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Paper Companies' Windfall of Unintended Consequences

Posted by kdawson on from the pulp-nonfiction dept.

Jamie found a post on ScienceBlogs that serves as a stark example of the law of unintended consequences, as well as the ability of private industry to game a system of laws to their advantage. It seems that large paper companies stand to reap as much as $8 billion this year by doing the opposite of what an alternative-fuel bill intended. Here is the article from The Nation with more details and a mild reaction from a Congressional staffer. "[T]he United States government stands to pay out as much as $8 billion this year to the ten largest paper companies.... 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.'"

31 of 284 comments (clear)

  1. lawmakers by Anonymous Coward · · Score: 5, Funny

    Incompetent lawmakers are incompetent.

    1. Re:lawmakers by RichardJenkins · · Score: 5, Insightful

      Precisely. We live in a society where 'corporate selection' fosters public companies who mindlessly take the action which most increases value for their shareholders. If a law is written such that it can be gamed - it will be.

      Lawmakers should take that into account and legislate around it; cause they sure ain't gonna change Corporate American Culture any time soon.

    2. Re:lawmakers by mrcaseyj · · Score: 5, Interesting

      In the short term the solution for this is for the president to order the IRS to withhold these payouts until congress can close the loophole. If the paper companies sue, they would get laughed at or scolded by the judges as this is an obvious and evil perversion of the intent of the law.

    3. Re:lawmakers by WindBourne · · Score: 3, Insightful

      You appear to be making the mistake of thinking that this was an accident. It may not be. The "gaming of the system" may actually be by the lawmaker.

      --
      I prefer the "u" in honour as it seems to be missing these days.
    4. Re:lawmakers by RichardJenkins · · Score: 3, Funny

      Corporations and individuals are not free to pursue their own interests in whatever method they want - we create laws specifically to prevent that.

      Are you saying you want a type of anarchy where anyone can do whatever they want, and hope that acting in a way detrimental to society correlates with bankruptcy?

      I agree with what you say about having to make sure the "balance is positive" - but I think copious legislation should be applied to ensure that you can only have achieve this by benefiting society.

    5. Re:lawmakers by OeLeWaPpErKe · · Score: 4, Interesting

      Exactly, and in this case, they did just that : they pursued their own intrest the way the law forced them to, instead of the most profitable (and therefore, at least in this case, most environmentally friendly, way).

      In general, the cheapest way for factories is often the one using the least raw material, and therefore at least close to the most environmentally optimal way.

      but I think copious legislation should be applied to ensure that you can only have achieve this by benefiting society.

      You're assuming that laws always benefit society. I guess women should be glad they get stoned in muslim countries. After all, it benefits society, right ? That's what the law does. Of course, very nearly all muslim countries are, at best, third world countries, racist dictatorships or worse. Seems their laws are less than optimal ... for both society and the environment.

      But of course, "America is different !". Oh wait, not at all in this case. I guess that what happened here, totally in compliance with the law, and bad for BOTH society and the environment ... means nothing to you ?

      But this was in compliance with the law, and against market forces, so surely it must have been good for society and for the environment ... oops ...

      Why don't we look at the environmental situation in a country where "copious legislation", in fact as copious as it gets, was in force.

      And there we find ... chernobyl, in the soviet union.

      It seems to me your argument is flawed, both in theory and in practice.

      You see, you assume laws are in the intrest of society, which is a standpoint that's idiotic, to say the least. In fact, given the world's current situation, the less laws a society has, the better it does.

    6. Re:lawmakers by benjamindees · · Score: 5, Insightful

      we create laws specifically to prevent that.

      The only thing this law has prevented is papermills from using alternative fuels.

      Are you saying you want a type of anarchy

      The parent said nothing about anarchy. No need to erect strawmen.

      I think copious legislation should be applied

      Your "copious" legislation has already been applied. It is demonstrably counterproductive.

      --
      "I assumed blithely that there were no elves out there in the darkness"
    7. Re:lawmakers by sumdumass · · Score: 3, Insightful

      Exactly, and in this case, they did just that : they pursued their own intrest the way the law forced them to, instead of the most profitable (and therefore, at least in this case, most environmentally friendly, way).

      Well, actually, in this case, the most profitable way was with the law. I'm not sure you entirely grasp what has happened here. Maybe you have and I'm just reading you wrong.

