- Since the 1970s, the production of many alternative energy sources has been supported through the use of tax credits and tax deductions. The two terms are often mistakenly confused. A tax deduction is an item whose purchase can offset a specific amount of income upon which taxes would normally be owed. A tax credit, by contrast, is like a tax coupon: it deducts a certain sum from the total amount of taxes owed.
- In 2008, a number of different energy industries, including wind and solar energy producers, were given a one-year production tax credit. A producer is compensated with a certain tax credit for each unit of a given product he produces. In energy-related production tax credits, electricity producers are generally given a tax credit for each kilowatt hour of electricity they produce. The exact size of the credit varied depending on the industry.
- The bill also offered a production tax credit to makers of renewable fuels, such as those used to power automobiles. Under the bill, producers of biodiesel and other organic diesel fuels were given a credit of $1 per gallon of fuels, while companies that mixed renewable diesel with petroleum were given a credit of 50 cents per gallon. The bill also closed a loophole that had previously allowed foreign producers of these fuels to cash in on the credit.
- In addition to credits provided to industrial producers, the bill extended a tax credit to residences that installed solar panels or small wind turbines onto their property. However, unlike production tax credits, these tax credits are given as a proportion of the cost of buying and installing these technologies. For example, households that install solar panels on their roofs can claim a credit of 30 percent of the cost of the price of the panels.
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