&EPA
ilted States
Environmental Protection
Agency
, Plannin
And Evaluation
(2121)
230-R-94-
August 1994
Federal Disincentives:
A Study Of Federal Tax Subsidies
And Other Programs Affecting
Virgin Industries And Recycling
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Federal Disincentives:
A Study of Federal Tax Subsidies and Other Programs Affecting
Virgin Industries and Recycling
United States Environmental Protection Agency
Office of Policy Analysis
August, 1994
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TABLE OF CONTENTS
FOREWORD ii
EXECUTIVE SUMMARY iii
I. INTRODUCTION 1
H. POTENTIAL DISINCENTIVES TO RECYCLING: FEDERAL TAX CODE 2
Percentage Depletion Allowances 3
Tax Code Provisions For The Timber Industry 10
Tax Provisions For Development Of Energy 13
Financing Provisions 17
Other Tax Considerations 18
Conclusions 19
HI. POTENTIAL DISINCENTIVES TO RECYCLING: FEDERAL PROGRAMS 20
Timber Production 20
Mining Subsidies 25
Energy Subsidies 26
Federal Subsidies for Water 34
Transportation Subsidies 37
Conclusions 40
IV. THE MAGNITUDE OF FEDERAL SUBSIDIES:
CASE STUDY OF THE PAPER INDUSTRY 41
Industry Overview •. 41
Method 43
Federal Tax Policies 44
Below-Cost Timber Sales 45
Energy Subsidies 48
Water Subsidies 51
Pollution Control Requirements 52
Export Restrictions 53
Federal Subsidies Of Virgin Paper In Perspective 54
REFERENCES 56
APPENDIX A: HISTORY OF FEDERAL POLICIES AND SUMMARIES
OF POLICIES NOT COVERED IN THE MAIN REPORT 60
APPENDIX B: DERIVATION OF VALUES USED IN THE BODY OF THE REPORT 66
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FOREWORD
This report was initially drafted by Temple, Barker & Sloane, Inc. (TBS) for EPA's Office of
Policy Analysis. EPA circulated the report for comment within the Agency and to several outside
reviewers. Subsequently, EPA integrated these comments into this final report.
EPA would like to acknowledge the contributions of several individuals to the research and writing
in the report. The initial draft was prepared by Douglas Koplow and Kevin Dietly of TBS with
assistance from Dr. Terry Dinan of the Office of Policy Analysis. They were substantially assisted in
their research by generous contributions of time and data from H. Richard Heede of Rocky Mountain
Institute in Boulder, Colorado. His pioneering work measuring federal energy subsidies filled an
important gap in the background data. Seymour Fiekowsky of the U.S. Department of the Treasury also
provided important information on the federal tax code.
EPA also acknowledges the contributions of the reviewers of the draft report. Thomas Gillis of the
Waste Policy Branch of the Office of Policy Analysis (OPA) managed the development of the final
report, providing comments and coordinating the work of the reviewers, and drafting the final report.
Adam R. Saslow, also of OPA's Waste Policy Branch, reviewed and edited the material and coordinated
the publication of the report.
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EXECUTIVE SUMMARY
In February 1989, EPA's Municipal Solid Waste Task Force recommended a national strategy for
addressing the emerging issues in solid waste management. As part of The Solid Waste Dilemma: An
Agenda for Action, the task force called for a study of existing disincentives to recycling. This report
responds to that recommendation.
Disincentives to recycling are the product of numerous factors --governmental policies at all
levels, market forces, and structural conditions within a particular industry. This particular report
focuses on identifying federal government policies that may hinder recycling activity and assessing their
impact. We expressly do not consider many other important factors that may also affect recyclables such
as state and local taxes, investment, and recycling policies; private or municipal underpricing of existing
landfill capacity; U.S. foreign policy and issues of industrial structure. Our focus, rather, is on federal
tax subsidies and other programs for extractive industries that affect the competing secondary industries.
Of the various recycling markets existing (paper, aluminum, plastic, and glass), the pulp and paper
market is highlighted as a case study of the impacts of disincentives because of paper's dominance in the
municipal waste stream.
This general discussion of disincentives is divided into three sections: those based on the federal
tax code, all other federal programs, and the case study of the paper industry. Much of the federal tax
code and natural resource development policies were found to have historical antecedents dating back to
the early 20th century or other periods of economic hardship during which the Congress sought to
encourage development of natural resources and extractive industries. For example, Congress authorized
the first depletion deductions for minerals in 1913. Timber sales from the federal government date to
1891. And below-cost mining leases have their antecedent in the Mining Law of 1872.
In many cases, the original intent of the tax provisions or programs have become antiquated.
Nevertheless, industry lobbying has been effective and the programs have remained, resulting in
continued preferential treatment for primary extractive industries vis-a-vis secondary markets. The Tax
Reform Act of 1986 eliminated some energy subsidies, the 10% investment tax credit, the energy tax
credit, and the capital gains allowances which had separated long-term capital gains from ordinary
income for tax purposes (See Appendix A) since 1922. This report, for the most part, deals with the
post-1986 world.
For several reasons, we have been unable to ascertain the precise magnitude of the impacts of the
federal tax and program subsidies on secondary materials markets ("cross-elasticity" effects). First, the
pricing mechanism is the primary vehicle by which tax and other subsidies in primary industries can
have an effect on recycled markets. Theoretically, subsidies should lower the price of the subsidized
good, rendering a comparative advantage not available to secondary competitors. The supply curve for
the subsidized good "artificially" shifts to the right, lowering its price vis-a-vis the secondary material.
However, if a market is monopolized, domestic subsidies to the industry are not likely to have a material
impact on the market price of the good. This may also be the case if the subsidized industry is producing
an output priced on the international market rather than on the basis of domestic supply and demand.
For the markets we examined, this cross-elasticity effect that domestic subsidies could yield was
substantially weakened because prices were set on the international market. Despite this dampening
effect, some cross-elasticity measures are used to estimate the effects of federal subsidies for primary
iii
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production of paper, steel, copper, aluminum, and lead on their recycled competitors (waste paper, scrap
steel, scrap copper, scrap aluminum, and scrap lead, respectively). The cross-elasticity estimates,
however, date back to 1977 and 1978. A fruitful areas for further research might be the development of
newer cross-elasticity estimates. Calculation of these new estimates was beyond the recommendations of
the Agenda for Action and, thus, beyond the scope of this report. Nevertheless, more current estimates
might be needed to replace older estimates to give us a better idea of the magnitude of the cross-over
effects.
Although we could not determine significant impacts of subsidies on recycling through the price
mechanism, subsidies to virgin industries (which undoubtedly raise their profit margins) render these
industries more attractive to new entrants over the long run. Entry into the virgin industries becomes
more likely and exit less likely in comparison to the unsubsidized world ~ with the total effect being an
"over-production" of the virgin material compared to quantities that would result from an undistorted
market. Although we have strong reason to believe that depletion allowances, tax policies and other
subsidies bolster virgin materials production through their long-run impact on entry into the industry, we
did not consider the entry and exit issue in this report.
Other findings that can be drawn from the report include the following:
Depletion allowances provided approximately $1.06 billion in benefits to independent oil and gas
producers and to all mining industries in FY 1988. The impact of these benefits on the glass,
aluminum, and oil and gas markets appeared to be small, however, given the small fraction of
domestically produced natural resources used in the production of some primary materials, the
small share of total production costs attributable to these benefits, and the existence of the
alternative minimum tax.
The majority of federal subsidies to primary production are indirect in the form of support to
energy production. The total value of federal energy subsidies in 1988 was $26.7 billion. Since
recycling tends to be far less energy-intensive than primary production, energy subsidies passed on
to energy consumers in the form of lower prices could vastly favor virgin production over
recyclable. For example, primary aluminum uses an average of 95% more energy than secondary
material, and recycled paper requires 43% less energy that virgin pulp. Although we have reason
to believe that energy subsidies are not heavily reflected in domestic prices, a conservative scenario
that assumes the full subsidy is passed on to energy consumers (such as aluminum producers)
would result in the energy-intensive primary aluminum industry receiving a total of $331 million in
subsidies in 1989, or 23% of the delivered price of aluminum.
The timber industry received specific benefits from the tax code, which amounted to $459 million
hi FY 1988, also comprising a rather small fraction of the total timber market.
Special tax provisions and direct program outlays cost the individual U.S. taxpayer close to $30
billion in 1988, with the significant portion of the total going for energy subsidies. While the
downstream effects to primary producers of paper, aluminum, glass, and other materials were difficult to
quantify for reasons cited above, we can be quite confident in concluding that the overwhelming bias of
federal tax policies and program outlays favors extractive industries and their beneficiaries over recycled
markets.
IV
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1. INTRODUCTION
in many communities, tightening landfill capacity, rising disposal costs, and increasing concern about
the environmental effects of landfilling and incineration, are posing very complex problems for waste
managers. Although EPA views solid waste management as a state and local responsibility, it believes that
the federal government can provide its expertise to identify and analyze key problems. Toward this end, in
February 1988 EPA created a task force, which published its findings a year later in The Solid Waste
Dilemma: An Agenda for Action. The Agenda identifies next steps for EPA in a number of areas, such as
source reduction, recycling, and reducing the risks associated with incineration and landfilling. This report
responds to a recommendation in the initial plan for EPA to complete a study of existing disincentives to
recycling.
A number of disincentives to recycling have been frequently mentioned, especially in analyses
sponsored by EPA in the late 1970's. The most commonly cited examples include the tax code, federal
subsidies for natural resource development, trade policies and discriminatory freight rates. In addition to
federally controlled disincentives, governmental policies at all levels, market forces, and structural conditions
within a particular industry (e.g., vertical integration, which inhibits shifts away from virgin inputs) may be
working against efforts to incite the development of markets for recycled goods.
Development of an effective strategy to encourage recycling requires an understanding of all forces
affecting different aspects of the recycling market. This particular report identifies the federal government
policies that may pose the greatest hindrance to recycling activity and attempts to assess their impacts. Time
and resource constraints prohibit us from considering many other important factors that may also affect
recyclables. With the exception of one report.1 neither the public nor the private sector has analyzed these
topics in recent years. As a result, EPA initiated this project with several objectives in mind:
Identify current disincentives resulting from federal regulations and federally subsidized programs.
Quantify the magnitude of federal subsidies wherever possible.
Complete a detailed examination of disincentives to paper recycling. The objectives of the case study-
were to quantify', to the extent possible:
the dollar value of federal subsidies provided, either directly or indirectly, to producers of virgin
pulp: and.
the potential impact of subsidies on production decisions (i.e.. the choice between primary and
secondary inputs to production).
