Congress May Extend Biomass Stove Tax Credit

Alliance for Green Heat, July 25, 2012 - The 25C tax credit for wood and pellet stoves and boilers that began at $1,500 in 2009, dropped to $300 in 2011, and then expired last January, may return.  While nothing is expected to be passed in Congress before the election, a variety of bills could be passed soon after, during what is known as a “lame duck session”.

One possibility is that Congress will simply extend the 2011 version of the bill, which would cap the tax credit for 75% efficient (LHV) biomass heaters at $300.  There has been talk of implementing this retroactively, so that purchases made earlier this year would be eligible for the tax credit.  Another option would be for legislators to create a standalone bill that could change the eligibility criteria and raise the credit up to $500 or even $1,000.

Various organizations in the biomass space are pushing for an extension of 25C, including the Alliance for Green Heat, Hearth, Patio & Barbeque Association, the Pellet Fuels Institute and the Biomass Thermal Energy Council.  For more background on the tax credit, see http://www.forgreenheat.org/incentives/federal.html, and for background on attempts to establish an alternative performance-based credit, see http://www.forgreenheat.org/incentives/homestarpage.html.

The currently expired 25C tax credit was a cost-based credit, meaning it was based on what the consumer spent on their biomass heater – not the amount of energy saved.  Many in the energy community, including the three big non-profit players in DC – the American Council for an Energy Efficient Economy, National Resources Defense Council and the Alliance to Save Energy – have been trying to craft and push a performance-based credit. This would involve having an energy auditor measure the expected energy savings and then basing the total credit on that. 

The 2010 Home Star bill and the 2012 HOMES Act were both performance-based systems but the legislation never passed.  Congress asked the GAO to study which system would be more cost-effective and would result in greater energy savings.  The report found strengths and weaknesses in both approaches and did not make any recommendation about which one was better.  Here is part of their summary:

Under criteria for evaluating a tax credit design, both the performance-based and cost-based credits have advantages and disadvantages with neither design being unambiguously the better option based on current information.

Both a cost-based and a performance-based credit are designed to reduce energy use and CO2 emissions by providing incentives for energy conservation investment. However, they differ in their relative effectiveness and costs. In general, a performance-based credit is more likely to effectively reduce energy use and CO2 emissions because it rewards energy savings from the investment rather than the cost-based credit’s rewarding of spending regardless of whether this spending results in energy savings.

However, the performance-based credit may have significant up-front costs for energy audits, not required by the cost-based credit, which could reduce its effectiveness by discouraging investment. In addition, for taxpayers who do invest, these up-front costs may mean that a performance-based credit may have significantly higher taxpayer compliance and IRS administrative costs than a cost-based credit. A credit’s fairness depends on subjective judgments of how a credit varies with a taxpayer’s income level.

Various groups took issue with the GAO’s report, including the National Association of Home Builders (NAHB) who found that it missed the bigger picture. They said in a recent blog post that “failure to extend the 25C tax credit undermines a successful policy that created jobs in the hard hit residential construction sector and yielded long-term gains for homeowners’ energy bills.”