Ed Brayton is a journalist, commentator and speaker. He is the co-founder and president of 
The Nation has a story that provides a perfect example of how corporate welfare operates, transferring enormous amounts of money from middle class taxpayers to the bank accounts of large corporations. And this one wasn't even done intentionally, it was just an opportunity that the paper industry took advantage of.
Thanks to an obscure tax provision, the United States government stands to pay out as much as $8 billion this year to the ten largest paper companies. And get this: even though the money comes from a transportation bill whose manifest intent was to reduce dependence on fossil fuel, paper mills are adding diesel fuel to a process that requires none in order to qualify for the tax credit. In other words, we are paying the industry--handsomely--to use more fossil fuel. "Which is," as a Goldman Sachs report archly noted, the "opposite of what lawmakers likely had in mind when the tax credit was established."
Here are the details:
The massive tax subsidy has barely been reported in the press, but it's caused a stir in the paper industry, which is struggling to stay profitable in the teeth of the recession. "Everybody's talking about it," paper industry analyst Brian McClay told me. "In the US and elsewhere in the world--in Canada and Brazil and Chile and Europe."On March 24 International Paper (IP) announced it had received its first check from the IRS for a one-month period this past fall. The total? A whopping $71.6 million. "It's probably close to a billion a year of cash," McClay said. "If you look at the economics of this business, to make that kind of money today you'd have to be on another planet." IP's stock rose 12 per- cent on the news.
The origins of the credit are innocent enough. 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.
"Seventy-three percent of the energy we use in our mill system we produce," says Ann Wrobleski, IP's vice president for global government relations. "We feel like we're the original green industry, if you will." (In developed nations, paper is the third-largest industrial greenhouse gas emitter, behind the steel and chemical industries.)
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.)
The law of unintended consequences strikes again.
Politics
Comments
As a libertarian, I staunchly support this corporate ripoff of the American people. I believe government has but one legitimate purpose, subsidizing corporations.
Or at least that's what I'm told by those who don't really understand libertarianism. In reality, this is precisely the kind of thing that drives libertarians nuts--a perfect example of the kind of thing that leads us to criticize government.
Posted by: James Hanley | April 11, 2009 12:12 PM
Is the percent of energy produced from this mixture more than the 73% from the black liquor alone?
In other words are they having to use less electricty (an inefficient source of energy).
If the overall CO2 emmission has gone down why the fuss, if it hasn't then law makers need to write more sensible laws.
Actually, the lawmakers should have rewarded the paper mills for being so energy efficient before anyone in politics had even thought about it.
Posted by: Chris' Wills | April 11, 2009 12:28 PM
James - Are you critical of the Bush Administration for acting as social engineers via the creation of this subsidy or are you instead criticizing them for not developing a policy that was not immune to this sort of fraud?
I understand your frustration if its the former; while thinking it's a bit unfair to blame them for the latter, especially given how fraudulently these companies acted.
While I too oppose the idea of tax subsidies, all of my ire in this case is directed towards these companies given tax subsidies are a reality in America with little chance we'll do away with them. I hope to see some heavy punitive fines and better yet, prison times for those complicit in this activity.
Posted by: Michael Heath | April 11, 2009 2:17 PM
I think using the tax code to try to encourage communally responsible action is perfectly legitimate. This is an unintended consequence that could quickly be remedied without fuss by a non-controversial bill.
Posted by: Shygetz | April 11, 2009 3:20 PM
Michael,
Actually I was just mocking the certain folks on this blog who repeatedly say that libertarians support the corporate-government lovefest.
I don't blame the corporations, however. They're just acting rationally (trying to maximize profit).
I don't really blame the government officials who created the subsidy, either. They also were acting rationally (trying to maximize votes).
But their individual rationality does not translate into something that is collectively rational as public policy. It's really more of a tragedy--the inexorable working of fate--than a moral problem.
Posted by: James Hanley | April 11, 2009 4:53 PM
James stated:
I do blame the corporations. While we should expect companies to act in an amoral fashion in their efforts to maximize profits; that is no excuse for acting in an extremely unethical manner as we see happened in this case.
Having had responsibility in a previous career for the purchasing and planning processes for a tech company with $3 billion dollars in global, direct material purchases per year, I can unequivocably state that business can not be efficiently transacted in without all parties acting in good faith. These companies crossed a line.
I had to also do business in Italy where business is not trusted to act in good faith. The government mandated paperwork to buy sell and your goods and services, and modify those orders, was a nightmare, because their government and citizens assumed that companies would act as you describe them. I would hate to see us instigate policies in this country like that, better we aggressively go after malfeasance such as this.
Posted by: Michael Heath | April 11, 2009 11:38 PM
And ahead of electricity generation? That's surprising.