At a later time. EPA may analyze other federal programs and different industries. In the meantime, it is
hoped that this information will contribute to federal policy development designed to promote
environmentally sound recycling, conservation, and energy efficiency in the most cost-effective manner
possible.
Franklin Associates. Ltd.. and the Center for Economic Policy Analysis. Economic Incentives and Disincentives fry
Recycling of Municipal Solid Waste. DRAFT. December 1988. Prepared for the Office of Technology Assessment.
1
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II. POTENTIAL DISINCENTIVES TO RECYCLING: FEDERAL TAX CODE
Introduction
For the purposes of this report, a potential federal disincentive to recycling is defined to exist where
federal tax or expenditure policy increases the cost of using recycled materials relative to the cost of virgin
materials, where the recycled material is a substitute for the virgin material. A disincentive can be created by
increasing the relative price of recycled goods, either by increasing the production cost of the recycled
material or by decreasing the production cost of the virgin material. As a result of this disincentive, fewer
feedstocks for recycling may be consumed in the marketplace than would otherwise be the case.
This report does not consider the long-run incentive effects of tax or expenditure policies: instead, it
considers only short-run impacts on costs and prices. For example, federal tax policy might decrease a
commodity's production cost, but have no impact on its product price (i.e.. the subsidy is not "passed
through" to consumers in the form of a price decrease). In the long run. the profit to be earned producing
such goods might attract additional firms or other additional investment, eventually lowering product prices
(because of increased supply). This report considers only direct effects on product prices, rather than the
indirect effects caused by entry into or exit from the industry. The latter issue would be a suitable topic for
future research.
In this chapter, we explore the potential disincentives created by the current federal tax code, as
amended in 1986. More recent changes to the tax code continue to make this area rich for further analysis.
There is a long history of structuring federal, state, and local tax codes to provide incentives that will spur
industrial or natural resource development, some of which may be deterrents to recycling. The potential tax
disincentives we examined in this effort fall into one of five categories:
percentage depletion allowances, which are available solely to primary minerals and some oil/gas
extraction companies:
tax provisions for the timber industry, which include special treatment of expenses associated with
timber production:
tax provisions for development of energy, which include expending of exploration and development
costs, tax-exempt bonds, and percentage depletion allowances:
financing provisions, which may either subsidize or hinder virgin material production: and,
other tax considerations, which is a catchall for other general tax deductions-not directed solely at the
virgin materials producers—that could influence the cpsts of primary and secondary materials,
depending on the characteristics of the production process and the firm (e.g., accelerated pollution
control expenditure amortization).
*
This chapter describes the main disincentives in each of these categories. In particular, the chapter
presents the origin of the disincentive, how the disincentive operates, the main industries affected, and the
extent to which the disincentive could adversely affect recycling-using either qualitative or quantitative
measures. Additional information about the history of the disincentive and its operation may be found in
Appendix A of this report.
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Percentage Depletion Allowances
Purpose of These Allowances
Percentage depletion allowances are tax deductions that are available to mineral producers (including
oil and gas) which are intended to promote resource exploration and development.
Depletion allowances were initially enacted to encourage development of natural resources --
specifically minerals and oil and gas -- during times of economic hardship (e.g.. the World Wars). While
Congress intended to rescind these tax benefits once economic activity increased, lobbying efforts by the
primary industries resulted in their retention. Appendix A contains a brief summary of the major events
leading up to the tax code provisions for existing percentage depletion allowances.
How Percentage Depletion Allowances Work
Producers are permitted to deduct a portion of the depletable resource's value each year. Theoretically.
this provides them with seed money to initiate activities to replace the lost resource. Depletion allowances
vary by industry and by the location of the resource (i.e.. domestic or foreign).2 There are also limitations in
the tax code regarding the extent to which percentage depletion allowances can be used.
There are two methods for calculating depletion deductions from taxable income for non-timber natural
resources:3
1. Cost depletion allowances permit industry to gradually recover capital outlays. The rate of recovery
depends on the ratio between the current unit sales of a mineral and the total anticipated unit sales from
the property. Cost depletion, like depreciation for capital equipment, is a standard accounting method
used to recover investment costs, and has existed since the origin of the tax code in 1913. Cost
depletion is calculated as:
(X + Y-Z)*P
where: X = The acquisition cost of the mine.
Y = Certain costs incurred to convert the raw deposit into a producing deposit.
Z = Previous depletion deductions already claimed.
P = The percent of the total mineral deposit sold during the fiscal year.
2. Percentage depletion allowances provide for a tax deduction against the gross income generated by
the property." Percentage depletion allowances enable the taxpayer a chance to recover more than the
A related federal program, foreign tax credits, may indirectly subsidize the production of virgin materials abroad. This
report does not address the foreign tax credit program.
Robert Tannenwald. Analysis and Evaluation of Arguments for and Against Percentage Depletion. Congressional Research
Service. March 22.1978.
Charles W. Russell and Robert W. Bowhay. Income Taxation of Natural Resources. 1989. Paramus. N.J.: Prentice Hall.
In.. 1989). p. 805.
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initial investment in the property. Percentage depletion is a straight percentage of gross income from
the mine property, regardless of mine value or actual investment expenditures:
I*D
where: I = Gross income from the property.
D = Allowable percentage depletion (this varies by industry -- see Table II-2).
Companies must compute depletion deductions using both approaches and then claim the larger of the
two amounts (i.e., the one that results in the lower net income and. therefore, the lower tax obligation). If cost
depletion results in the higher value, the company uses cost depletion until its investment has been fully
recovered. After this point, the company may deduct the value of the percentage depletion. Thus, the true
value of the subsidy to primary minerals industries is the value of tax deductions that occur after investment
costs have been recovered.
Percentage depletion deductions may not exceed 50% of taxable income (calculated before deductions)
in a given tax year.5 A company may use depletion allowances regardless of whether or not it sells the
mineral or fuel in question on the open market or uses it directly (as in a captive or vertically integrated firm).
Depletion allowances for internal use are calculated on the basis of an imputed market value of the materials.6
Percentage depletion allowances provided a gross tax benefit of greater than $1 billion in FY 1988
according to federal government budget estimates.7 Table II-1 summarizes the special tax treatment for
producers of virgin materials; $743 million (70 percent) of the depletion allowance benefit in 1988 accrued to
energy producers, with the remaining $318 million claimed by non-fuel mineral producers. The table shows
the effect of the 1986 Tax Reform Act. For example, during 1987 there was a decline in the cost of this
special tax treatment, although in some cases such as timber (discussed later), the tax benefits may have
simply shifted to different, previously unused categories.
Tannenwald, pp. 3. 5.
Russell and Bowhay. p. 803. This is an important point because many mineral processing industries are vertically
integrated.
Franklin Associates. Ltd.. and the Center for Economic Policy Analysis. Economic Incentives and Disincentives for
Recycling of Municipal Solid Waste. Draft. December 1988. Prepared for the Office of Technology Assessment.
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Table II-l
ESTIMATED COSTS FOR SPECIAL TAX TREATMENT
FOR VIRGIN MATERIALS PRODUCTION, FISCAL YEARS 1980 TO 1989
Minerals:
Expensing of exploration and
development costs, non-fuel minerals
Excess of percentage over cost
depletion, non-fuel mineral
Capital gains treatment of iron ore
Subtotal - Minerals
Timber:
Capital gains treatment of certain
timber income
Expensing of multi-period timber
growing costs
Investment credit and seven-vear
amortization for reforestation
expenditures
Subtotal - Timber
Total - Mineral »d Timber
Energy:
Expensing of exploration and
development cost for oil and gas*
Excess of percentage over cost
depletion for oil and gas
Total - Energy
Tola! - Mineral, Timber & Energy
1
FY80
27
493
27
548
740
-
-
740
1.288
2.980
2.041
s.olT
6.309
in millions of 1987 dollars)8
FY81
31
506
25
563
756
-
-
756
1.319
3.419
2.656
6.075
7.394
FY82
30
466
24
sT?
808
-
12
820
1 .339
3-.42S
2.667
6.095
7.434
FY83
62
531
45
638
831
-
34
864
1 .503
2.639
1.944
4.582
6.085
FY84
65
589
44
698
997
-
49
1.046
1.744
1.978
1.771
3.750
5.494
FY85
85
493
32
610
610
-
53
663
1.272
519
1.659
2.178
3.450
FY86
88
500
31
618
690
-
57
7~47
1.365
639
1.936
2.5~75
3.940
FY87
35
410
10
4~55
290
130
210
630
1.085
(675)
1.030
3~55
1.440
FY88
34
318
-
.352
10
256
203
468
820
(400)
743
343
1.163
FY89
37
293
-
330
-
279
195
474
804
(172)
618
446
1.250
Note: The corporate and individual categories have been combined for all years to give a total. In the energy category, the individual
benefits dominate substantially: in Fiscal Year 198S. 1986. 1987. 1988. and 1989 the corporate benefit is negative for
expensing of exploration and development costs.
' Franklin Associates. Ltd.. "Economic Incentives and Disincentives for Recycling of Municipal Solid Waste Draft." for the Office of
Technology Assessment. December 1988. Based on Franklin analysis of the "Budget of the United States for Fiscal Year 1982. 1983.
1984. 1985. 1986. 1987. 1988. 1989."
11 Some of these values are negative, meaning that the Treasury actually received revenues for these years. Since current repayment of
previously deferred taxes under the exploration expensing provisions exceeds the new deferred taxes due to reductions in the
expensing provisions in the Tax Reform Act. these values will stay negative until earlier deferrals are paid over time, and these figures
will again be positive (Seymour Fiekowsky. U.S. Department of Treasury', personal communication. June 28. 1989).
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TibU II-2
APPLICABLE PERCENTAGE DEPLETION ALLOWANCES'
Rate Elltlblc Materials
Regulated natural gas. fixed coniraei natural gas. and geothermal production (subject to certain conditions).
Sulfur. Uranium
If from deposits in the United Slates anonhosiie. clay, latente. and nephelite syenite (to the extent that alumina and aluminum compounds are
extracted therefrom), asbestos, bauxite, celesme. chromite. corundum, fluorspar, graphite, ilraenite. kyanite. mica, ohvme. quarts crystals (radio
grade), runic, block steatite talc, zircon
If from deposits in the United States, ores of the following metals antimony, beryllium, bismuth, cadmium, cobalt, columhium. lead, lithium.
manganese, mercurv. molybdenum, nickel, platinum and platinum BTOUD metals, tantalum, ihonum. tin. titanium, tungsten, vanadium, and zinc
15% - Oil and gas wells, subject to certain conditions, domestic Bold, silver, copper, iron ore: oil shale fnot subject to 7S*t depletion).
14% • Metal mines other than those listed at 22't or IJV rock asphalt, vermiculite.
