Rising energy prices combined with technological developments mean that renewable energy sources are becoming increasingly competitive with fossil fuel sources of energy. Mandatory renewable energy targets provide an added incentive to invest in renewable energy sources and the expectation of a modest price for carbon emissions helps encourage new investment in renewables even further. That said, in Australia the investment in renewables has, to date, been relatively small. At the same time, policy makers assert that there is some urgency for Australia and the world to reduce carbon emissions.

The purpose of this paper is to examine the treatment of capital expenses in the renewable energy sector with particular emphasis on the need to introduce accelerated depreciation provisions to help encourage new investment in alternative sources of power. Accelerated depreciation, which is described in greater detail below, refers to the capacity for selected industries to claim bigger tax deductions for the cost of their investments in new equipment in the early years of a project. Such provisions increase the after-tax profit earned by investors and, in turn, the likelihood of such investments taking place.

In Australia today, mining and the airlines are the industries receiving the most generous accelerated depreciation provisions. Given the Australian Government’s stated intention of reducing greenhouse gas emissions, it is inconsistent, and inefficient, for it to provide accelerated depreciation allowances to high-emission industries (thereby encouraging them to invest more heavily in emission intensive activities) while excluding the renewable energy industry from such concessions.

This paper argues that the money currently spent subsidising new investment in mining and airlines should be transferred instead into accelerated depreciation provisions for the renewable energy industry.