The OECD's Centre for Tax Policy and Administration published OECD Taxation Working Paper No. 73 on 19 March 2025. Authored by Luisa Dressler and Ross Warwick, and authorised for release by CTPA Director Manal Corwin, the paper addresses a gap that has been conspicuous in climate policy debates: the relationship between corporate income tax (CIT) design and private investment in clean technology. The paper does not make firm prescriptions. Instead, it builds a conceptual framework, identifies where CIT may be working against net-zero goals, and proposes three tracks for investigation and reform.
Why CIT belongs in the climate policy conversation
Reaching net zero requires a dramatic acceleration of private clean investment. The International Energy Agency estimates that global annual energy investment must rise from around 2.5% to 4.5% of GDP, reaching USD 5 trillion a year by 2030. Between 2013 and 2020, roughly 75% of global investment in renewable energy already came from the private sector. That share is unlikely to shrink, making the conditions that govern private capital allocation directly relevant to climate outcomes.
CIT is one such condition. A substantial body of research, beginning with Hall and Jorgenson's seminal work in 1967–69, shows that higher effective corporate tax rates reduce private investment. A review of published studies finds that 82% report a negative association between statutory CIT rates and investment, and 74% find that investment is higher when more of the cost of capital is deductible. The paper argues that these dynamics apply to clean investment as much as to any other, yet the specific intersection of CIT and climate policy has received little systematic attention in either research or policy guidance.
Several countries have moved ahead regardless. Canada, France and the United States have introduced significant CIT incentives for clean investment. The United States Inflation Reduction Act (IRA) channels support partly through the corporate tax system; initial Congressional Budget Office estimates put the ten-year cost at USD 391 billion, later revised upward by USD 428 billion. The European Union has extended more flexibility to member states to support clean technology, including through tax measures. These developments make a unified analytical framework all the more necessary.
Section 2: setting the scene
The paper opens by cataloguing the obstacles that stand between current clean investment levels and the scale required to meet net-zero commitments. As of 2022, economies representing 92% of global GDP had some form of net-zero target, but the gap between current investment trends and what is needed remains large.
Barriers fall into two categories. The first is market failures and frictions: the unpriced external costs of carbon emissions (as of 2021, 58% of GHG emissions across 72 countries were completely unpriced, and 93% faced a price below EUR 60 per tonne of CO₂), technology adoption spillovers including learning-by-doing and induced innovation, network effects, and firm-specific financing constraints. The second category is technology cost barriers: many solutions needed for net zero, including green hydrogen for steel and cement production with carbon capture, remain at demonstration or prototype stage and are not yet cost-competitive.
The paper positions CIT within this obstacle landscape. Baseline CIT provisions affect all investment, but they do so unevenly. And the existing stock of tax incentives is not neutral from a climate perspective: in recent years, typically 10–20% of the fiscal cost of recorded OECD tax expenditures in the Inventory for Fossil Fuel Support has been attributable to producer support measures, many of them CIT incentives, which actively work against emissions-reduction goals.
Section 3: how CIT affects clean investment decisions
The paper's analytical core is a three-part framework centred on the investing firm.
Intensive and extensive margin effects. CIT affects both how much a firm invests (the intensive margin) and what it invests in or where it locates (the extensive margin). Effective Marginal Tax Rates (EMTRs) summarise the tax burden on investments that are only just breaking even; across OECD countries in 2023, most EMTRs were positive, meaning CIT raises the minimum return a project must generate to be worthwhile. Effective Average Tax Rates (EATRs) capture the overall tax burden on profitable projects and illuminate how CIT can make one technology or location more attractive than another for non-tax reasons.
Asset characteristics. The paper identifies several asset features that make clean investment disproportionately exposed to baseline CIT provisions.