Ball clay, bemonite. china clay, sagger clay, and clay used or sold for use for purposes dependent on its refractory purposes, so long as the material is
not specifically listed at ::*. above, or 7' >•> or ?'. below.
All other minerals not listed here, including, but not limned to. aplite. bants, borax calcium carbonates, diatomaceous earth. CE feldspar, fullers
earth, garnet, gilsomte. granite, limestone, leonardne. magnetite, magnesium carbonates, marble, mollusk shells (including clan shells and oyster
shells), phosphate rock, potash, quartzite slate, soapstone. stone (used or sold for use by the mine owner or operator as dimension stone or ornamental
stone), thenardite. tnpoli. trona. and i if not applicable under::'.) bauxite, flake graphite, fluorspar, lepidohie. mica, spodumene. and talc (including
prophyllne) unless material is used for np rap. ballast road material, rubble concrete aggregates or similar purposes, in which case the allowable
depletion is ?•§.
'All other materials' does __t include soil. sod. din. tun', water, or mosses, minerals from sea water, the air. or similar inexhaustible resources; oil or
gas wells
10% - Asbestos from foreign sources.
Brucite. coal, lignite, perlite. sodium chlonde. and wollastronite
Natural gas produced from geopressured bnne subject to certain condition.';
7K% . Clay and shale used or sold for use in the manufacture of sewer pipe or bnck. and clay, shale and slate used or sold for use as sintered or burned
lightweight aggregates
S% - Gravel, peat, pumice, sand, scoria, shale 'txceptwhen listed as eligible for 1 V« or 71i*» depletions), sione (except as eligible for 14*» depletion)
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Beneficiaries of these Allowances
The primary beneficiaries of percentage depletion allowances are all mining industries (including clay.
gravel, and hardrock minerals, such as copper) and independent oil and gas extraction companies. Table II-2
summarizes the depletion allowances under the current tax code, which range from 5 to 22 percent of gross
annual income. Depletion allowances could be subsidizing primary production in the following areas that
compete with recycling:
Aluminum: From domestic sources: nephelite syenite-when alumina and aluminum compounds are
extracted (22 percent) and bauxite (22 percent). From U.S.-owned foreign deposits: bauxite (14
percent).
Other metals: From domestic sources: cadmium, chromite. lead, mercury, nickel, platinum, tin, zinc
(22 percent): copper, iron ore (15 percent). From U.S.-owned foreign deposits. 14 percent.
Plastics, used oil recycling: Oil and gas extraction (10 to 22 percent), generally available only to
independent producers.
Glass: Sand (5 percent), clay for refractory properties (15 percent).
Concrete and road materials: Any minerals that may receive a 14 percent depletion allowance when
used directly, or a 5 percent depletion allowance when used in concrete or as ballast road material.8
Also, depletion allowances subsidize energy (e.g.. oil and gas extraction (10 • 22 percent), oil shale (IS
percent), uranium (22 percent)), which may also be beneficial to primary industries, especially energy-
intensive ones like aluminum production.
How These Allowances Affect Recycling
The magnitude of the impact on recycling of any given subsidy, if one exists, will vary by the size of the
depletion allowance, the virgin material mined, the structure of the industry using the material, and the
availability of substitutes for both product feedstocks and for the final product. For many of the inputs listed
in Table II-2. prices are set on the international market As a result, these rather significant domestic
subsidies do not significantly affect market price. In the long run, depletion allowances and other subsidies
"distort" the market by making the production of virgin materials more attractive than it otherwise would be.
Profits — artificially raised by favorable tax policies -- attract greater entry into the virgin materials market
than otherwise would be the case. It was beyond the scope of this project to gather detailed data on each
recycling market or to determine whether depletion allowances stimulate exploration for new minerals and
thereby subsidize their use.9 Instead, we used readily available information to explore whether depletion
allowances posed a significant disincentive to recycling. First, we relied on findings from a December 1988
report by Franklin Associates. Ltd. (FAL). et al.. which reviewed key studies from the late 1970's to quantify
the impact of various disincentives to recycling. Second, for a few industries (including oil and gas,
' Recycled materials can be used in road construction. For example, cullet is turned into glasphalt. and shredded used tires
can be made into rubberized asphalt. Also, there is reuse of asphalt (through remelting) and concrete aggregate.
* For a complete discussion of these arguments, see Tannemvald
7
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aluminum, and glass) we performed a screening analysis using currently available information. We then
assessed the fraction of the total primary product price that might be attributable to depletion allowances.
The studies in this review generally indicated
that subsidies to virgin material production do not
discourage the use of recyclable feedstocks. For
example, as shown in Table II-3. an Environmental
Law Institute (ELI) report using econometric
modeling10 predicted that eliminating tax subsidies
to virgin materials would change their prices, in the
most likely situation, from between 1 and 5 percent.
The most common consumer recyclables (e.g.,
paper, steel, and aluminum) had price change
impacts that were predicted to be 2.2 percent or
less. Taking this one step further. Table II-3a
shows that the ELI report and a 1978 JACA
Corporation analysis each predicted modest
increases (generally less than 1%) in the quantity of
secondary materials supplied once the virgin
materials prices increased. To the extent that the
1986 tax amendments may restrict some companies
from taking advantage of these tax deductions, the
estimated impacts on the supply of recyclables are
further diluted (see Appendix A for a discussion of
changes to the tax code).
Industry Examples
We performed an initial screening analysis of
the aluminum, glass, and the oil and gas industries
to provide perspective on the fraction of primary
product costs that could be attributed to tax
subsidies.
Aluminum
Outside of energy, bauxite is a key input to
aluminum production. However, only about 6.4
percent of all bauxite used in the U.S. aluminum
industry today originates from domestic bauxite
Table II-3
IMPACTS OF TAX SUBSIDIES ON
VIRGIN MATERIAL SUPPLY
CURVES
Industry
Paper
Steel
Copper
Aluminum
Lead
Predicted Cost Impicti
Maximum
Possible
-4.2
-30
-60
Most
Likely
1
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nihiuion of 1 19"« Enwomml Ln- Inomiie oidvfor EPA
Table II-3a
EXPECTED INCREASE IN RECYCLING OF
SECONDARY MATERIALS WITH SUBSIDY
ELIMINATION
M«teri»l
Waste paper
Scrap sleel
Scrap copper
Scrap aluminum
Scrap lead
Quantity Incrtue
(percent)
004-063
0.42-2.00
035
1 00
1175
Suuti FnnkJm Associuet. Ud Dtccntxrl9M.pt 13. tustdaiuicviHiitionofi
1 »•« EmTomiMil UK hamite repc* for »A ind 1 19" nport fcy J ACA CoiponMn
for UK US RurtiuofUinti
The models applied in these studies were developed nearly 20 years ago and. thus, do not take into account changes in the
recycling environment (i.e.. technology, environmental consciousness, etc...). Updating these models would be a suitable
topic for future research.
8
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sources.11 No U.S. facilities are currently producing
metallurgical-grade aluminum.12 Thus, percentage depletion allowances on domestic bauxite are not a factor.
However, since U.S.-owned foreign deposits are also eligible for percentage depletion allowances (although at
14 percent rather than 22 percent), there could be some impacts on the domestic aluminum market from this
tax benefit.
The U.S. Bureau of Mines estimates that the bauxite mining and drying process constitutes less than 2
percent of the market price of finished aluminum.13 Therefore, even if all imported aluminum came from
wholly U.S.-owned foreign deposits, advantages accruing to the primary industry due to percentage depletion
allowances would be less than 0.25 percent of the market price for aluminum.14 As a result, there is likely to
be a negligible impact on primary aluminum production prices and, thus, on recycling.
Glass
Using information obtained from the 1982 Census of Manufactures on glass products, it appears that
the cost of sand, clay for refractors, and other minerals (all supported by depletion allowances) account for
roughly 4 percent of the total delivered cost for glass containers. These figures are not dramatically different
for other glass products, such as flat, pressed, blown, and industry glass. Thus, it is doubtful that depletion
allowances (of either 5 or 14 percent) for inputs to virgin glass manufacturing have any significant impact on
glass recycling. The maximum estimated impact is 0.6 percent of the final delivered cost.
Oil and Gas
Currently, depletion allowances are available only to independent oil and gas producers. In the lower
48 states (there are few independent producers in Alaska), independent producers account for approximately
30 percent of the total oil and gas consumed nationwide.15 However, a smaller fraction will qualify for
depletion allowances under the current tax code. It is currently estimated that between 25 and 40 percent of
all independent producers (accounting for 8 to 12 percent of the domestically consumed oil and gas) pay the
standard tax. rather than the alternative minimum tax and would be eligible to claim depletion allowances.
An even smaller percentage may use the depletion allowances because of additional criteria that must be met
U.S. Department of the Interior. Bureau of Mines. Minerals Yearbook: Volume I. Metals and Minerals. 1986 (Washington.
D.C.: U.S. Government Printing Office. 1988). p. 145.
David Wilburn. U.S. Bureau of Mines, personal communication. October 3.1989. Non-metallurgical uses for aluminum
include aluminum-oxide abrasives.
David Wilbum. U.S. Bureau of Mines, personal communication. October 3.1989. This assumes a 15 percent return on
investment.
This estimate was derived as follows: (14% depletion on non-domestic bauxite) x (100% of imported bauxite from U.S.-
owned foreign deposits) x (2% bauxite cost as a fraction of aluminum cost). The actual impact would be even lower, since
only the portion of percentage depletion that is in excess of cost depletion is a subsidy, and since some portion of the savings
would most likely be passed through to the bauxite user.
U.S. Environmental Protection Agency. Office of Solid Waste. The Solid Waste Dilemma: An Agenda for Action.
Background Document Washington. D.C. (September 1988). p. 3.F-4.
-------
under the tax code.16 Also, it should be noted that benefits may not be transferred with a property' sale.1'
Thus, it appears that a very small fraction of the oil and gas produced domestically is actually subsidized by
depletion allowances. Where production is subsidized it should have no effect on the market price for oil and
gas. Thus, the oil and gas depletion allowance subsidy should have no impact on recycling.
Caveats
In general, the findings from this examination of depletion allowances suggest that these subsidies to
virgin material production are costing taxpayers well over $1 billion per year (see Table II-1). However, we
cannot reach strong conclusions regarding the relationship between these depletion subsidies and recycling
markets because: (1) empirical models were developed in the late 1970's (key assumptions may no longer be
applicable: and, (2) rough calculations for a few industries show that only a small fraction of the primary
product cost is attributable to minerals subsidized by depletion allowances. However, depletion allowances
are not the bulk of federal disincentives to recycling - as will be shown in this chapter and elsewhere. In
addition, our analysis did not capture the long-run effects of enhanced profitability among subsidized
industries, which undoubtedly encourages more entry into the industry than would result from an
unsubsidized world.
