The above story about black liquor is about another such scheme to capture subsidies, with the usual distortions and costs to the markets involved. There are a lot of schemes, most of which go unreported, and all of which go on for years before being modified.

Politicians can create these schemes faster then public opinion can shut them down.

In a joint letter to Congress, Canadian ambassador to Washington Michael Wilson and his counterparts call on the United States to close a loophole that allows pulp and paper companies to take advantage of a tax credit for using alternative fuels.

They say American companies are reaping up to $8 billion a year by mixing in a pulp byproduct called black liquor with diesel fuel, qualifying for the credit, in contravention of World Trade Organization rules.

Some companies claim credits that amount to approximately 30 per cent of the selling price of pulp, the diplomats assert.

Note the date on the article about “splash-and-dash”: April 1, 2008. Later in 2008 Congress changed the law regarding biofuel subsidies so that only fuel sold for use in the U.S. is eligible. As a result, splash-and-dash is no longer an issue.

Public support would “tank” when faced with the impacts of both: a ~$65 billion per year incremental federal revenue stream from either a carbon tax or allowance sales; and, the impacts of the investment of ~$700 billion per year in new low/no carbon emissions facilities and equipment to actually reduce carbon emissions.

When it became obvious that global carbon emissions were continuing to rise, despite the economic pain in the US, as the result of continually growing emissions from China and India, among others, the entire process would collapse and take its perpetrators down with it.

And, because nothing is actually delivered, the entire scheme depends on regular and detailed investigation to verify that (1) carbon was being produced, and (2) now less carbon is being produced. How are they going to do that?

For example, there is much fraud now in subsidizing biofuels, but it is entirely legal and tolerated politically. I would guess that politicians are profiting from the loophole.

Demands for Crackdown on Biofuels Scam
12/15/09 – stopglobalwarming.org

Up to 10% of biofuel exports from the US to Europe are believed to be part of the rogue scheme reaping big profits for agricultural trading firms.

The “splash and dash” scam involves shipping biodiesel from Europe to the US where a dash of fuel is added, allowing traders to claim 11p a litre of US subsidy for the entire cargo. It is then shipped back and sold below domestic prices, undercutting Europe’s biofuel industry.

The trade is not illegal, but flouts the spirit of producing green fuel by transporting it needlessly across the Atlantic at a time when campaigners are voicing concern about emissions from global shipping.

Fraud, and potentially manipulation, is far more likely to occur in the offsets component of the market than in the allowance trading. It’s here that there will be temptation to game rules to create counterfeit supply and where regulators will face the greatest challenges with respect to information asymmetry and participant incentives.

Market manipulation might also be more likely under different cap and trade design approaches. Both the EU ETS and the RGGI system are downstream and allow non-compliance (speculative) participants. That is not true of an upstream system like the CLEAR Act (Cantwell). In that setting, there are far fewer participants and a small number that would, of necessity, hold or control substantial portions of the market. That is at least a potential recipe for market manipulation claims.