      The paper companies already produce about 70% of their energy by using byproducts in the process of making paper. Under the law, if they add just a few gallons of fuel to the process, claim the process requires Gasoline, Diesel fuel or Kerosene, they get 50 cents per gallon on the 70% of energy they already created with the black liquor or whatever it was called. If they used 100 units of energy divided up with 70 gallons of their byproduct and 30KW or whatever the equivalent is of coal powered electricity, then by removing one KW electricity and adding it to the byproduct, they now get 50 cents for those 70 gallons. So at least in this case, they are doing both- "the most profitable (and therefore, at least in this case, most environmentally friendly, way)" and the most profitable way the law made them.

      From the portion(s) of the law that I can tell, they don't have to add much more then one gallon of diesel to every batch of byproduct to qualify for the alternative fuel credit. The key point is in calling the process something else that requires Gasoline, Diesel fuel or Kerosene to get the credit for what they were already doing.

    8. Re:lawmakers by Ashriel · · Score: 5, Informative

      Doesn't matter. Precedent from the Supreme Court states that the IRS has sovereign immunity and cannot be sued on any issue within it's own domain.

    9. Re:lawmakers by Volante3192 · · Score: 4, Insightful

      Except in our case, the cost of getting the car would exceed the benefit of getting the credit.

      What the paper companies have is a benefit of the credit outweighing the initial cost to pull it off.

    10. Re:lawmakers by jbengt · · Score: 3, Informative

      I won't argue with your distaste of the Federal Reserve, Fannie May, or Freddie Mac, but I want to make a few points about regulation and government intervention.

      The great majority of sub-prime loans made were not made under The Community Reinvestment Act.
      The sub-prime loans made under the Community Reinvestment Act have a lower default rate than those made outside of its' purview

      Too much regulation did not cause Fannie May, Freddie Mac, and others to overvalue their portfolios.
      Too much regulation did not cause the ratings companies to give the securitized mortgages high ratings greatly understating their risk.

      Too much regulation did not create the credit default swaps without enough reserve to pay them off in case of a bad economy, nor did it cause the companies selling those to insure their credit default swaps with more credit default swaps from another company that also did not have enough reserve to pay them off.
      Too much regulation did not cause the ratings companies to rate the companies holding credit default swaps with insufficient backing AAA even though they could not pay off their obligations in case of default.

    11. Re:lawmakers by CrimsonAvenger · · Score: 5, Insightful

      In the short term the solution for this is for the president to order the IRS to withhold these payouts until congress can close the loophole. If the paper companies sue, they would get laughed at or scolded by the judges as this is an obvious and evil perversion of the intent of the law.

      Alas, we live in a nation where rule of law is paramount.

      The letter of the law is what the law is, not the "intent" of the law.

      Which means it would be illegal to withhold payments specified by law, and any lawsuit challenging such an act would likely succeed, with penalties.

      In other words, you're stuck with the law as written until someone changes it. The government trying to game the law by not obeying it is, if anything, worse than some corporation gaming it by taking advantage of something not foreseen by the lawmakers.

      After all, if the government can choose to not obey this law that you dislike, what's to prevent them from disobeying a law you like?

      --

      "I do not agree with what you say, but I will defend to the death your right to say it"
    12. Re:lawmakers by canadian_right · · Score: 3, Informative

      This "loophole" has existed and been blatantly abused for many, many years. These paper mills are not even close to the worse abusers. The worst one I heard about, and this was years ago, was factories that sprayed a light mist of diesel on coal to claim this tax credit.

      This tax credit should just be ended, not fixed.

      --
      Anarchists never rule
    13. Re:lawmakers by jc42 · · Score: 4, Insightful

      If the paper companies sue, they would get laughed at or scolded by the judges as this is an obvious and evil perversion of the intent of the law.

      Quite possibly it was written with exactly that intent. We've been often reminded by nearly everyone studying Congress that most proposed laws aren't written by the legislators at all; they're usually written by "consultants" who are part of the lobbying setup and are paid by the corporations interested in the laws. It has come out repeatedly that most members of Congress haven't even read the laws that they vote on. They usually have only read the summaries, which are written for public PR.

      So it's quite likely that whoever worked out the exact wording of the law was in the pay of one or more companies who wanted exactly what the story is about. They probably discussed it behind the scenes, until they were fairly sure that the wording would allow their employers to take advantage of the law in this fashion.

      It's how things are done. And it's hardly any secret. It's been written about more times than we can probably count.

      (Actually, none of this precludes the possibility of a Congressman understanding the issue. The point is that usually they don't bother themselves over such details. That's for their underlings to handle.)

      --
      Those who do study history are doomed to stand helplessly by while everyone else repeats it.
  2. Law from 2005 by Anonymous Coward · · Score: 5, Informative

    It wasn't mentioned in the summary, but the tax credit was passed in 2005. So no one thinks the $8 billion is related to stimulus packages passed more recently.