Tax Code Provisions For The Timber Industry
Historically, there have been two general t>pes of tax code provisions for the timber industry: (1)
capital gains allowances for timber and (2) the expensing of some timber management expenditures in the
year in which they were incurred, rather than waiting until the timber was harvested. Under the current tax
code, as amended in 1986. only the latter category of deductions remains available to the timber industry. In
this section, we describe the tax policies affecting the timber industry: timber management policy and
reforestation expenses. Appendix A presents information on capital gains taxes, since the tax code may
address them in the future.
In general, expenditures to enhance the value of an investment (e.g., development of a new product)
may be either "capitalized" or "expensed" for tax purposes, depending upon the type of investment project.
Capitalization is required when expenditures are made to enhance the value of an investment and the revenues
or the increase in value associated with that investment will not be realized for two years or more. In this
scenario, the costs incurred in a given year may not be used to offset current taxable income until the
investment begins to yield a saleable product or service (e.g., a road to be used, mature timber to be sold). At
the point of recovery, the initial investment plus interest may be "amortized" (recovered) throughout the
useful life of the investment.
Expenditures for current operating expenses or on investments with a producing life of less than two
years may be "expensed." hi other words, they may be deducted from income in the year in which they are
incurred, rather than being deducted at some date in the future. This allows firms to reduce their taxes now.
16 These include a cap at 50% of taxable income from the property for the year, and 65% of the taxpayer's income from all oil
properties, limited to the first 1.000 barrels per day.
r Environment and Energy Study Institute. Weekly Bulletin. April 10.1989.
10
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rather than when the investment produces income. The result is. in effect, a zero-interest loan equal to the
amount of tax paid on the expenditure for the amount of time the tax payment is deferred.
Following these general principles, the timber industry should be capitalizing all of its expenditures
associated with timber production. However, there are special tax provisions that allow the timber industry- to
expense some interim management costs against current income rather than capitalizing the expenses until the
timber is harvested (typically 20 or 30 years hence). The rationale for this exception is that the time from
initial investment until harvest is so long that there is a great deal of uncertainty associated with the value of
the final harvest. The discussion that follows provides more detail on which costs are capitalized and
expensed in the timber industry. Figure II-1 summarizes schematically the expenditure flows in the timber
industry.
Figure II-l
TIMBER PRODUCTION COSTS
Initial investment
Profit Realization (20-30 vrs)
Planting Costs'
Land Acquisition
Seedings
Access Roads
Labor & Equipment
Interim Management
Expenses
Closure
BtttsI R«o»v*l
JfefenftttttLttU*
Nafta: The coatt of shaded activities can be experaed in the fiscal year in which they are incurred The emu of the unshaded activities annex be recovered
unit timber culling stare (generally 2i>30 years)
' If exating land a reforested (during closure i planting costs are not incurred in the next cycle
* Reforestation may be only partially expensed ^^
Many expenses associated with timber production must be capitalized in the same manner as in any
other industry. These expenses include initial product, labor! and equipment expenses for planting the timber
stands, preparing preparation, and buying and planting the seedlings. The construction of timber roads must
also be capitalized, although not necessarily over the same period as the timber stand. Tax treatment of the
costs associated with roads will vary depending upon the type of road (primary, secondary, or spur). The
costs are amortized using cost depletion allowances for each category of expenditures—non-road expenses
and road expenses-once the timber harvest begins. While cost depletion is a common tax policy in many
industries, some people have argued that timber stands should not benefit from cost depletion allowances
when other agricultural crops do not. Timber producers have countered that the 20-30 year time frame of
11
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timber investments makes timber harvesting more like plant construction than like fanning. In any case.
unlike mineral and energy' extraction, timber producers may recover only their initial investments.
12
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Expensing of Timber Management and Reforestation Costs
All costs of managing the forest stands may be deducted in the year in which they are incurred, although
technically they should be included in forest capitalization expenditures. Provisions allowing the expensing
of these costs were retained in the Tax Reform Act of 1986 because industry asserted that capitalization
requirements would impose a significant incremental bookkeeping burden on individual landowners.18
Allowable deductions for management and reforestation activities include all material and labor costs
associated with annual brush removal, taxes on the timber stand, interest on loans, and thinning, pest and/or
weed control.19 While this polio, has existed for many years, tax expenditures were almost zero until 1987
(when the capital gains treatment for the industry began to be phased out. see Appendix A and Table II-1).
Expenditures for interim management costs jumped from nearly zero in FY 1986 to $130 million in FY 1987.
These expenditures reached $279 million in FY 1989.x
Two special tax provisions to encourage reforestation of timbered land also provide the industry with
tax reductions. First, individual or corporate taxpayers are eligible for a 10% annual tax credit (up to a total
of $1,000) on the first $10.000 in qualifying reforestation expenses. Second, the amortization of the $10,000
in eligible reforestation expenses may be accelerated (7 years versus 20 to 30 years). That is, the entire
$10,000 is amortized sooner, so that the forester recovers the investment faster and receives a $1,000 tax
credit. Qualifying expenses for this benefit include only those costs that must normally be capitalized and
include direct costs to plant or seed for forestation and reforestation purposes (e.g.. site preparation, seed or
seedling costs, labor, and tool costs).2'
As with the deductions for interim management costs, deductions for the reforestation benefits have
increased markedly since tax reform in 1986 (Table II-1), primarily because the base for estimating the
amount of the deduction has been changed. Claimed deductions for the investment tax credit and the rapid
amortization of the first $10.000 in reforestation expenditures jumped from $57 million in FY 1986 to $210
million in FY 1987. although these claims decreased slightly (to $195 million) in FY 1989.-
The impact of timber subsidies on the paper recycling industry is the focus of the case study
summarized in Chapter IV. As shown by the 1976-77 data presented in Table 11-3. eliminating tax subsidies
to the paper industry would likely increase costs by as much as 1%.
!t Ross W. Gone and Jack H. Taylor. Timber Industry: Possible Effects of Various Tax Reform Proposals. Congressional
Research Service, updated 12 1 86. p. 7.
19 Russell and Bowhay. pp. 2220-21: Gorte and Taylor, p. 1.
20 Franklin and Associates. December 1988. p. 3.
21 Russell and Bowhay. pp. 2220-23.
21 Franklin Associates. December 1988. p. 3.
13
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Tax Provisions For Development Of Energy
Energy is currently subsidized through several major tax policies: allowable expensing of some
exploration and development costs (which would normally be capitalized), tax-exempt bonds, and percentage
depletion allowances.3
The oil and gas industry may expense exploration and development costs, as well as the intangible costs
associated with locating and drilling a well (other than purchases of equipment). For example, expenditures
to survey potential sites and prepare a well for drilling may be expensed as intangible drilling costs.24 For
hard rock minerals.25 firms may also expense exploration costs to locate a body of ore or to determine its
extent or quality. Additionally, firms may expense developmental costs until the mine becomes productive.26
While these deferred taxes must eventually be paid, the expensing provisions provide industry with interest-
free loans (in the form of deferred taxes) for a portion of the enterprise's development costs.
Tax-exempt bonds, such as tax-exempt pollution control bonds and tax-exempt bonds for publicly
owned utilities, also provide subsidies to capital-intensive utilities. For example, the nuclear industry, as the
most capital-intensive of the energy industries, receives a significant percentage of the federal subsidies
provided by tax-exempt bonds.
Benefits to Primary versus Secondary Industries
The importance of these subsidies for our study of recycled markets lies in the comparison of energy
requirements for primary versus secondary industries. Materials reclamation can save large amounts of
energy, particularly in the energy-intensive primary industries (Table II-4 summarizes various estimates of
energy savings from recycling). Energy savings arise from a number of differences between primary and
secondary production.27
The energy required to extract and transport raw materials is usually greater than the energy required to
transport secondary materials.
In many cases, the energy required to manufacture products from primary materials is greater than that
required for secondary production..
The energy required for transporting primary products to markets is usually higher than that for
transporting secondary products since primary production sites are generally further from markets than
recycling operations. The relationship can. however, be reversed where the recycled goods need to be
transported to distant primary production facilities.
23 Other tax provisions include accelerated depreciation and the "investment tax credit" (now eliminated).
24 Russell and Bowhay. p. 113. Congressional Budget Office. Reducing the Deficit: Spending and Revenue Options. February
1989. p. 357.
25 Hard rock minerals are found in deposits mixed with rock (e.g.. gold, copper, lead, and iron).
26 Russell and Bowhay. pp. 120-23
27 Robert Forsell StaulTer. "Energy Savings From Recycling." Resource Recycling. January February 1989. p. 24.
14
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If we define "energy intensive" by a firm's energy costs relative to their total production costs, analysis
suggests the following: an energy intensive primary industry (using large quantities of subsidized energy) will
accrue greater benefits from energy's special tax treatment than a less energy intensive secondary industry.
While both primary and secondary industries benefit from the subsidies, the Qfil subsidy to primary producers
is greater because energy costs are a larger component of aggregate production costs. Thus, the impact of
subsidized energy on secondary industries could be significant, albeit indirectly, as raw materials extraction
and processing firms are some of the largest industrial users of electricity in the United States.28 In general.
however, federal energy subsidies have little effect on actual energy prices because energy prices are
determined in the world energy market. Nonetheless, there may be circumstances where energy subsidies
have substantial effects (for example, a regional power authority can subsidize electricity prices, attracting
primary producers) on production costs.
Table 11-4
ENERGY SAVINGS FROM RECYCLING
100% loev.
Virgin Recycled %
MBtu/ton MBtu/ton Savings
Aluminum*
250.7
Glass1
5*0
11.8
32-3
12 C
Steel'
95°o
43%
8°o
**«
6IS
44%
Note: These point estimates are averages of figures reported
in several published studies. E.P.A. cannot comment
on the validity or comprehensiveness of the estimates.
To the best of our knowledge, the estimates represent
comparative energy use during the production process
using primary or secondary feedstocks. For a
complete presentation of identified studies, see Table
B-1 in Appendix B.
Richard Porter and Tim Robots, ecfe. Energy Sating by Wang Reading (New- York Elsever Applied Science Publahera. 198.H p 60 High and lew
esUmaev Robert Bans The Ena^i- Involved in Producing Enameenng Materials.' Pipe Irian Mechanical Enancera. Vol 19 J. 29 ~6. n Porter and Roberts, p
GO Energy Savings far Aluminum Ingot Production. P Pautz aid H J Pietrozeruuk. "Ahull aid Enerpe.* 'I'rTfTlfr'i'fTBffl '"*'983- Berlin, m Porto- and
Robots, p 63.
