Friday, March 03, 2006

A Lovely Scheme

A few years ago, I ran across a novel with an irresistible title, by an author previously unknown to me. "The Fools in Town Are On Our Side" got me hooked on the late Ross Thomas, who wrote twisty thrillers of the "guilty pleasure" variety. Yesterday, a friend referred me to an article in Time Magazine describing a scheme that would warm the hearts of Artie Wu and Quincy Durant, the two confidence men who were Mr. Thomas's greatest creations. The article describes the exploitation of a loophole in the tax code by producing synthetic fuels that only meet the definition under the most generous interpretation possible, along with current efforts to pry the loophole open even wider, rather than closing it.

Briefly described, the scheme takes advantage of incentives put in place during the 1970s to stimulate synthetic fuels production in this country. The government provides tax credits to companies in the synfuels industry to guarantee a floor price high enough to make the fuels attractive to produce. Coal gasification, coal liquefaction and the production of synthetic liquids from oil shale were major beneficiaries of this program in the early 1980s. The scheme described by Time, however, involves nothing more elaborate than treating coal in a minimal fashion that still leaves it in solid form, then marketing it as a synthetic fuel and pocketing the tax credits. The new wrinkle exposed by Time involves an amendment to this year's Reconciliation Bill that would maximize these credits by assessing them against oil prices in 2004, rather than the much higher prices prevailing in 2005 and 2006. Hundreds of millions of dollars are at stake.

Let me state clearly that I don't know anything about this beyond what I read in Time, nor can I vouch for any of the reported facts. My reason for drawing your attention to this is not to stir up outrage, though there would be ample cause, if the allegations proved true. Rather, I think this is a wonderful example of how well-intended energy programs can be exploited for purposes entirely contrary to what their supporters and the lawmakers who enacted them had in mind. It serves as a timely reminder--with all sorts of proposals floating around to push new energy technology, promote biofuels, and generally foster "energy independence"--that a potentially significant fraction of the funds targeted for these areas could end up bankrolling simple greed, without advancing our energy interests in the slightest, unless we're very careful about how we specify these programs.

When most of us think about alternative energy, we envision small companies pursuing highly innovative and risky new technologies and processes. We imagine scientists working diligently in private and government labs to squeeze out extra layers of efficiency and cost-effectiveness for solar collectors, advanced batteries, and hydrogen storage and conversion. But we need to realize that others will gaze longingly at the impressive line of zeroes in those appropriation figures and concoct ways to siphon off a bit for themselves.

That doesn't mean we should reduce or cancel these programs, but it does argue for an approach to energy incentives that would be much harder for the unethical to exploit. Rather than paying for activities that may add little or nothing to our supplies or efficiency, we should be rewarding results that are objectively measurable in incremental BTUs and kiloWatts. Specifying means, instead of outcomes, exposes us to inefficiency and worse.

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