OPINION: POTOMAC WATCH
APRIL 17, 2009
Alternative Fuel Folly
The Wall Street Journal
By KIMBERLEY A. STRASSEL
Every so often Washington throws out a controversy that brilliantly illustrates
everything wrong with Washington. Consider the brewing outrage over "black liquor."
Barbara Kelley
This is the tale of how a supposedly innocuous federal subsidy to encourage
"alternative energy" has, in a few short years, ballooned into a huge taxpayer
liability and a potential trade dispute, even as it has distorted markets and
led to greater fossil-fuel use. Think of it as a harbinger of the unintended
consequences that will accompany the Obama energy revolution.
Back in 2005, Congress passed a highway bill. In its wisdom, it created a
subsidy that gave some entities a 50-cents-a-gallon tax credit for blending
"alternative" fuels with traditional fossil fuels. The law restricted which
businesses could apply and limited the credit to use of fuel in motor vehicles.
Not long after, some members of Congress got to wondering if they couldn't
tweak this credit in a way that would benefit specific home-state industries.
In 2007, Congress expanded the types of alternative fuels that counted for
the credit, while also allowing "non-mobile" entities to apply. This meant that
Alaskan fish-processing facilities, for instance, which run their boilers off fish
oil, might now also claim the credit.
What Congress apparently didn't consider was every other industry that might
qualify. Turns out the paper industry has long used something called the "kraft"
process to make paper. One byproduct is a sludge called "black liquor," which
the industry has used for decades to fuel its plants. Black liquor is cost-effective,
makes plants nearly self-sufficient, and, most importantly (at least for this
story), definitely falls under Congress's definition of an "alternative fuel."
All of which has allowed the paper industry to start collecting giant federal
payments for doing nothing more than what it has done for decades. And in
fairness, why not? If Congress is going to lard up the tax code with thousands
of complex provisions designed to "encourage" behavior, it shouldn't be
surprised when those already practicing said behavior line up for their
reward, too.
In March, International Paper announced it had received $71 million from the
feds for a one-month period last fall. The company is on track to claim as much
as $1 billion in 2009. Verso took in nearly $30 million from the operation of
just one mill in one quarter of last year. Other giants are gearing up to realize
their own windfalls. Wall Street has gone wild, pushing paper-company stocks
up dramatically in recent weeks.
Happy as industry is to have this new federal lifeline in the middle of a recession,
it is the only one smiling. Foreign competitors are screaming that the subsidy is
unfairly propping up the U.S. industry in tough times. They claim the U.S. industry
is ramping up production simply to realize more tax money. Canadian forestry
firms are already demanding their government file a trade complaint.
In order to qualify for the credit, alternative fuel must be mixed with a taxable one.
(The government might want to encourage alternative fuels, but not to the extent
that it loses its gas-tax revenue.) This means that to qualify, the paper industry
must mix some diesel with its black liquor. This has sent environmentalists around
the bend. They have accused the industry of burning fossil fuels that it didn't used
to burn, simply to get the tax dollars. (The industry has not been clear on whether
it is, in fact, using more diesel.)
And then there's Congress, which is suddenly looking at billions more in red ink
than expected. In 2007 it estimated a 15-month extension of the credit would cost
taxpayers $333 million. It has since revised those numbers to take into account
black liquor and is now figuring a one-year cost of more than $3 billion. Wall Street
analysts are talking $6 billion. Senate Finance Committee bosses Max Baucus and
Charles Grassley are reportedly aware of the issue, none too happy, and they are
working to bar the paper industry from receiving the credit.
But this, in turn, has tossed up uncomfortable questions. The paper industry argues
that if the government is going to be in the business of rewarding good behavior, it
ought to do it equally. Is green policy only to be aimed at dirty or economically
unviable actors? Is black liquor any less useful than ethanol or biodiesel, and if so
why? If not, shouldn't Washington encourage its use? Isn't every green subsidy in fact
the basis for a trade dispute? These are questions Congress has no interest in
confronting, since it would expose the muddle that is its entire green-energy program.
All of this is highly amusing, if not surprising. Every government attempt to manage
energy markets has resulted in similar disarray. Look at the havoc that came from the
energy price controls, regulations and subsidies of the 1970s. Or look, more recently,
at the ethanol fiasco, and the accompanying soaring food costs. Energy powers the
economy. Mess with energy markets, and mess with everything else. When will
Washington learn?
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