Annals of unjustifiable government subsidy, kraft process edition

By Felix Salmon
April 4, 2009

Christopher Hayes has the astonishing story of how a well-intentioned tax provision, designed to get the transportation industry to add alternative fuels to their gasoline and diesel, has turned into an $8 billion subsidy for the US paper industry, which is needlessly adding diesel to its “black liquor” — a byproduct of the paper-manufacturing process which is burned for fuel. The unintended windfall for the paper industry is massive:

This past fall the Joint Committee on Taxation computed the cost of extending the tax credit for three months and projected it would cost a manageable $61 million. It now appears that the extension (which was passed as part of the TARP) could cost as much as $2 billion before the credits expire at the end of this calendar year.

This will be a very interesting test case of whether change has really come to Washington or not. There’s zero justification for this subsidy, but, says Hayes:

So far, though, to the surprise of McClay and others, there’s been not a peep from Capitol Hill. Allen Hershkowitz, a senior scientist at the Natural Resources Defense Council and director of its paper industry reform project, told me the industry wields significant clout in Washington and has benefited from myriad federal subsidies throughout its history, but that “this is really a perverse exploitation at the expense of the environment.”

The Obama administration seems to have done a reasonably good job of minimizing the old version of pork, where government billions went to the pet projects of powerful legislators. It remains to be seen whether the new version — where random industries suddenly find themselves having won the stimulus-package lottery — will be harder to eradicate.

(HT: Rortybomb)


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