The Role of Federal Tax Credits in U.S. Solar Industry Growth: An Analysis of the Relationship Between the Business Investment Tax Credit and Installed Solar Photovoltaic Capacity in the United States from 1997-2015

Abstract

Tremendous growth has been observed in the U.S. solar industry over the last two decades. While technological improvements and falling costs have played large roles, a federal policy that provided a 30 percent tax credit toward solar photovoltaic (PV) installations is commonly touted as the critical driver in facilitating this growth. The policy is known as the “Business Energy Investment Tax Credit” or “ITC”. The effect of various federal policies on the energy sector has been documented by researchers. Yet, the body of literature analyzing just one policy (the ITC) on one energy source (solar PV) is less robust. Additionally, research that does exist on the ITC is sometimes truncated in terms of years of analysis and may not include the entire history of the policy. This paper uses fixed effects models and state-year level data from the National Renewable Energy Laboratory, the U.S. Energy Information Agency, and other sources to analyze the extent to which the ITC has contributed to indicators of growth in solar PV from 1997-2015; roughly ten years of the policy’s implementation and ten years prior for comparison. Results indicate the tax credit has had a positive and strikingly robust effect on solar PV growth even after the addition of extensive controls. Policy implications discussed include the need for continuation of the credit if solar PV’s barriers to entry in the energy market are to retain parity with other more “traditional” sources, potential negative effects of the ITC on other energy sources, and impacts of the ITC on secondary outcomes including the price of electricity, CO2 emissions, and global climate goals.