Methodological and Technological issues in Technology Transfer

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5.5.5 Fiscal Measures: Tax Incentives and Guarantees

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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