Landfill Gas and Synfuel

Landfill Gas and Synfuel

June 01, 2006

Landfill gas and synfuel producers may be out of luck, but they have not given up.

The US government rewards companies that produce landfill gas, other “gas from biomass” and synthetic fuel made from coal with credits. The credits used to be called section 29 credits. They were relabeled section 45K credits in August last year.

The credits are currently $1.17 an mmBtu. The amount is adjusted each year for inflation. They can only be claimed on the output from facilities that went into service by June 1998, and then only through 2007.

The problem is the credits phase out if oil prices return to levels reached during the Arab oil embargo of the 1970’s. Credits would have phased out last year if the average wellhead price for domestic crude oil had reached $66.79 a barrel, and the credits would have suffered a “haircut”— a reduction but not a full phaseout — if the average wellhead price had been above $53.20 a barrel.

The IRS said in April that the average wellhead price last year was $50.26 a barrel, just below the start of the phaseout range.

Oil prices are higher this year.

Two coalitions of synfuel producers tried to persuade Congress to include language in the tax reconciliation bill that President Bush signed on May 17 to link whether the credits phase out not to current oil prices but to prices the year before. In other words, whether credits phase out in 2006 would depend on oil prices in 2005. The proposal was also to freeze the amount of the credit at the 2005 level of $1.13 an mmBtu and not make any more inflation adjustments.

The proposal passed the Senate, but was dropped in the final negotiations with the House over what would remain in the tax reconciliation bill. A number of large synfuel plants have now shut down after failure to get a legislative fix. In the hectic last few days of the negotiations, the synfuel coalitions offered to forego any tax credits in 2007 in exchange for an assurance they would receive credits during 2006.

Congress may still pass a “trailer” bill this summer to extend a number of expiring tax incentives. The synfuel coalitions have not given up hope of getting relief in the trailer bill, but they would have to overcome seemingly steadfast opposition from Bill Thomas (R.-California), the chairman of House tax-writing committee. Lobbyists for the coalitions say that, at some point, the offer to forego tax credits in 2007 will be withdrawn if the talks drag on because there will be too few months left in 2006 to make the offer worthwhile.

By Keith Martin