Paper companies complain that the IRS policy of allowing production tax credits on only the net amount of electricity supplied to the grid will reduce credits for power plants at paper mills by half. Many paper mills burn lignin from spent chemicals used in the papermaking process, bark and wood chips in boilers to produce steam. The steam is then run through a steam turbine to generate electricity. Electricity output at a typical mill can vary from 10 megawatts to more than 50 megawatts.

The US government allows production tax credits of 1¢ a kilowatt hour to be claimed as a reward for generating electricity from “biomass.” Credits can only be claimed on electricity a mill sells to a third party, but not on electricity the mill consumes itself. The IRS said in October that such tax credits can only be claimed on the net amount of electricity that is supplied to the grid.

The American Forest & Paper Association complained in a memorandum sent to the US Treasury Department by email in late November that 110 paper mills it surveyed in 2004 sold four million megawatt hours of electricity to the grid and bought back 2.3 million.

The trade association estimates, production tax credits could not be claimed on slightly more than half the electricity the paper industry generates from biomass and sells to nearby utilities. The issue is certain to spill over to Congress.

Keith Martin