Posted by: Azkyroth | April 12, 2009 4:20 AM
Ironically given your first comment, this specific case generalizes to one of the most important and enduring objections to the minarcho-capitalist strain of "Libertarian" thought.
Posted by: Azkyroth | April 12, 2009 4:22 AM
Well, if butterfly's wings can cause a storm, it would be illogical to expect that the large scale governmental actions will not have unintended and unforeseen consequences. No matter how thorough government would be.
Posted by: mic | April 12, 2009 8:13 AM
to Michael Heath:
The company has a fiduciary responsibility to its shareholders. This is not corporate malfeasance; it is shrewd business maximizing their benefit from tax policy.
If you drove a motorcycle, then went out and bought a Prius and took the Government's tax credit you'd be doing the same thing.
Posted by: Chuck | April 12, 2009 8:55 AM
Laws have bugs, just like software, CPUs, and machinery. We don't stop writing software or building machines because of that, we fix them. If the bugs are potentially dangerous, we take extra care to fix them quickly. So, there's nothing really surprising or unusual about this bug, it just needs to be addressed quickly. If this turns out to be a significant problem, then the institution giving out the money needs more discretion in who to give it to so that it isn't forced by law to give money to groups the money wasn't intended for.
Posted by: Mike | April 12, 2009 8:55 AM
Mike, in the case of software (and to some extent machinery) failure-prone over-complicated parts can be redesigned and refactored so as to reduce the number of bugs present. Also, no-longer-needed modules are removed. The difference with laws is that neither process really happens. We just end up with the equivalent of spaghetti code and stop enforcing laws instead of repealing them (or rather, we start selectively enforcing them only when out to "get" someone). Both are huge issues.
Posted by: Boris | April 12, 2009 10:15 AM
So noone else has to waste time looking up the bill, its from the 109th congress: HR 3.
http://thomas.loc.gov/cgi-bin/query/D?c109:1:./temp/~c109qC0isW::
This bill is an 835 page monster and the section in question can be found on page 804. Sponsored by Young (AK) along with 85 cosponsors.
‘‘(e) ALTERNATIVE FUEL MIXTURE CREDIT.— ‘‘(1) IN GENERAL.—For purposes of this section, the alternative fuel mixture credit is the product of 50 cents and the number of gallons of alternative fuel used by the taxpayer in producing any alternative fuel mixture for sale or use in a trade or business of the taxpayer. ‘‘(2) ALTERNATIVE FUEL MIXTURE.—For purposes of this section, the term ‘alternative fuel mixture’ means a mixture of alternative fuel and taxable fuel (as defined in subparagraph (A), (B), or (C) of section 4083(a)(1)) which— H. R. 3—805 ‘‘(A) is sold by the taxpayer producing such mixture to any person for use as fuel, or ‘‘(B) is used as a fuel by the taxpayer producing such mixture. ‘‘(3) TERMINATION.—This subsection shall not apply to any sale or use for any period after September 30, 2009 (September 30, 2014, in the case of any sale or use involving liquefied hydrogen).’’
Happens all the time, will continue to happen.
Posted by: bookerNO | April 12, 2009 10:22 AM
Its a result of poor wording. The bill should have specified/required that an alternative fuel be used to replace part of an oil-based fuel *ALREADY IN USE*, *PRIOR TO THE BILLS PASSAGE* to reduce the amount of the oil-based fuel used, to qualify for the credit.
Posted by: Jeff | April 12, 2009 10:25 AM
I strongly disagree with you Chuck, you're taking fiduciary responsibility to its shareholders to mean something that it doesn't. It's common for people to tack on the maximization of profit and conflate the two.
We're talking about fraud, concealment, bribes, embezzlement and other acts that violate the trust of the shareholders.
Or are you actually suggesting that say if a loophole were found wherein a person could commit murder legally, that you would expect the company you hold stock in to put out a hit on the CEO of your company's main competitor because it would increase profits?
There is no responsibility to maximize profits using any means available, their responsibility ends at not committing fraud (check any cases where companies have actually been sued, it is always based on misrepresentation or fraudulent behavior).
If you don't think a company is making enough money, you have the right to sell your stock and buy into a company that you think will.
I have no doubt the paper companies are self justifying their behavior by believing they may go out of business if they don't take advantage of this loophole that clearly violates any possible interpretation of the spirit of the law. But that doesn't make it right, as the rep said in the article, it is what it is, and it's theft. I doubt you can find a thief that doesn't think they deserve what they are taking for some reason or another.
