Decomposing garbage produces methane gas. Congress voted last October to let anyone who uses landfill gas to generate electricity claim “production tax credits” of 0.9¢ a kWh on the electricity. The generating equipment must be installed between October 23, 2004 and December 31, 2005 to qualify. Credits can be claimed for five years after the equipment is put into service.

Congress was concerned that it was giving too large a tax subsidy for landfill gas, since many gas producers qualify for a separate “section 29 credit” of $1.13 an mmBtu for trapping and collecting the gas. What Congress apparently did not want was a situation where section 29 credits are claimed by the gas producer and production tax credits are claimed by an electricity generator on the same gas.

However, the language it wrote to prevent this was poorly drafted and does not rule out production tax credits in any case. The US Treasury Department is aware of the problem and has asked Congress to clarify the language. A senior economist with the Joint Tax Committee in Congress said in May that the staff plans to fix the language in a “technical corrections bill” later this year, but it is not sure yet what the new language will say. He said what Congress had in mind was “totally new gas from a totally new facility.” Electricity does not qualify for production tax credits, he said, if the generator uses gas on which section 29 credits were claimed. It also does not qualify if the gas is run through a “facility” that was used to collect any gas that qualified for section 29 credits.

Landfills are filled with garbage one section at a time. The collection equipment looks like a large spider. The body of the spider is a “blower” that provides suction to pull gas from the ground. There are also pipes – called horizontal and vertical “wells” – that run down into each section so the blower can draw the gas. When a new section is filled with garbage, the gas collection system is extended by adding wells in the new section.

The hard question is what happens if someone installs a generator today to use gas from a new section, but that gas runs through the same blower used for older sections where gas qualified for section 29 credits. Can production tax credits be claimed on electricity generated with gas from the new section? There is no clear answer. The Joint Tax Committee staff said it plans to leave that question for the Internal Revenue Service. The issue is whether the wells used in the new section are considered a separate “facility” for producing gas.

The uncertainty may be fatal to many projects. Ordinarily, one would get a private ruling from the Internal Revenue Service settling the issue, but there is almost no time given the December deadline for putting generators in service. A ruling takes three to six months.