, but often subsidizing it, and imposing significant taxes on renewable energy equipment (See Cabraal and Cosgrove-Davies 1995. who report that in Sri Lanka, import duties added some 30 percent to the costs of PVs Kenya also has duties and taxes on PVs while subsidizing electricity to encourage local manufactured and assembly).

There is, furthermore, an economic case for providing public financial support for renewable energy technologies in program development, demonstration, education, training. and monitoring. again, in recognition of their positive externalities and environmental advantages This is the rationale behind the Global Environment Facility's (GEF's) financing of renewable energy: during 1991-94, the GEF financed renewable energy projects in eight countries that included PVs. wind power, and micro-hydro in India and biomass for power generation in Brazil (the CEF quarterly operations reports provide more details) Twenty-five renewable energy projects are currently under review or in venous stage of preparation and appraisal in twenty countries.

At the national level, financial support could come either from public revenues or from user charges or surcharges on the use of fossil fuels The latter has the advantage of making the programs less dependent on public financing A good example is the United Khigdom's "nofto." or non-fossil-fuel obligation program, which applies the revenues from a small surcharge on electricity to support the winners of competitive bids to supply electricity from renewable energy sources. Several similar schemes exist in Europe Japan. and the United States, all of which have active public programs to develop renewables