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Is The Government Hopeless When It Comes To Energy?

Chris Hayes has a terrific story in The Nation about one horrific and unintended side-effect of the alternative-fuels tax credit passed by Congress in 2005. The credit actually ended up paying paper companies to waste diesel fuel and pollute more than they otherwise would. Chris's piece also includes an elegant description of the Kraft process used to make paper:

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.)

Yup, total fiasco. Ideally Congress will shutter this loophole now that it's been exposed. In the meantime, Matt Yglesias makes a more general point, arguing that this sordid affair shows that when it comes to developing alternative energy sources, it's much better to simply tax greenhouse-gas emissions—through either a carbon tax or cap-and-trade system—than have Congress directly bankroll alternative-energy sources, since Congress is very likely to muck things up. (There's an obvious exception for infrastructure projects, such as electric grids or mass transit, since those things won't magically materialize just because we have a price on carbon.)

There's an elegant logic to Matt's view, but I wanted to quibble just a bit. There's actually a case for both taxing carbon and offering additional incentives for alternative energy sources. Pollution's not always the only externality at work. As Rob Inglis noted in this old post, even setting aside carbon, there are a whole variety of market barriers frequently preventing new alternative-energy sources from gaining a foothold (he used solar PV installations as a case in point). In these cases, public support can be vital.

An Energy Department scientist I was chatting with yesterday offered up another good example. Back in the 1970s, DOE labs discovered that using electronic ballasts in fluorescent light bulbs would make the bulbs vastly more energy-efficient—the bang for the buck, as they say, was huge. But, at the time, there were only two manufacturers making the ballasts, and neither had incentive to adopt the new technology, since if one did, the other would quickly follow, and no one would gain any market advantage—they'd just have spent a bit more money. So the Energy Department briefly set up a third ballast manufacturer, which encouraged the two private companies to switch, which led to impressive energy savings for the public at low cost. Yes, the government was "picking winners" here—but with positive results.

So this paper-mill saga is grotesque, and Congress certainly has a tendency to muck up very, very badly. (The ongoing corn-ethanol debacle is the best case in point.) But that doesn't necessarily mean the government should hop out of the business of promoting alternative energy altogether.

(Photo credit: Library of Congress)

--Bradford Plumer