• "Secondary v Virgin Fiber Newsprint' Pulp and Paper. V 5O *5. May 1976. in Porter and Robert!, p 66. L Haraerud and O Olaon. 'Stall vi Brarna upp
eller Atervmna Retupappem." Teknak TidrijA i pp 18-19. in Porter and Robero. p 6~. Emironment Canada. X« Enem- Sauna from Solid Wane
Nlanaaemmt Cpnom. Cttawa. 1976. in Porter and Robertt. P 68. 'Econoniica of Recycled Fiber I'aac for Lnerbcard.' Pujp and Piper. V ff.i. *4. April I9T6. in
Porter and Roberta p 66
' Robert CowlesUtcher and Marj'SheiL'Souroe Separation and Ciizen Recyclinji' inWillamD Robraon. ed. The Solid Waae Handbook .New Yoric lohn
Wiley A Soro 19861 m L\T«ha PollacL Mininy L'rhan \V«a. The Potential ibr Reo-cline i Warilinatoa DC The Woridmtch InttMe. AnriH9871D 22.
' Roberta Fonell Stau&r. *Energy Savings From Recycling." Reguree Recvcljij. Jarajar>-Tebruar>-1989. p. 59
•Porter and Roberts, p 13
John Huston. "Developing Markets for Recycled Materials." in Proceedings of the 1988 Conference on Solid Waste
Management and Materials Policy. New York: New York Legislative Commission on Solid Waste Management. 1988). p.
H-100.
15
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Potential Impacts of Energy' Tax Subsidies on Aluminum Production Costs: A Case Study
In this section, we report the preliminary findings of a simple analysis \ve performed using readily
available information. In this analysis we assessed the potential impacts of tax-based energy subsidies on the
production of aluminum. Energy subsidies extending beyond tax subsidies are described fully in Chapter III.
To assess the importance of energy tax subsidies on the cost of energy-intensive primary production,
we examined aluminum production. We view aluminum as a good indicator of the potential importance of
energy tax subsidies on recycling because (1) recycling aluminum saves proportionally more energy (an
average of 95 percent) than any other material, and (2) energy accounts for a significant share of total
aluminum production costs.
Producing virgin aluminum from bauxite requires an average of 250.7 million Btu/ton, while deriving
aluminum from recycled feedstock requires only an average of 11.8 million Btu/ton.29 Thus, secondary
feedstocks yield an energy savings of approximately 95 percent.30 To determine the net value of the subsidy
to primary aluminum, we first identified industry's energy use patterns from a report on industry generated by
the U.S. Department of Energy. Energy Information Survey (EIA).31 The EIA survey characterized
consumption for all of the fuel sources for every category except electricity. However, since electricity
constitutes the majority of the aluminum industry's energy usage, and since the magnitudes of the subsidy
vary widely by the type of electricity generation (see Table III-4). we estimated the source of electricity (fossil
fuel, hydroelectric, or nuclear) for the industry. To do this, we matched state-by -state primary aluminum
production capacity in 19863: and electricity sources.33 Actual data are presented in Table B-2. in Appendix
B. The energy mix and estimated tax subsidies to primary aluminum are presented in Table 11-5.
29 See chart in Appendix B for range and sources of estimates.
30 Robert Letcher and Mary Sheil. "Source Separation and Citizen Recycling." in William D. Robinson, cd.. The Solid Waste
Handbook (New York: John Wiley & Sons. 1986). cited in StautTer. p. 59.
31 U.S. Department of Energy. Energy Information Administration. Manufacturing Energy Consumption Survey:
Consumption of Energy. 1985. Washington. D.C.. 1988). p. 20. November 1988.
32 U.S. Department of the Interior. Bureau of Mines. Minerals Yearbook: Volume I. Metals and Mineral. 1986. (Washington.
D.C.: U.S. Government Printing Office. 1988). p. 97.
33 Operating generating capacity is current as of December 31.1988. and is from "1989 Annual Statistical Report." Electrical
World. April 1989. p. 63.
16
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Table II-5
ESTIMATED ENERGY CONSUMPTION IN, AND TAX SUBSIDIES TO,
THE PRIMARY ALUMINUM INDUSTRY
(TAX-BASED SUBSIDIES ONLY)*4
Fuel Type
Source Fuel for Elec.:"
Hydroelectric
Fossil Fuel
Nuclear
Other
Purchased Electric'
Residual Fuel Oil
Distillate Fuel Oil
Natural Gas
LPG
Coal
Coke and Breeze
Other
' f
T«.r#1
Soumn and Notes
Estimated
Consumption*
(MBtu)
34. 10°.
56.03°.
9.81°o
0.06'.
100.00 V.
210.000.000
2.6SO.OOO
300.000
23.000.000
1.000.000
418.000
2.650.000
10.700.000
#&m«oo
' Ener&' consumption data for the primary aluminum industry at (ram the L' S
Consumption Survey Consumption ot'EnenR' 198S DD IT 2f Consumotion
byEIA to protect proprietary data. Howevo
total was 5 3 Billion Btu This figure was di
* Estimates were derived using the value of u
an shown in Appendix B. Table B-Z.
Estimates were derived by multiplying enen
• The fuel mix uKd to generate electricity UK
Bureau of \lflies. Mineral* Y'»flfbaoL 1986
Electrical World April 1 989. p 63 Plan c
UK the one electricity mrc as the sate as a
• The overall subsidy for purchased elecaric p
typo of elecmclv generation shown in colui
•. die sum of the two categories, da
vided equally into (he residual oil i
K expendtturet divided by the total
y consumption by the estimated n
sd b>p the primary' aluminum produ
and data on state electrical general
ipacity figures for fouil fuels incluc
whole Demotion ofelcctncity jha
lower b>' pnmar>' aluminum produc
nn two
Tai Subsidy*
(19**S/MBtu)
S0.56
$0.31
S2.08
S0.04
SO. 57
SO. 08
S0.08
S0.08
S0.08
S0.03
S0.03
S0.04
$M*
Energy information Adminisn^tioi
figures for residual fuel oil and cod
wed by subtracting all released cat
• III lull • HII||HB«I« LxlJ^^wi^ itwl
power supplied in 1 984. both firm
ibsidy i column 2 x column 3)
sere • bated upon data on aluminu
ing capacity, provided in "1 989 An
le gcoihermal plants. Estimates ass
res is presented in more detail in T
wi i> a consumption-weighted avo
Total Estimated'
Tai Subsidy
$119.432.250
$212.000
$24.000
$1.840.000
$80.000
$12.540
$79.500
$428.000
j$m,*5l,8*&
"L Nlanu^rfl|rinjl5n^'B^
f and breeze were withheld
Ozones fimitthe indus&y
ve.
n Table IH-4. The denvationt
m pmduction provided in the
nual Statistical Report."
ume that aluminum plants
able B-3. in Appendix B
^gc bated on the shares of
As shown in Table II-5. the average tax subsidy to the priman aluminum industry is $0.49 per MBtu.
This value is a consumption-weighted average of all of the fuel types (and their associated tax subsidy values)
used by the industry. Using this average subsidy value and the above estimates of required energy for virgin
and secondary production, we derive the following estimate of the net energy tax subsidy to virgin aluminum
Table H-S addresses only tax-based subsidies. Table ffl-5 is more comprehensive and includes a variety of other energy
subsidies.
17
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production. Note that this subsidy estimate assumes that secondary aluminum production uses the same
energy mix as primary aluminum (and therefore has the same average subsidy).
Tax-based energy subsidy per ton for virgin aluminum:
Average energy use per ton virgin aluminum - 250.7 million Btu/ton
Average energy subsidy = $0.49/million Btu
Energy subsidy per ton virgin aluminum = ($0.49)(250.7) = $123/ton
Tax-based energy subsidy per ton for recycled aluminum:
Average energy use per ton recycled aluminum =11.8 million Btu/ton
Average energy subsidy = $0.49/million Btu
Energy subsidy per ton recycled aluminum = ($0.49)( 11.8) = $6/ton
Net tax-based energy subsidy for virgin aluminum production:
$123 virgin subsidy/ton - $6 recycled subsidy/ton = $117 net subsidy/ton
Conclusion
The average market price for aluminum for the five-year period 1984-88 was .704/lb.. or $l,410/ton,
delivered35 Therefore, the net tax-based energy subsidy for virgin aluminum production of $117/ton equals
8.3 percent of the delivered price.
Caveats
This estimate is subject to several caveats. First, the magnitude of the subsidy may be understated.
since the delivered price for aluminum includes transport costs and producer markup. Also, this subsidy
represents only energy subsidies from tax provisions. Other subsidies described in Chapter III account for a
much larger share of total energy subsidies, especially for electricity production. Furthermore, it's important
to underscore the key assumption of this analysis: that the full magnitude of energy subsidies from tax
provisions is passed on to energy consumers (aluminum producers). Known as the "cost pass through" issue.
this analysis has assumed that all cost savings are passed on to the consumer. We did this to yield a "worst
case" scenario — i.e.. a maximum subsidy to the aluminum industry. However, as stated in our discussion of
depletion allowances, the predominance of the international market in setting price mitigates the domestic
subsidy "pass through" to energy consumers in the form of a lower price. Thus, our aluminum analysis
should be viewed as a maximum scenario for the full impact of special tax provisions for the energy industry.
In addition, as indicated in the following section, many tax-based financing subsidies were eliminated in
1986, thus significantly reducing the overall magnitude of federal subsidies.
Financing Provisions
The Tax Reform Act (TRA) of 1986 rescinded many of the incentives that were aimed at capital
investment (e.g.. the investment tax credit, accelerated depreciation and preferential treatment of capital gains
Prices from American Metal Market. Metal Statistics 1987 and Metal Statistics 1989. (New York: Fairchild Publications.
1987.1989).
18
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(see Appendix A)). The TRA also capped the amount of tax-exempt municipal bonds36 available for
supporting privately-owned and operated projects considered beneficial to the public. These policy changes
removed tax subsidies that had benefitted large, highly capital-intensive endeavors.
It is unclear what impact these changes have had on recycling capacity and specifically the expansion of
existing capacity or the construction of new facilities which utilize secondary materials. In some instances.
the elimination of the aforementioned financing incentives may harm recycling, but not as much as it will
affect other waste management options. For example, materials recovery facilities (MRFs)--which are owned
and operated by both municipalities and private companies-do not require as large a capital investment as do
waste-to-energy plants. In the area of integrated waste management, private activity bonds (PAB's) were
used primarily to support capital-intensive projects, such as the building of a waste-to-energy facility. In this
instance, removal of the financing incentives may actually have helped recycling, which competes for capital
against waste-to-energy facilities.