    No, those will cost us a lot more when companies figure out how to fraud them.

  3. Laws are used as written, not intended by corsec67 · · Score: 4, Insightful

    This is another example where the intention of the law doesn't mean anything, what is actually written and what that can be stretched to mean does.

    If a law is supposed to have a specific intention, then it should be written just for that.

    --
    If I have nothing to hide, don't search me
    1. Re:Laws are used as written, not intended by cjfs · · Score: 5, Insightful

      This is another example where the intention of the law doesn't mean anything, what is actually written and what that can be stretched to mean does.

      This is rather troublesome. If these situations continue our representatives may be forced to actually read the legislation they're passing.

    2. Re:Laws are used as written, not intended by amrik98 · · Score: 4, Funny

      This is another example where the intention of the law doesn't mean anything, what is actually written and what that can be stretched to mean does.

      This is rather troublesome. If these situations continue our representatives may be forced to actually read the legislation they're passing.

      Instead of thinking of the children?

    3. Re:Laws are used as written, not intended by jimicus · · Score: 3, Insightful

      If a law is supposed to have a specific intention, then it should be written just for that.

      Don't count on that happening any time soon. I've made similar points with my local MP about badly-drafted laws a couple of times - the response is inevitably a "soothing" "I'm sure they won't use it for that".

      There have been cases recently where I have been proved correct. I wonder if I should write to my MP and say "Further to my letter of 1999, I told you so".

    4. Re:Laws are used as written, not intended by Anonymous Coward · · Score: 4, Interesting

      The problem has nothing to do with intention. The problem is that the law was very badly written for every purpose. The law gives a $0.50 tax credit for every gallon of diesel mix used but the credit should have been based on some fraction of the price of diesel. The paper makers scam only works because the price of diesel has fallen so much.

      Indeed, if diesel and biofuel prices fell far enough we could all make money simply by burning gallons of it in our back yards: spend $0.40 on a gallon of mix; claim $0.50 from the IRS.

      If the law had been drafted by someone who wasn't retarded this situation would never have arisen.

    5. Re:Laws are used as written, not intended by Curunir_wolf · · Score: 3, Interesting

      The real problem here is that the law is basically an attempt to circumvent the fundamental principals of the Constitution, which was written to limit the powers of the Federal government. The founders didn't trust government, and sought to mitigate the necessary evil of having a government at all by restricting it to some very specific powers.

      The 16th amendment gave the Feds all kinds of new power, so that's what they always use to try things like controlling behavior (a power they really shouldn't have). So whenever they pass a law offering a "tax credit", people sit around going "hmmm... how can we get some of that?" And why not? That's what people do. The more of your money goes to taxes, the greater the motivation to limit your liability or to have some benefit from government giveaways.

      Same thing with all government handouts. About 40% of the budget of Medicaid and Medicare is spent on fraud. 40%. Because if people can get something for free, they will. Some will find legal ways (like these paper companies), and others don't care whether it's legal or not (like people that commit Medicare and welfare fraud).

      So the real problem is $3.8 trillion of government spending. It attracts corruption, fraud, waste, opportunists, and everything else bad that people keep complaining about. And the 535 or so deciding how to spend that money aren't really very interested in being very diligent with it, because it's other people's money - so who cares about a few billion wasted here or there?

      Repeal the 16th amendment, institute very strict term limits, hold the Federal government to the Constitution, and these problems would go away.

      --
      "Somebody has to do something. It's just incredibly pathetic it has to be us."
      --- Jerry Garcia
  4. Government interfearence screws up everything by pecosdave · · Score: 3, Interesting

    There is a limit to the amount of profit a car manufacturer on an individual car in the U.S. This only applies to basic passenger cars, not luxury cars or trucks. The answer? This is why the big 3 pushed trucks and SUV's so hard - which granted a large part of their customers wanted, but they largely ignored another large crowd that wanted small U.S. made economy cars. They produced crap instead, so we bought Japanese. Thank you Uncle Sam.

    Some Americans With Disabilities Act rules apply only to companies of certain size, as in number of employees. Compliance is incredibly expensive in many cases. Some companies put the brakes on at a certain number of employees due to the expense of compliance sentencing said companies to stagnate growth at a certain size giving their mega corporation competitors an upper hand. Thank You Uncle Sam. The same can be said of certain FDA regulations and any other regulatory agency you can name.

    My sister works for the Department of Agriculture. She writes checks to farmers to not grow crops.

    Here's an idea:
    KEEP THE FUCKING GOVERNMENT OUT OF IT

    Unless something really needs regulating, leave it the hell alone. Food? Fine we need an FDA to make sure our food isn't nasty and contaminated. They probably overstep their usefulness in some cases, and under step it in others, but that's expected.

