Suppose the government offers a tax credit to companies that use renewable fuels mixed with fossil fuels like diesel. Cool, right? Uh, try perverse:
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.”
The massive tax subsidy has … 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.
Of course it did.
So how’s this work? Like this:
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.
This is bad enough on its face: It increases fossil-fuel use. It adds to pollution. It unnecessarily puts the public’s money into private hands.
There’s one other problem with it, which, as a former newspaperman with friends still in the business, I take personally. Rising newsprint costs have been cited as a factor in newspaper layoffs nationwide. So the taxpayers are now subsidizing newspaper layoffs.
And CEOs wonder why people don’t trust corporations.