The Tax Reform Act of 1986 restricted the use of PAB's. but it did not eliminate them. Some types of
facilities are still eligible for PAB's. including all new waste processing or treatment plants handling solid
waste, wastewater, sludges, or hazardous materials. This includes recycling and composting facilities, as long
as the feedstock to the plant has a negative market value (i.e.. the facility is paid to take the material).
i
Processing plants may be benefitting from lower-cost loans. However, a minimum of $1 million in
plant costs would be necessary to justify the transaction costs associated with PAB's. eliminating the benefit
for smaller-scale projects.3' In addition, since there is no maximum bond issue size, large capital projects still
stand to gain the most from the PAB's that remain. Finally, since scrap dealers usually pay some small
amount for their inputs, they are not eligible for tax-free loans.
Other Tax Considerations
Other federally-derived38 tax advantages exist that, although not directed at primary producers, could
benefit them more than secondary producers. An example of such a tax policy is the allowable amortization
of pollution control equipment. Pollution control expenditures can be deducted from taxes and are subsidized
in the tax code through shorter depreciation schedules (5 versus 7 years for most capital investments). While
this subsidy may well reflect public welfare considerations, it still provides tax benefits for "dirtier"
industries.
Primary producers are subject to various (primarily state) taxes. Typically, these van- substantially by
state and commodity. The three main types of state taxes are:39
" Now known as "private-activity bonds" or PAB's. these instruments were formerly known as "industrial development
bonds." or IDE's.
37 John C. MacLean "Tax Exempt Debt Financing for Privately Owned Facilities." BioCvcle. August 1988. p. 62.
31 Consideration of state-level incentives and disincentives was outside the scope of this project.
J* Booz-AIlen and Hamilton. Inc.. An Evaluation of the Impact of Discriminatory Taxation on the Use of Primary and
Secondary Raw Materials, pp. 17-17b. Prepared for the US EPA. 1975. NTIS # PB-240 988.
19
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Severance Tax. A flat-rate tax per unit mined or cut.
Production Tax: A percentage or flat rate tax levied on the produced good, rather than on the unit
removed.
Yield Tax Laws: Function in a similar manner to a severance tax. Relieves timber owners from
annual property taxes, and imposes a tax on the land at the time of timber harvest.
Conclusions
More current cross-elasticity estimates are needed to better gauge the impacts of virgin materials prices
on recycling market quantities. However, based on available data, we can conclude the following:
The impact of tax benefits provided by percentage depletion allowances and special expensing
provisions is affected by:
the predominance of the international market in setting prices for most virgin materials.
including energy, and
the restriction of oil and gas depletion allowances to the smaller, independent producers.
In our simplified analysis, we found that the net tax-based energy subsidy for primary aluminum
production was approximately 8.3 percent of the delivered price. Because primary processors
typically consume more energy than secondary processors, this subsidy does favor the former.
The impact of reduced financing provisions after 1986 on recycling is unclear and warrants
further investigation. However, it does seem clear that reductions in the amount of municipal
financing have had a negative impact on waste-to-energy units, which compete with recycling.
20
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III. POTENTIAL DISINCENTIVES TO RECYCLING: FEDERAL PROGRAMS
In addition to policies discussed to this point. Congress has legislated policies which in many ways
support the development of virgin resources (vis-a-vis recycled substitutes) and their transport. Federal
policies which support the development of virgin resources are directed toward:
Timber production, in the form of below-cost timber sales:
Mining subsidies, by lowering the cost and requirements for mining leases and land reclamation.
respectively:
Energy subsidies, through various federal programs subsidizing the construction and operation of
utilities as well as provisions supporting waste-to-energy facilities under the Public Utilities
Regulatory Policies Act of 1978 (PURPA):
Water subsidies, as part of federal water projects and water sales; and
Transportation subsidies, through various federal programs related to the maintenance of the
transportation infrastructure.
Each are discussed in more detail in the sections that follow.
Timber Production
The federal government is directly involved in promoting and subsidizing timber production via two
means. First, as the owner or manager of over 100 million acres of limberland. the federal government owns
over 20 percent of all commercial timber acres in the United States.4" Thus, below-cost timber subsidies
could have an important impact on virgin material prices. The impact of timber subsidies is discussed
generally below and as part of a specific "case study" (on virgin paper and paperboard production) in Chapter
IV. Second, the government provides technical support in the form of land management "consulting" to the
many private timber owners. We were unable to quantify the impact of this technical support.
Below-Cost Timber Sales
The first federal forest reserves were set aside in 1891.41 The federal government initially supported the
production of timber from federal lands to encourage the settlement and development of the West. The
government's timber policy was expected to attract new settlers, provide jobs, increase industrial activity, and
40 U.S. Department of Commerce. "Forest Land • total and Timberland Acres." Statistical Abstract of the United States. 1989.
Table 1144. The U.S. Forest Service, within the U.S. Department of Agriculture oversees the vast majority of federal forest
land (88.7 million acres), the Bureau of Land Management within the Department of the Interior manages a much smaller
amount of land (6 million acres all in the western U.S.).
41 From John H. Beuter. Federal Timber Sales. Congressional Research Service. February 9.1985. Report 85-96-ENR.
21
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provide the impetus for the development of transportation systems. The government has continued to use
timber policy as a means to a similar end with regard to economic development in southeast Alaska.42
Timber sales involve the transfer of ownership of timber on federal government land to private
enterprise. Federal timber sales were first authorized in 1897 and the first sales were made in 1899. Below-
cost timber sales subsidize the wood products industries including the operation of pulp, paper, lumber, and
forest products companies. Although not all timber sales are below-cost, even those sales that do generate
positive cash flow do not necessarily yield a profit to the federal land manager, an important criterion for
most private market transactions.
The accounting of timber sales is fairly complex, making the calculation of gain or loss difficult. The
subsidies provided by the government are found in several aspects of the transaction, including treatment of
road costs, pricing timber tracts, cross-subsidization between less and more desirable timber species,
allocation of administrative expenses, and export restrictions on logs. Each is discussed below.
Treatment of Road Costs. In many cases, the largest concentration of mature, marketable timber on
federal lands is in remote, inaccessible areas that are often steep and rocky. Frequently, there is a need to
build roads to reach these locations. Before 1964. the construction of roads and other means of access to
these timberlands was considered part of the government's cost of making a timber sale. The National Forest
Roads and Trails Act of 1964. however, provided the first legislative recognition of purchaser-built roads
(i.e., roads built by the timber company rather than the government) as pan of a timber sale contract. Thus.
the government may pay for roads directly (by constructing or maintaining them) or benefit indirectly (by
receiving roads built by the timber purchaser as partial compensation for timber). The inexact calculations of
cost or benefit (related to the development of roads) ultimately yield imprecise assessments of profit or loss.
Losses from timber sales may. thus, be understated.
Roads built or maintained directly by the government are financed via Congressional appropriations.
They are financed much like large-scale private projects with lump-sum amounts dedicated as Congressional
budget line-items However, the Forest Sen ice allocates only a very small portion of the total project cost in
a given year's budget. For example, the Forest Service often amortizes the costs of road building over the
turnover period of the stand (i.e.. the time between one harvest and the next harvest of the same stand). Thus.
road costs for Tongass National Forest in Alaska are amortized over 129 years, rather than the useful life of
the road or the length of time during which the road will be used to harvest the current stand (as would be the
normal accounting practice). The government's amortization practice allows the Forest Sen-ice to minimize
the impact of road building costs on any particular year's budget.43
Another area in which road building costs might subsidize timber sales relates to the treatment of
purchaser-built roads. There has been some disagreement about how to treat purchaser-built roads in Forest
Service accounting procedures.44 Sometimes these costs are actually treated as receipts, with the argument
that since timber value is created by the road and there is a net inflow of money to the Treasury, the roads do
not decrease value, but rather create it. On the other hand, many argue that road building should be treated as
41 More detail on the history- of federal timber sales in Alaska can be found in Appendix A.
43 Richard Rice. Economist. Resource Planning and Economics, the Wilderness Society. "Below-Cost Timber Sales and
'Cross Subsidies' on the Tongass National Forest." Internal memorandum to Philip Shabecofl". May 18.1989.
44 Beuter. p. 48.
22
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a cost, since the portion of the timber value that has been traded for the roads (bid prices are lower for no-
road areas) represents foregone receipts to the Treasury. When the cost of road credits are treated as receipts,
the road costs are lost to the government twice: once with a lower sale price for the timber sale, and again
when the Forest Service reports the expenditure as a net receipt.45
Timber Appraisal Value. Sales of federal timber under the 1976 National Forest Management Act
and the preceding 1897 Organic Administration Act. are authorized only at or above the appraised value of
the stand. Ostensibly, the purpose of these provisions is to prevent the "giving away" of a natural resource.
However, neither law provides guidelines on how to calculate the appraised value. The final appraised value
is the advertised rate used for setting minimum bids for the timber tracts.
The process of timber appraisal has remained virtually unchanged over the past 90 years and contains a
number of components which provide industry with subsidies:
Residual value calculation of timber value. In order to determine a reasonable asking price for a
product, most industries assess the fixed and variable costs of producing a product as well as the price
of competing products. The Forest Sen ice reverses this process by starting with the market price of
timber and the salable product in the stand. They then deduct the estimated costs associated with the
purchaser's access, harvest, and process time. The Forest Sen ice accounts for a reasonable rate of
profit.45 The residual of this calculation is the estimated value of the actual timber in the stand based on
current market prices. As evidenced by the calculation, the advertised rate does not consider the costs
incurred by the Forest Sen ice in making a sale.
Calculation of the base rate. Each species has a minimum sell value per thousand board feet, set by the
Forest Sen-ice. The total value for a timber tract may be derived by estimating the volume of each
species on a tract and multiplying it by the respective base rates. Originally, the estimate for the base
rate included the Forest Sen-ice's transaction costs. However, these rates have not been adjusted
upward over time to reflect the rising costs of making a sale. Today, while the base rate still forms the
minimum value accepted in bids from timber purchases, it is unrelated to the market value of the timber
to the Forest Sen ice's sales-related costs. The base rate is the minimum price at which a timber tract
will be sold, even if the advertised rate is lower.
Advertised rates versus timber's worth. Advertised rates (based on the residual value calculations) and
bids do not necessarily reflect what will be paid for the timber or what the federal government will earn
on the sale. Advertised rates are still subject to discounts and stumpage rate adjustments for less
desirable species (see cross-subsidization, below). In addition, bids do not determine revenues, since
The Forest Service has argued that 100 percent of the road building costs should not be allocated to timber sales, since the
roads often have other benefits. For example, roads may reduce forest management and protection costs for future timber
sales to some degree, by improving access for the thinning and caring of stands. Roads may also facilitate access to the
timberlands for many other land users, which may have positive recreational benefit. However, roads may bring
unexpected costs. For example, they may create - and often in perpetuity - costs for road maintenance and environmental
protection by exacerbating problems with erosion and non-point source run-off. Furthermore, increased recreational use
may exacerbate environmental problems. Finally, the presence of roads usually preempts Wilderness designation (Beuter. p.