Posted by: James | April 12, 2009 12:01 PM
Ethanol was a multi-billion dollar vote purchase. Why would anyone care that some of the money went to IP instead of ADM? (Unless you're ADM.) When the government decides who is going to be rich or poor, you better be the one having breakfast with a senator.
Posted by: FreddyB | April 12, 2009 12:59 PM
I'm not sure what the problem here is. Please correct me if my understanding is wrong:
1. The paper companies were already using a 100% "alternative" fuel in their mfg process (no diesel, gas, etc.).
2. The energy bill includes a provision to encourage usage of alternative fuels. In this case, the provision applies to a mixture of alternative and traditional fuels.
2a. Was there no provision in the bill for non-mixed fuels? What if I was originally using a 100% fossil-fueled process in my plant, and I discover that I can do better with a 100% alternative-fueled process... do I get a credit? Based on the intent of the bill, I would assume that the credit in this case would be GREATER than the credit for mixtures.
So, my question is: if you are upset about the current situation, what do you think SHOULD have happened:
3a. That there were no credits (corporate welfare) whatsoever in the energy bill?
3b. That the provision was written in such a way to exclude EXISTING uses of alternative fuels (i.e. only people who convert from fossil->alternative get a credit?)
3c. That there was a provision to allow the paper companies to collect some kind of subsidy based on their existing usage of alternative fuel so they wouldn't be adding diesel based on tax laws rather than process requirements?
Posted by: Paul | April 12, 2009 3:52 PM
Paul: Its all very well and good saying "they just need to do it right" but how do you plan to ensure this actually happens? Don't get me wrong, the US could do much better at policy formation than it does, but that will only cut out some of the most egregious unintended consequences.
Understand that the global economy is the most complicated system known to humanity. It is the product of over 6 billion human brains interacting with each other and their environment and its adaptive enough to actively subvert your attempts to understand it. I believe that policy formation should be as high quality as possible, but the only defence against making bad rules is not to make rules in the first place, and you need to account for that when you're deciding whether or not to introduce some new tax or subsidy or regulation.
Posted by: James K | April 12, 2009 8:56 PM
Just raise the cost of using fossil fuels. Put a permanent $50 per barrel tax on oil and then watch everyone start using less of it. No need for rules, regulations, subsidies, etc. Once the price of oil is high enough everyone will switch to renewable energy sources since it would be cheaper than the oil.
Everyone with any common sense knows it would work. The reason it doesn't happen is that all the politicians believe it would get them voted out of office.
So instead of raising the cost of oil we pass stupid laws that say cars have to get a certain MPG rating, we pass subsidies to use ethanol, we create subsidies to encourage companies to build wind turbines, etc, etc, etc. Replace all that crap with a simple tax and the market will do all of these things by itself.
Posted by: Shawn Fox | April 12, 2009 10:13 PM
Shawn Fox:
Oh, noes! That would be governmental tampering with sacrosanct "Market Forces" (I'm mentally genuflecting to Mammon, here)as opposed to perfecly acceptable corporate tampering with governmental regulation.
Posted by: democommie | April 13, 2009 3:37 AM
Azkyroth wrote:
Although this does not apply to the specific case, which could not have occurred without government passing a specific policy that changed the business's incentives, Azkyroth is correct that the generalization of the discontinuity between individual and collective rationality is an argument against libertarianism.
Because I'm well-versed in that particular general problem, I treat such collective action problems as a justification for a limited degree of government. Of course not every libertarian agrees with me.
Unfortunately, while we create government to solve such problems, it also has the ability itself to create such problems, as in this specific case. The reality is that human interests differ and are not always congruent,* so there is no paradise to be found on earth, whether a libertarian's envisioned paradise or a statist's. My essential claim as a libertarian is that such problems are minimized when we have some, but very limited, government.
*Differing interests are not alway non-congruent. When I want the money and you want the product we have different interests but they are congruent.
Posted by: James Hanley | April 13, 2009 8:06 AM
James Hanley:
"*Differing interests are not alway non-congruent. When I want the money and you want the product we have different interests but they are congruent."
That isn't, I know, a defense that a prostitute's lawyer could use in court--but it sounds like one!
Posted by: democommie | April 13, 2009 9:23 AM
Democommie,
You're on to me! And it is, in fact, the primary argument for legalization of prostitution (that, and that it would be easier to regulate to ensure the girls are clean).
Posted by: James Hanley | April 13, 2009 10:18 AM
Congratulations to the paper companies for finding a way to profit from the gravy train legislation that ADM bought and paid for! I wish I could find a sweet deal like that, but I don't have the time to read govt documents and I don't want to give Lesko any money.
Shawn Fox:
If the politicians raised fuel taxes, they would certainly get a lot of heat from the voting public. Every person that has to drive to work or uses fuel oil to heat their homes would be very pissed off.
