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Governments can take a number of fiscal actions to encourage the uptake of
environmental technology. While these can be highly effective, it should be
noted that in many cases these may be second best alternatives to more consistent
measures to internalise environmental costs or remove subsidies, which may not
be politically acceptable (essentially offsetting one subsidy with another).
In other cases they may be useful to initiate a market, but should not become
permanent features.
Investor tax incentives. Governments can seek to encourage investment
by supplying tax incentives for investors in certain types of companies or investments.
One example is in the UK where private investors buying venture capital funds
and new shares in unlisted businesses (not necessarily environmental) can partially
offset the investment against income thus reducing tax liabilities. This has
helped to encourage investors to put capital out into new technologies, although
it has proved difficult to ensure that investors back the kind of risky investment
the schemes are aimed at (rather than creatively packed less risky alternatives).
An alternative approach has been taken in the Netherlands where the Government
has given a tax-free status to returns on investments in approved environmental
funds. These have succeeded in attracting substantial amounts of capital and
in reducing the cost of finance for appropriate environmental projects. Perhaps
most importantly they have helped encourage financial institutions to find and
help develop new "green projects". However, they do not provide risk
capital, and there have been problems of definition. While such projects normally
support domestic businesses and ventures, the Dutch government recently extended
its investor tax incentives to the selected projects in developing countries,
with the potential to support technology transfer. In theory, the sort of tax
support given to domestic venture capital could also be extended to selective
venture capital opportunities in developing countries which might be an effective
way of encouraging appropriate technology transfer.
Capital expenditure tax incentives. An effective way to encourage the
uptake of new technology is by providing accelerated capital depreciation on
certain equipment - in extreme cases all in the first year, or alternatively
on a faster schedule than normally used. This has been used in a number of markets
to help accelerate the uptake of renewable energy (California, India) and is
currently being used in the Netherlands to encourage businesses to install certain
types of environmental technology. One advantage of accelerated capital allowances
is that they can usually be combined with leasing to provide an accessible and
flexible sort of financing.
Loan guarantee schemes. In order to help support new business development,
a number of governments have introduced loan guarantee schemes to support domestic
small business development. They consist of the central government guaranteeing
loans made by domestic banks to the small business sector to encourage the development
of that sector. In most cases only a partial guarantee is provided so the participating
private sector banks have an incentive to lend prudently. Other organisations
have introduced schemes more specifically targeted at lending for environmental
projects (e.g., the European Investment Bank). Such loan guarantees do
depend on the existence of a strong, independent financial system.
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