The unintended use of an alternative energy tax credit by paper mills is reminiscent of the country’s misguided rush to ethanol as an environmentally friendly alternative to gasoline. Both show that prescribing ways to reduce fossil fuel use is often less effective than setting targets and letting companies decide how to meet them.
It wasn’t until some paper companies began requesting tens of millions of dollars in tax refunds that Congress realized that an alternative fuels credit was being used by this industry. International Paper, apparently the first to use the credit, has already received $71 million. Industry analysts predict the company could get more than $1 billion in tax benefits this year. Verso Paper received nearly $30 million in tax credit just for its mill in Jay.
The tax credit was part of the 2005 transportation bill. It provides a 50-cent-per-gallon credit for companies that blend biofuels into fossil fuels to promote alternative energy use.
In an unexpected twist, paper companies realized they could take advantage of the credit — by mixing diesel fuel into the biomass they were already burning to power their operations, thereby increasing their use of fossil fuel. For decades some paper mills have burned “black liquor,” which is a byproduct of the pulping process, to run their machines.
These companies should not be penalized for using alternative energy, but allowing them to claim billions of dollars worth of tax credits to basically keep operating the way they have for decades perverts the intent of the credits. Worse, adding fossil fuel to biofuel to gain the credit is completely counter to the intent of the legislation. At a minimum, Congress must stop this practice.
Use of the credit by paper companies was criticized Thursday at a Finance Committee hearing on energy tax credits. “Bad economic times are no excuse to cheat,” Sen. John Kerry, D-Mass., said in a statement.
Sen. Olympia Snowe defended the payments on the ground that they are akin to an economic stimulus package for paper companies, which are facing their worst financial situation in decades. “Given the gravity of our economic circumstances, do we really want to punish an industry that employs 1.3 million Americans?” she asked.
More than 40 paper mills across the country, including several in Maine, have announced temporary closings and layoffs. Sen. Snowe said the black liquor incentive was saving jobs.
If the intent is to save jobs, lawmakers should ensure companies that receive the payments are preserving jobs and investing in their mills, not just passing the windfall on to investors.
More important, the situation shows the problems with offering incentives for a specific behavior or technology. Instead, financial incentives should be offered for increasing energy efficiency or reducing greenhouse gas emission, allowing companies to decide how best to do this.