Some fiscally responsible senators should probably take note of the fact that taxpayers are about to lose as much as $8 billion because the paper industry figured out how to game an alternative-energy tax break. Chris Hayes reports:
In 2005 Congress passed, and George W. Bush signed, the $244 billion transportation bill. It included a variety of tax credits for alternative fuels such as ethanol and biomass. But it also included a fifty-cent-a-gallon credit for the use of fuel mixtures that combined "alternative fuel" with a "taxable fuel" such as diesel or gasoline.Enter the paper industry. Since the 1930s the overwhelming majority of paper mills have employed what's called the kraft process to produce paper. Here's how it works. Wood chips are cooked in a chemical solution to separate the cellulose fibers, which are used to make paper, from the other organic material in wood. The remaining liquid, a sludge containing lignin (the structural glue that binds plant cells together), is called black liquor. Because it's so rich in carbon, black liquor is a good fuel; the kraft process uses the black liquor to produce the heat and energy necessary to transform pulp into paper. It's a neat, efficient process that's cost-effective without any government subsidy.[...]By adding diesel fuel to the black liquor, paper companies produce a mixture that qualifies for the mixed-fuel tax credit, allowing them to burn "black liquor into gold," as a JPMorgan report put it. It's unclear who first came up with the idea--Wrobleski told me it was "outside consultants"--but at some point last fall IP and Verso, another paper company, formerly a part of IP, began adding diesel to its black liquor and applied to the IRS for the credit. (Verso nabbed $29.7 million at just one of its mills in the final quarter of 2008 for its use of mixed fuel.)[...["You use the toilet every day," said one hedge fund analyst who's been closely following the issue. "Imagine if you could start pouring a little gasoline into the bowl and get fifty cents a gallon every time you flushed."
Yech. More depressing is that this is the sort of thing the political system is actually fairly bad at correcting. There was plenty of lobbying energy on the side of that tax cut but virtually the only lobbying energy that will be directed at repealing it is coming from the paper industry. Happily, Chris got tipped off to this scam and there's some chance that attention will give way to action. Sadly, there's little chance that this is the only scam of this sort going today. It should also serve as one more reason why simpler tends to be better in these things. A clear price on carbon is harder to game than a mish-mash of off-ramps and tax credits. A simple tax code is harder to hide from than the bloated monstrosity we currently use. Complexity has consequences.