44).
Sources have noted that special federal tax provisions for virgin industries may be offset, in pan. by special state or local
taxes for resource extraction (e.g.. royalty or yield tax. see Chapter H). For timber, federal sales include the cost of local
yield taxes when calculating the advertised rates for their sales. (See Beuter. p. 56.)
23
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the government is paid as wood is removed from the forest, and wood may be removed behind schedule
or not at all.
Non-competitive bidding. On tracts such as the Tongass where there are multi-year contracts, there is
no competition for cutting rights. Thus, there is no competitive bidding process, and cutting rights are
priced at the minimum value. For other tracts, the winning bidder may pay the advertised rate set by the
Forest Service, but will usually pay more.
Cross-Subsidization Between Desirable and Undesirable Species. Timber is priced not by
estimated market value, but by what the Forest Service feels the average purchaser can afford to pay and still
make a profit. Some species are expected to cost more to harvest than they are worth and, therefore, have a
"negative appraised value." Because the timber is believed to be "worthless." the Forest Service encourages
industry to harvest this timber by combining tracts containing "worthless" species with tracts of high-value
timber. This combining of tracts, referred to as cross-subsidization, results in a reduction in the price charged
for the high-value timber because it is offset by the negative appraisal value of the low-value stock.
By law. the Forest Service must charge at least a nominal amount, or "base rate." for harvesting each
species. To meet the requirements of this law, the Forest Service sells the lower-value species at the base
rate, and then reduces the sale price of the high-value species to compensate for "overcharging" on the low-
value species.47 In essence, the Forest Sen-ice is paying a lumber company to harvest the logs.
No Allocation of General and Administrative Costs. The operation of timber sales by the Forest
Service requires efforts in both the national and regional Forest Sen-ice offices. The Sen-ice is charged with
managing sustainable cuttings on federal lands to ensure healthy timber stands in perpetuity Therefore, it
must develop a harvest schedule that considers:
* The age and mix of species in a given stand:
* The value of the timber:
* The need for access to the stand:
* Concerns for community stability:
* Environmental concerns associated with the cutting of timber: and
* The salvage of damaged timber (e.g.. due to insects, fires, volcanoes). *
General administration and overhead costs (like those associated with developing a harvest schedule)
are not reflected in the price of the timber, although they can be substantial. For example, general and
administrative costs for the Forest Semce Region 10 offices in 1988 were $6.1 million.49 An estimate of the
planning costs associated with the management of sustainable cutting (including all Forest Sen-ice's national
and regional efforts) was $144 million in 1983.* Depending on the species mix of a tract and the value of a
particular sale, these unrecovered planning costs may exceed the tract's advertised rate and approach 5
47 Rice. "Timber Revenues and Expenditures on the Tongass National Forest. 1988." p. 3.
4* Beuter. p. viii.
49 Rice. "Timber Revenues and Expenditures on the Tongass National Forest. 1988." Memorandum. May 18.1989. Region
10 for the U.S. Forest Service includes Alaska. Hawaii. Puerto Rico, and the U.S. Virgin Islands.
50 Beuter. p. viii.
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percent of the market value of stand.51 A simple way to allocate these general costs would be on the basis of
total volumes of timber sold in a given sale as a percentage of total regional and national sales. Private
industry must include general and administrative costs in its pricing and decision-making criteria. Not
including such costs for government sales reduces the acceptable selling price for the timber.
Export Restrictions on Logs
In 1968. U.S. Department of the Interior and the U.S. Department of Agriculture jointly issued
limitations on the export of logs from federal lands in western Oregon and western Washington (Forest
Service Region 6). Later that year, the Foreign Assistance Act of 1968 extended this ban to all federal land
west of the 100th median (which bisects Texas and the Dakotas). Under the ban, only those species declared
(by the Secretary of Agriculture and the Secretary of the Interior) to be surplus to domestic needs were
available for export. This ban has been continually renewed and expanded to a virtually complete ban on the
export of logs from federal tiraberlands.52 In rare circumstances, the federal government has allowed
exceptions to the ban for species for which there is no domestic demand and/or no domestic processing
facilities.53 To the extent that the ban limits markets for some domestic timber, it may act to artificially lower
the price relative to that obtained in a free and open market. We could not quantify the impact on recycling.
however.
Technical Support from the Department of Agriculture
The Forest Service provides various programs to help improve timber management, including fire
protection, insect and disease control, and forest utilization/management. These programs seem to be used
primarily by small- to medium-sized land owners.54 Unfortunately, we could not locate more detailed
information on their impact.
Potential Impact on Recycling
The annual cost of timber subsidies to the Treasury was estimated at between $126 million and $382
million. In terms of the U.S. paper industry, this number represents only about 4% of the value of total paper
production. The effect on the paper market of these below-cost sales is further diluted by the small fraction
(one-third) of the total below-cost timber that goes to paper production. Applying this number to the total,
the effect of below-cost timber sales on recycling is estimated to be between $42 million and $126 million.
51
5J
Ibid., p. 56.
Al/IU,. p. -«W.
Ibid., p 19. Ron Lewis. USDA Forest Service. Timber Management Division, personal communication, July 21.1989.
In the Tongass National Forest, for example, the Alaska Pulp Corporation, a Japanese-owned corporation, is allowed to
export Alaska yellow cedar because there is little or no domestic demand for the wood, no processing facilities exist in the
U.S. and it represents only 1 to 2 percent of the total harvest from the forest (Miller Ross, USDA Forest Service. Tongass
National Forest, personal communication. November 6. 1990).
54 Franklin Associates. Ltd.. Economic Incentives and Disincentives for Recycling of Municipal Solid Waste. Draft.
(Washington. D.C.: Office of Technology Assessment. December 1988). pp. 10-11.
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Mining Subsidies
The federal government has established specific requirements for reclaiming raining lands. However.
active mines developed before 1974 - and even before 1981, in some instances — are exempt from these
costly post-closure actions.
Below-cost Mining Leases
While timber sales and coal, oil and gas leases may subsidize the extraction of resources, the land still
belongs to the government following these actions. In contrast, the extraction of hardrock minerals is
governed by the Mining Law of 1872. Provisions of this law allow a potential miner to stake a claim on
federal land where valuable minerals may exist. Once a claim has been staked, the miner need only spend
$100 a year on mineral exploration or development work to retain the claim forever, along with all revenues
from any hardrock minerals extracted from the claim. Unlike the case with all other minerals, the claimant is
not required to pay the federal government a royalty on the minerals extracted. In addition, the Mining Law's
patent provision allows the claim holder to transfer property rights, both surface and sub-surface rights, to
private ownership for between $2.50 and $5.00 per acre.55 This provision has yielded the sales of 3.2 million
acres of public land (an area approximately the size of Connecticut) over the last 117 years.56
Since the 1920's. the scope of this law has been significantly narrowed. Legislation has removed "fuel"
minerals (e.g.. oil, gas. and coal) and "common variety" minerals (e.g.. sand, gravel, stone, and cinders) from
the law's authority. Legislative action has also withdrawn more than 135 million acres (of a total 727 million
acres of federal lands) from mining for use as wilderness areas and national parks. However, efforts to
change the law's hardrock minerals patent and annual work provisions have not been successful.57 These
loopholes have resulted in an enormous number of claims. As of 1985. the Bureau of Land Management had
recorded two million claims.58 However, as the development of rural areas for recreational uses (e.g., skiing)
has expanded, the driving force behind the "mining" acquisitions today is usually the land value for non-
mining uses, such as development, rather than for mining purposes.59
Absence of Land Reclamation Requirements Before 1974
Closing a mine and reclaiming the land through re-vegetation can be very expensive and does not result
in any tangible benefits to the mining company. To the extent that mining operations can avoid these
tt
Alice Rivlin. (former) Chair of the Governing Council of the Wilderness Society and Senior Fellow in the Brookings
Institute's Economic Studies Program. Statement before the Senate Budget Committee. March IS. 1989. p. 9.
"Bumpers Moves Mining Law Reform." Weekly Bulletin. June 5.1989. p. B4.
U.S. General Accounting Office. The Mining Law of 1872 Needs Revision (March 1989). p. 3. Legislation introduced by
Sen. Dale Bumpers (D-Ark) would eliminate the transfer of land ownership, impose an 8 percent federal royalty on all
minerals extracted in commercial quantities, and would greatly increase the annual requirements to prove that a claim is
productive (Weekly Bulletin. June 5. 1989).
Ibid.. Interior Should Recover the Costs of Recording Mining Claims. September 1986. GAO/ECED-86-217.
GAO reviewed 20 patents issued since 1970. for which the government received less than S4.500. The market value today
was between S13.8 million and S47.9 million. Many of the lands are located near ski resorts. U.S. General Accounting
Office. March 1989. pp. 3.4.
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reclamation costs, their product costs are reduced. The Forest Sen-ice has regulated post-mining land
reclamation only since August 1974. Before then, mining carried out under the authority of the Mining Law
of 1872 had no provisions to ensure land reclamation. Mining on lands owned by the Bureau of Land
Management (BLM) have been regulated in this manner only since 1981 .ffl
The U.S. General Accounting Office (GAO) estimates that, as of 1988.424.049 acres of federal land
disturbed by hardrock mining operations remains unreclaimed. Of this, 281.581 acres are situated on
abandoned, suspended, or unauthorized mining operations. The estimated cost of reclaiming this land is
$284 million.61 Most of this land was mined before federal requirements for financial guarantees were
initiated in 1974 (Forest Sen-ice) and 1981 (BLM). These guarantees seem to be working, with most new
mines with financial guarantees being adequately-reclaimed, reducing the current importance of this subsidy.62
Even today, however, the BLM land protection requirements are much less demanding than those of the
Forest Service. BLM mine sites that are less than 5 acres are not required to post financial guarantees, and
even larger sites rarely have financial guarantee requirements enforced. For example, in 1986, only one of
566 BLM hardrock mining sites had posted a reclamation bond. As a result, more than one-third of the sites
were left unreclaimed.63
Energy Subsidies64
The production of saleable energy requires three main steps: extraction of fuel minerals, processing of
fuel minerals, and delivery of processed fuels to point of use (e.g.. a gas station or an electrical outlet in a
factory). The conversion of raw materials into energy varies enormously by energy type. Therefore
government subsidies may differ in applicability and magnitude by energy type, and different energy types
may receive a disproportionate amount of federal support. For example, electricity, the most capital-intensive
form of energy, delivered 13 percent of U.S. energy in 1984. but received 65 percent of federal subsidies
(about $33 billion), reducing the average price of electricity by about 20 percent.65
Energy subsidies lower the cost of energy to both primary and secondary producers, but to the extent
that primary production is more energy intensive (see Table II-4, for example), primary producers receive a
greater subsidy for their costs of production. Energy subsidies are pervasive. In 1984, they included: 33
60 U.S. General Accounting Office. An Assessmeni of Hardrock Mining Damage (April 1988). GAO.ftCED-88-123BR. pp.
9.17.
