The Impact of Tax Holidays on Renewable Energy Project Development in China: A cost benefit analysis

Abstract

In recent years the Chinese economy has moved away from a carbon intensive
economy towards an economy that relies increasingly on renewable energy. While this
has been most evident with respect to hydro development, it can also been seen in
increases in energy produced by solar and wind projects. This increase has been
largely as a result of government intervention and through the offering of incentives
from 2005 through to the present.
This article seeks to assess the influence of the government policy of allowing a 6 year
tax holiday for specified high technology renewable energy projects. It will firstly
discuss how this tax holiday incentivizes investment when financial managers
consider project options before attempting to appreciate some of the wide ranging
implications of intervention and distortion in the market.
This is done by analysing the methods of cost benefit analysis used in public finance
and showing the impacts of tax holidays on this decision-making process. As a result,
this paper shows that there are significant limitations in project evaluation undertaken
in public finance due to the common practice of only weighing up prospects from the
first five years of a project during its evaluation.
This is problematic as a project may have negative cash flows associated with
decommissioning at a later date, which has been seen in early generation wind farms
and other renewable projects such as nuclear projects in particular
This paper concludes by discussing the intention of tax holidays and the distortions
that occur in an economy as a result of their implementation; this analysis clearly
shows that this distortion may be exacerbated by limitations in public finance
valuation.
As a result, this paper shows that government intervention boosts investment;
however, it distorts rational financial participants and can lead to over-investment if
limited financial analysis is undertaken.