*Capital cost intensity.* Renewable energy technologies are significantly more capital-cost intensive than fossil fuel generation. Where capital allowances are not indexed to inflation, assets with high up-front costs face a real increase in effective taxation relative to assets with high variable costs, which are typically deductible immediately. This disadvantage grows for equity-financed projects and is amplified in higher-inflation environments.
*Asset lifespan.* Solar PV and wind assets have useful lives of around 25 years; hydropower around 50; nuclear around 60. Because accelerated depreciation and immediate expensing bring forward deductions that are eroded for long-lived assets by the time-value of money and inflation, these incentives deliver proportionally larger benefits to assets with longer working lives. The modelling in the paper demonstrates this explicitly.
*Investment risk.* Green hydrogen and other emerging clean technologies carry significant technological and policy risk. Risky projects are more likely to generate early losses. Most CIT systems offer limited loss carryover provisions and do not index carried-forward losses for inflation, penalising precisely those investments that are most likely to experience initial loss positions. The debt-equity bias compounds this: because interest on debt is deductible but the opportunity cost of equity financing is not, CIT systems favour debt-financed projects, yet risky new investments often rely on equity.
Firm characteristics. The paper finds that smaller, newer and domestically-owned businesses face relatively greater CIT disincentives than large, established incumbents.
Incumbents have better access to debt finance, can offset investment losses against other income streams, and are more likely to have sufficient taxable income to utilise tax incentives immediately. New entrants lack these advantages, yet competitive pressure from new, clean entrants is an important mechanism by which emissions-intensive incumbent firms are displaced. CIT features that hinder new entrants may therefore slow the "creative destruction" the net-zero transition depends on.
The paper presents Dutch data showing that while smaller businesses make frequent use of clean CIT incentives in terms of number of claims, larger firms account for the bulk of qualifying investment by value. This asymmetry reflects differences in investment scale, returns, and the fixed costs of navigating incentive eligibility.
Regarding firm ownership, state-owned enterprises may face different tax treatment that weakens the direct CIT-investment link. Multinational enterprises (MNEs) present a different set of complications: evidence suggests MNE subsidiaries are less responsive to CIT changes, perhaps because of better access to finance, taxation of rents, or tax-planning activity. Investment changes in one jurisdiction may be partially offset by changes elsewhere, with uncertain net effects on global emissions.
The Global Minimum Tax. The paper devotes attention to Pillar Two of the international tax agreement, which imposes a 15% global minimum effective tax rate on MNE groups with revenues above EUR 750 million. Where CIT incentives push a group's effective rate below 15% in a jurisdiction, top-up taxes under the GloBE Rules may arise, diluting the incentive's effect. The impact is not uniform: expenditure-based incentives tied to tangible assets and payroll are more shielded by the substance-based income exclusion than income-based incentives such as rate reductions or broad exemptions. Accelerated depreciation and immediate expensing for tangible assets are specifically noted as unaffected by the GloBE Rules.
The economic and policy context. The paper stresses that CIT does not operate in isolation. High inflation reduces the real value of unindexed capital allowances and loss carryforwards, increasing effective tax rates on capital-intensive investment. Rising nominal interest rates widen the debt-equity bias. High real interest rates generally, as experienced following recent inflationary pressures, disproportionately affect projects with large up-front costs, exactly the profile of renewable energy generation.
Carbon pricing, regulation and other climate policies interact with CIT in ways that can produce redundancies or complementarities. Where a binding emissions cap under an emissions trading system exists, additional clean investment support may simply redistribute abatement costs rather than reduce total emissions (the "waterbed effect"). Binding performance standards have an analogous effect. In these contexts, CIT incentives shift the distributional burden of the transition without changing its aggregate scale. The paper also notes that lengthy permitting processes can act as a binding constraint that renders the fiscal cost of CIT incentives partially wasted: modelling suggests permitting delays could reduce the emissions impact of IRA incentives by a third.
Section 4: policy implications and options for reform
The paper distils its analysis into three broad tracks for action.