Posted by: kws | April 13, 2009 1:04 PM
"I do blame the corporations. While we should expect companies to act in an amoral fashion in their efforts to maximize profits; that is no excuse for acting in an extremely unethical manner as we see happened in this case."
Companies are not moral or amoral, they are simply legal entities being run by people. People are, to a T, selfish and can be expected to act as such. The company didn't do anything illegal, it simply exploited a stupid regulation for its benefit. This is no different than a welfare queen popping out another kid or a bum collecting their "earned" income credit. Better yet, how about all those people cashing in on the hybrid car benefit or the new house benefit? Are you going to turn down methods to defray your tax liability and maximize your take-home income? I hear plenty of people crowing about how they want to pay more in taxes to support government but I don't see any of them doing it voluntarily. People are absolutely selfish, all of us, anyone who says otherwise is a liar or a saint. The latter do not exist.
This is a perfect example of why the government should NOT be involved in the market, it creates inefficiency and waste. Great process developed without government intervention subverted by government laws.
Posted by: deavis | April 13, 2009 1:23 PM
deavis:
"Great process developed without government intervention subverted by government laws."
What the hell does that mean?
Posted by: democommie | April 13, 2009 9:01 PM
Deavis,
Your examples are flawed for a number of reasons. The most important one is, for each of the credits for which the average person attempts to qualify, involves a massive expenditure that, at least in this case, the corporation did not have to make. For example, in order to qualify for the hybrid or new house credit, I have to purchase one or the other. For the average American that is an expenditure that is either a significant proportion of their annual income, hybrid, or many times more than their income, home. In these cases the people make these expenditures, the government policy benefits, cars and homes are purchased, more energy efficient policies are advanced. In the case of the "welfare mother" or the "bum" they have the rather crushing burden of abject poverty, not to mention having a child. All of these scenarios fail because they involve, in addition to urban myths about "welfare moms" and "for profit bums," implementing economic decisions that have the intended effect.
None of these scenarios compare even remotely to a company intentionally utilizing a government program purely to increase profit in a manner that has the opposite impact on the economy and environment than that intended.
Posted by: dogmeatib | April 13, 2009 9:47 PM
The problem of the government doing stuff that makes our energy situation worse is nothing new.
They instituted Daylight Savings Time which wastes energy.
They levy property taxes on the freight railroads and their infrastructure, yet no property taxes are levied on the highways. It could be done with user fees and public ownership of the highways that we have today. Some conservatives tout the private management of the Skyway Bridge in Chicago and the Indiana tollway, but they pay no property taxes.
A fuel tax and sales taxes are levied on railroads diesel, but the tax is used to fund the government, unlike the tax on gasoline and truck diesel which funds the roads.
They are building an at grade rail transit system in Minneapolis/St. Paul which I suspect will waste more energy that it saves due to congestion.
If we really cared about energy conservation, we would move to electrify the railroads, and build more projects like the new bullet train in California to reduce airline flights, and electrify our city bus lines. China is doing this and leaving us in the dust.
Posted by: John Klug | April 13, 2009 11:56 PM
The companies that lease those two roads are paying billions in leasing fees to the state, and you're worried about whether they're paying the state property taxes, too?
Also, as an occasional user of both those roads, I don't think you need to be a conservative to tout the private management. Both have improved in quality since being leased out--all you need to be to tout them is a traveler.
Posted by: James Haley | April 14, 2009 6:51 AM
And your essential claim is full of crap. No matter how many times you put lipstick on the pig. Without the power of government to force the amoral business world to conduct itself with the barest morality and common good we have the Gilded Ages.
Living in your world would almost certainly be hell on earth for you. Unless you were born to riches, or got very, very lucky, you, my Libertarian Wanker, would be working in a fucking sweat shop, right next to your wife and kids, for starvation wages.
Just like the huge majority of Americans did until very recent times. Look at 1900, the indisputable, basic facts are that at this point in time, your "ideal intersection" between government and business produced anything "ideal" for the average American. It was common to work 12-16 hours per day and received $1 to $2 for that labor.
To put that in perspective, bacon cost thirteen cents a pound. Same with sausage. Both were dangerous to eat, frequently unsafe to eat as they were routinely contaminated with feces, waste materials and parasites because big business didn't care if you died.
A house cost around $4000. Which is why people lived in tenement housing. Or worse, the factory housing and store that kept them poor and indentured.
...
You libertarians are so foolish. You live in a society that is what it is BECAUSE of government. And so much better than it was when government espoused YOUR ideals. And yet you want to burn it down and go back to the economic dark ages...
You're worse than the Christianistas...
Posted by: Moses | April 14, 2009 11:46 AM