    Yes, we do need an agency to keep track of Plutonium and Uranium. Just saying, yeah, track that.

    We need an EPA - but it needs to know it's place.

    ATF? We don't need that. It's a redundant agency originally created for tax purposes, not what they're doing now. It's also limiting freedom.

    No government regulation usually helps huge companies by keeping the small competitors down. Create an agency to regulate an industry, then the companies buy the candidates they want and put them in the regulatory committees. The little guys can't do that.

    --
    The preceding post was not a Slashvertisement.
    1. Re:Government interfearence screws up everything by Samschnooks · · Score: 4, Insightful

      Unless something really needs regulating, leave it the hell alone. Food? Fine we need an FDA to make sure our food isn't nasty and contaminated. They probably overstep their usefulness in some cases, and under step it in others, but that's expected.

      Unfortunately, industry will stick their noses in when regulations are being written. Wonder why the FDA doesn't have many warning about the mercury in Tuna whereas private consumer groups do?

      Let's just say, legally this would be considered hearsay, but it was said that the Tuna industry was literally looking over the FDA'a shoulder when those regs were written.

      So, even then, Government is too easily corrupted. Unfortunately, I don't have a better idea.

    2. Re:Government interfearence screws up everything by glgraca · · Score: 3, Insightful

      I have a better ideia: keep the private sector out of government.

      If you look closer, you'll find it's the agricultural lobbies that have gotten these absurd incentives, not the government that decided out of thin air to grant them.

    3. Re:Government interfearence screws up everything by mmalove · · Score: 4, Interesting

      "So, even then, Government is too easily corrupted. Unfortunately, I don't have a better idea."

      I do. You have to take the law back to principles, rather than specifics. Here's a few many of you are familiar with:

      THOU SHALT NOT KILL.
      THOU SHALT NOT STEAL.

      Therefore, undisclosed mercury in Tuna and defrauding an energy subsidy as a paper mill would be considered BREAKING THE LAW.

      While we're at it, I have another recommendation. Since waterboarding is simply "enhanced interrigation", I'd suggest it should be a viable questioning technique for these types of white collar crimes. I have a strange belief system where if someone elses' countrymen are trying to kill me, I can at least see they were raised and taught that way. When my OWN countryman are trying to kill me, they should be punished ten times worse.

      --
      You can get 15 minutes of fame, but you can go down in history for infamy.
    4. Re:Government interfearence screws up everything by downix · · Score: 3, Interesting

      I did, I intentionally pushed to the logical conclusion of "where do you draw the line".  You want food regulated, but what about silverware?  Got to make sure we don't see a return to mercury/lead for those, or the use of toxic plastics, but then we have plates, which leads us to..... you see the pattern?

      Now, I am with you in some respects, that the regulations are custom tailored to the corporate giants as/is, and that needs to stop.  I miss the days of the trust-busting, breaking up big business to give the little guy the shot at the top, Theodore Rooseveltites.  Now that was how to regulate.

      --
      Karma Whoring for Fun and Profit.
  5. Re:In general, sneakyness beats altruism by OeLeWaPpErKe · · Score: 3, Insightful

    Ever heard of corruption ?

    If the lawmakers find a hole they gain nothing. If they miss a hole they lose nothing.

    If companies miss a hole they gain nothing, if they find a hole they gain $8 billion.

    If lawmakers find a hole, they gain nothing. If they miss a hole, they get 2% of that $8 billion.

    There, fixed that for ya.

  6. Wait, this seems familiar... by dcmoebius · · Score: 3, Funny

    Does anyone else feel like this is an episode of "The Office"?

  7. Re:Well, folks... by Ashriel · · Score: 3, Interesting

    Capitalism seemed to work pretty well until we gave up on it early last century (it was just too damn hard for large companies to compete in an open market). We could always try that again.

  8. Re:Well, folks... by blahplusplus · · Score: 4, Insightful

    This has nothing to do with central planning, this is clearly a case of abusing the law for gain.

    The two are NOT the same.

    Nor does is it evidence of your implied counterpoint that in a decentralized economy stupid economic or environmental decisions would not get made, they certainly would.

    There's a reason why we have laws in the first place, some days I wonder if anyone certain people on slashdot has read the history of corporate America and the things they used to get away with in a more decentralized economy because there was no authority whatsoever.

  9. Re:Well, folks... by Scrameustache · · Score: 3, Funny

    Capitalism seemed to work pretty well until we gave up on it early last century

    Children worked 18 hours a day in coal mines and the liked it!

    --

    You can't take the sky from me...