Track 1: Screen CIT for obstacles to clean investment and rationalise fossil fuel support. The starting point for any government should be a diagnostic review. This means identifying where baseline CIT provisions unintentionally penalise clean investment, particularly through misaligned capital allowances, the debt-equity bias, and restricted loss relief. It also means identifying and reforming CIT incentives that support fossil fuel production or consumption. The fossil fuel angle is the most straightforward: the economic and climate case for removing such incentives is clear.
Track 2: Evaluate whether reforms to baseline CIT can play a climate role. The paper argues that a less distortive baseline CIT system can support clean investment, without requiring targeted clean technology incentives. Reforms that provide more generous capital cost recovery, reduce the debt-equity bias, or improve loss relief have the advantage of technology neutrality and administrative simplicity. The paper cites the United Kingdom's 2023 decision to make full expensing of plant and machinery investment permanent as an example of how investment-friendly CIT reform can be positioned as part of a broader net-zero strategy.
However, the paper is careful to note that broad CIT reforms stimulate all forms of investment, not just clean. Without complementary climate policies, particularly robust carbon pricing, the additional investment may flow into emissions-intensive as well as clean assets. The net effect on emissions is context-dependent and cannot be assumed to be positive. This track is most likely to deliver climate benefit where strong carbon pricing or binding regulation is already in place to steer the composition of newly stimulated investment toward clean technology.
Track 3: Use targeted CIT incentives for clean investment, but with care. Where governments choose to deploy targeted CIT support, the paper sets out a series of design principles.
Expenditure-based incentives are generally preferable to income-based ones. Incentives tied to capital expenditure, such as enhanced allowances, accelerated depreciation and tax credits linked to investment costs, deliver proportionally larger benefits to marginal and capital-intensive projects. They do not generate fiscal costs that scale with project profitability, and empirical evidence suggests they more reliably produce additional investment rather than windfall gains.
Income-based incentives such as reduced rates or exemptions carry greater risks. Their fiscal costs grow with project profitability, they may confer windfall gains on projects that would have proceeded regardless, and they risk triggering international competition to attract clean investment through preferential tax treatment.
The paper highlights design features that matter at the margin: refundability and transferability of tax credits, which extend their benefit to firms in loss positions; the breadth or narrowness of eligibility criteria, which affect additionality and fiscal cost; and technology-neutral versus technology-specific approaches, each with distinct trade-offs. The IRA's transformation of technology-specific credits into emissions-performance-based credits for electricity generation, where any source qualifies provided its greenhouse gas emissions rate is not greater than zero, is noted as an example of a technology-neutral approach that partially overcomes some limitations of targeted incentives, though the paper acknowledges that technology-neutral approaches may favour market-ready technologies over those with the greatest long-term abatement potential.
Across all three tracks, the paper emphasises the importance of monitoring and evaluation. Investment incentives should be subject to regular review, with clear policy rationales, assessment against alternative instruments, and scrutiny of both revenue costs and emissions outcomes.
Practical significance for tax practitioners
The paper matters to tax practitioners on several levels. It provides a structured framework for assessing whether an existing or proposed CIT regime is aligned with, neutral toward, or working against a client's or government's net-zero commitments. It identifies specific provisions, capital allowance rules, loss carry-forward restrictions, debt-equity bias, fossil fuel preferences, that are candidates for reform or challenge.
For advisers working with businesses considering clean energy investment, the analysis of how asset characteristics interact with CIT design is directly applicable. Capital-intensive renewable assets, long-lived infrastructure, and equity-financed early-stage projects all face specific pressure points within standard CIT systems that the paper maps clearly.
For those advising MNEs, the interaction between Pillar Two and clean investment incentives requires attention. The paper's guidance that expenditure-based incentives targeting tangible assets are more likely to survive the substance-based income exclusion is practically useful for structuring clean investment in a post-GloBE environment.
The full document, which contains further quantitative modelling, additional references and the complete policy options discussion, is available for download from the OECD.