Alternative Fuel Tax Credit is Giving Paper Plants $8 Billion a Year to Increase Their Carbon Emissions

Great story from Chris Hayes on alternative energy policy gone wrong:

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. [...]

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.)

So by making the energy source for the plant dirtier they get the alternative energy tax credit. Good for business, bad for the taxpayer and bad for the environment. Great piece. Also a great illustration of why some of us are skeptical of the idea of trying to solve big environmental problems primarily through subsidies for clean energy. This actually doesn’t appear to be a case of deliberate legislative malfeasance and it’s still a big problem. Then you have the things where under cover of doing something good, lobbyists actually do something terrible.

I do think we need very substantial public investments in the infrastructure aspects of the clean energy economy. That means the wires for progress agenda of building a modern energy grid, and it means building the mass transit, freight rail, and intercity passenger rail links we need to move goods in a more fuel efficient manner. But in terms of people’s choices about which kinds of fuel to use, it means relying primarily on methods that raise the price of polluting and then let the market bring cleaner or more-efficient solutions to the fore. The alternative, which sounds good, winds up leaving a lot of room for perverse consequences.