The Dernogalizer

May 4, 2009

Black Liquor: This Ain’t Your Father’s Liquor

Filed under: Energy/Climate,National Politics — Eugene Huskey @ 12:48 am
Tags: ,

Hello everyone! It’s Huskey here. Sorry I haven’t posted in a while. To some, that may be a welcomed absence. Anyway, for those of you who may have missed my previous post, I am a friend of Matt. He has asked that I contribute to his blog and offer a fresh opinion on political matters, both environmental and non-environmental. I tend to look at things from a fiscal perspective, which will be evident in many of my posts. Another thing that will be apparent is I am a conservative. I however, am not like most people, in that I actually respect other views and acknowledge that both ideologies have postiive views and negative views.  So, most would probably say I am a moderate.  In any event, I believe in what I say and give my opinion when it is asked to be solicited whether the person asking likes it or not. I would expect the same if the roles were reversed. Matt and I have that mutual understanding, which is one of the reasons he has asked me to post on here. I hope you all enjoy and please share your thoughts in the comments form!

Gene

OK….to the main reason for the post!

Cartoon from USA Today

Cartoon from USA Today

Every so often Washington throws out a controversy that brilliantly illustrates everything wrong with Washington. Consider the brewing outrage over “black liquor.”

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 post), 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?

For more info:

http://www.washingtonpost.com/wp-dyn/content/article/2009/05/01/AR2009050103861.html

http://www.bloomberg.com/apps/news?pid=20601109&sid=abDjfGgdumh4&refer=home

http://en.wikipedia.org/wiki/Black_liquor

**Update 5/26/09**  Here is a recent NY Times article which reports on the broader issue of stretching the definition of “renewable”.

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