Unintended technology-bias in corporate income taxation : the case of electricity generation in the low-carbon transition

This paper shows that corporate tax provisions can lead to different effective tax rates (ETRs) if there is a capital cost-intensive and a variable cost-intensive way of producing the same output. It develops a framework for analysing sources of the difference in ETRs and adapts existing models to compare forward-looking ETRs for low-carbon and high-carbon electricity generation technologies, considering tax provisions for cost recovery in 36 countries. It finds that standard tax systems are technology neutral when investments are debt-financed because the deductibility of interest payments compensates for the fact that capital allowances are based on nominal (rather than real) capital costs. Under equity finance, ETRs are higher for investments in capital-cost-intensive technologies as the cost of equity finance is often not deductible. Since low-carbon electricity generation tends to be relatively capital-intensive, this result represents a form of unintentional misalignment of the corporate tax system with decarbonisation objectives,.