The impact of corporate taxes on (renewable) power generation capacity

Using granular data on power-generating assets and rich variation in local business tax rates in Germany, we find that corporate taxes decrease the installed power generation gross capacity in a given municipality. A one standard deviation increase in local business tax rates is associated with a 3 % decrease in renewable power generation and an 11 % decrease in non-renewable power generation in the respective municipality vis-à-vis other municipalities in the same district without a tax increase. Non-taxable entities and state-owned enterprises do not show such investment response. In conservative political environments, this effect is more (less) pronounced for renewable (non-renewable) energy capacity. Our results suggest that increases in corporate tax rates may have unintended consequences for the green transition, hampering the absolute expansion of renewable energy. At the same time, our results suggest that corporate taxes decrease investment in non-renewable energy relatively more, highlighting the importance of examining differential investment effects of corporate taxes and their implications for tax policy in the energy transition.