This report was originally published by the International Institute for Sustainable Development (IISD)
The transition to renewable energy is essential for meeting global climate goals and building resilient, low-carbon economies. However, investment in clean energy remains deeply uneven. While developed countries and major emerging markets like China and India attract most of the capital, many developing countries face challenges in attracting the financing needed to expand renewable energy.
This report explores how countries in emerging and developing markets use tax incentives to support renewable energy investment, i.e., “green” tax incentives. These incentives include income tax holidays, accelerated depreciation, and import duty relief. Based on an original data set covering 35 countries, the report looks at how governments design these incentives, what problems they aim to solve, and how effective they are as an investment promotion tool in different national contexts.
Key Findings
• Green tax incentives are common but not equally used across regions. In Asia and Latin America, they account for more than 70% of the renewable energy incentives identified. In Africa, where many governments rely more on donor support and concessional finance, the figure is only 24%.
• Profit-based incentives are the most frequently used, but they often fail to support early-stage projects in riskier markets where companies are not yet profitable. Cost-based incentives, including targeted tax credits, tend to lower risks more directly and help unlock investment.
• Many countries apply incentives too broadly, without focusing on technologies that most need support. This approach can waste resources and reduce impact, especially in countries that face tight budget constraints.
• Tax incentives work best when governments combine them with other supportive policies. These include national energy plans, power purchase agreements, local content requirements, and affordable financing through public or development banks. Without this broader policy support, tax incentives may fail to deliver results.
• Experiences from China and India offer valuable lessons. In the early years, both countries used tax incentives together with public investment, strong institutions, and coordinated industrial policies to lower project costs and build domestic supply chains. As their markets grew, they shifted toward auctions and performance-linked payments that rewarded cost reductions and efficiency.
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