" Ibid.. General Accounting Office estimates are based on random samples from mine operations in the 11 Western states
(AZ. CA. CO. ID. MT. NV. NM. OR. UT. WA. WY) where most hard rock mining takes place.
62 U.S. General Accounting Oftlce. Financial .Guarantees Encourage Reclamation of National Forest System Lands (August
1987). GAO/RCED-87-157.
a Ibid., statement of James Duffus E. Director of Natural Resources Management Issues • Resources. Community, and
Economic Development Division, before the House of Representative Subcommittee on National Parks and Public Lands.
April 11.1989.
M All dollar figures in this section have been scaled to constant 1988 dollars using GNP implicit price deflators found in the
Department of Commerce. Survey of Current Business.
a Amory Lovins and Richard Heede. "Hiding the True Costs of Energy Sources." The Wall Street Journal. September 17.
1985. p. 28.
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categories of tax expenditures, program outlays for energy development in 57 agencies, and direct loans and
loan guarantees from federal agencies.66 As Table III-l shows, these subsidies affect all stages of energy
extraction, processing, sale, and use. Subsidies that were eliminated in the Tax Reform Act of 1986 are not
included in this table.
Table III-l
MAJOR FEDERAL SUBSIDIES FOR THE PRODUCTION,
PROCESSING, AND SALE OF ENERGY
Fuel extraction, processing, and delivery
Extraction:
• Percentage depletion allowances*
• Expensing of drilling and exploration costs*
• Deduction for tertiary injectants for crude oil*
• Expensing of R & D expenditures*
• Credit for increasing R & D expenditures*
• Below-cost mining leases and timber sales
• Deduction for future reclamation: rapid amortization for
reforestation expenditures*
• Bevill amendment exclusion of extraction waste from mining
operations
Processing:
• Bevill amendment exclusion of mining wastes
• Expensing of R & D expenditures*
• Credit for increasing R & D expenditures*
• Subsidies for enriched uranium
Delivery:
• Deferral of tax on shipping companies*
• Interest exclusion for private activity bonds (PAB's) for docks
and airports*
• Subsidized maintenance and development of truck, barge, and
ship transport infrastructure
• Federal subsidized loans or loan guarantees on transportation
projects
Utility subsidies
Plant construction:
• Tax-exempt bonding of publicly owned utilities*
• Exclusion of interest on energy PAB's*
• Exclusion of interest on state and local PAB's*
• Direct federal loans, loan guarantees, or bonding for utility
construction projects
• Tax deductions for cancelled projects*
Plant operating costs:
• Price-Anderson cap on utility liability for nuclear accidents
• Incomplete accounting for nuclear plant decommissioning cost
• Federally subsidized or paid-for storage of radioactive waste
• Nuclear waste disposal R & D
Energy sales:
• Gasohol exemption from gasoline excise tax*
• Below-market sales of energy from federal projects
(Tennessee Valley Authority. Bonneville Power
Administration)
• Required purchase of power at above-market rates through
states-level requirements allowed under PURPA
* Denotes tax-based polices, some of which are addressed in Chapter tt
Richard Heede. Rocky Mountain Institute. Table C 1984 Federal Energy Subsides Tax Expendifira-Lew EKirnate.' 1984 data updated April 1989; "1984
Federal Energy Subsides Program Obligations." 1984 data updated April 1989: A Preliminary Anamm of Federal Ergrp-Subsidies n
House SubraruTOttee on Energy and Commerce. June 20.1985: Center for Renewable Resources. Tiff fij^lff Co»a of Eneqjv. (October 1985); "Utilities Move Closer to
Nuclear Decommissioning External Trust Compliance.' Public L'ulmes Formighilv. March 2.1989. Franklin Associates, Ltd. and the Center for Economic Policy Analysis.
Economic Incentives and Disincentives for Recycling Municipal Solid Waste. Draft. December 1988. preuaed (brine Office of Technology Aumaieiil: Cynthia Pollack.
Mining Urban Wastes The Potential forRecvclmg iWoridSratch Insiiute. April 198' I
H. Richard Heede. Rocky Mountain Institute, testimony before the Subcommittee on Energy Conversation and Power of
the House of Representatives Committee on Energy and Commerce, "A Preliminary Assessment of Federal Energy
Subsidies in FY 1984." June 20.1985. p. 7: Ibid.. Rocky Mountain Institute, "Table C: 1984 Federal Energy Subsidies:
Tax Expenditures - Low Estimate." 1984 data updated April 1989: "1984 Federal Subsidies: Program Obligations." 1984
data updated April 1989.
28
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Because of the breadth of energy subsidies, data on the level and effect of the subsidies are difficult to
find. One comprehensive assessment was performed in 1985 by the Rocky Mountain Institute, a pro-
conservation research group. We have used their estimates of energy subsidies in 1984 as a starting point.
Because the 1986 Tax Reform Act removed some tax subsidies to energy, we reduced the figures presented
by Rocky Mountain Institute to reflect these changes. We assumed that once a tax provision was eliminated.
funds would be reallocated into other, previously unused tax benefits. We then added several subsidies
relating to nuclear power that were not included in the Rocky Mountain Institute study and scaled the final
estimates to 1988 dollars. As shown in Table III-2. we estimated that the total annual value of federal energy-
subsidies in 1988 dollars is $26.7 billion.
In the next sections we describe key components of the $26.7 billion subsidy. The total subsidy
estimates by energy sources are then summarized in Table III-4.
Table III-2
EXAMPLES OF PROGRAM OUTLAYS SUBSIDIZING ENERGY IN FY 1984
(In 1988 SmiUions)
Aytncv Subsidy Major Purpose
Department of Energy $3.500 SI .74 billion spent on R&D for civilian fission: S606 million
spent on R&D lor civilian fusion: uses for the remainder are
unknown
Department of Labor SI.600 Black Lung Program
Department of Health and Human
Services
Army Corps of Engineers S1.200 Work allocated to the waterbome transport of oil. gas. and coal:
construction, rehabilitation, operation, and maintenance of
hydroelectric dams
Nuclear Regulatory Commission S315 Energy-related activities
Environmental Protection Agency 5233 . Estimate of work related to the environmental impact of energy
Rkhaid Heede. A Prelimingv Assessment of Federal Energy Subsidies in 1984. Rocky Mountain Institute. June 20.1985. ibid. "1984 Federal Enojy
Subsidies Pi ma din obligations." 1984 daia updated in April 1989
29
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Direct Program Outlays
The federal government devotes significant
resources each year to improve energy security and
increase the state of knowledge regarding a particular
energy source. While many of these expenditures may
seem valuable for the nation, they are not spread evenly
across all available options. This may skew private-sector
research and investment patterns away from the most cost-
and time-efficient options. Table III-2 presents some of
the largest FY 1984 program outlays to illustrate the
magnitude of Federal Loans. Loan Guarantees, and
Bonding to Energy-Related Enterprises. The Federal
Financing Bank offers favorable interest rates to many
energy development projects through various agencies.
The major costs associated with these loans are interest-
rate subsidies and occasional defaults on principal
repayments. These costs are off-budget and therefore are
not easily identified. Table III-3 presents a summary of
the estimated costs of FY 1984 loans and guarantees to
energy in 1988 dollars.
Table IH-3
COST OF LOANS AND GUARANTEES TO
ENERGY, FY 1984
(in 1988 Smillions)
Agency
Tennessee Valley Authority
Bonneville Power Administration
Other Power Marketing Adminstrations
Rural Electrification Adminstration
Maritime Adminstration
Synthetic Fuels Corporation
Department of Energy
Export-Import Bank
Tel»l "' '•" •-•-C. .:--.^xr
Sutnldv
$880
$294
$176
$4.482
N/A
$113
N'A
$311
;;? «a»'.:.;::'
Souer Heedt. June 20 I98< p 24
Other Subsidies
We supplemented the Heede estimates of the total federal subsidy to nuclear power to include subsidies
provided by the Price-Anderson Act. and subsidies related to decommissioning costs. In addition, we
considered the $ 1.2 billion per year in federal support for uranium enrichment.67 but assumed the subsidy to
be zero, since the proportion that goes to commercial reactors rather than military use could not be
determined.
The Price-Anderson Act. which limits the liability of a nuclear plant for an accident, has been estimated
to reduce costs to facility operators by $11.3-S22.6 million ($1988) per reactor year.68 With approximately
84 active nuclear reactors in the country in 1984.69 this subsidy totals between $949 million and $1,898
million, or an average of $1,424 million annually.
The costs to decommission a spent nuclear reactor are extremely high, and only recently have they been
forced into the utility rate structure. In 1984. 80 percent of reactors had an internal trust put aside to provide
H Weekly Bulletin. June 5. 1989. p. B13.
6* Herbert Dennenberg. Pennsylvania Insurance Commissioner, cited in the Center for Renewable Resources. The Hidden
Costs of Energy (October 1985). p. 7.
" World Nuclear Industry Handbook 1990. Nuclear Engineering International, p. 36.
30
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for the cost of decommissioning.70 Because the federal government may be responsible for the
decommissioning of the remaining 20 percent of the reactors, this is. in effect, a subsidy.
To calculate the annual value of this subsidy, we reviewed several estimates of plant decommissioning
costs. These cost estimates ranged between $50 million and $3 billion.71 Based on our review we selected
an average cost per reactor of $1.5 billion. At $1.5 billion per reactor, the cost of decommissioning 16.8
reactors (20 percent of the 84 reactors in operation in 1984) would be $25.2 billion. In order to calculate the
annual obligation needed to accumulate this $25.2 billion, we assumed the following:
Money would be set aside annually:
The lifespan of a reactor was equal to the length of its Nuclear Regulatory Commission license, or 40
years: and.
An annual real interest rate of 3 percent.
Applying these assumptions, it would be necessary to dedicate $334 million each year. At the end of
40 years, the fund would total $25.2 billion.
Other Policies that Affect the Competitiveness ofRecyclables
The Public Utilities Regulatory Policy Act of 1978 (PURPA) established one other subsidy to some
waste-to-energy plants. PURPA required major utilities to purchase electricity from other generators at a
price that reflects the utilities' avoided costs of expanding capacity, provided that these generators produced
power through some combination of cogeneration. biomass. waste-to-energy, or other renewable source. The
Act also allowed states to require that this power be purchased at an even higher rate, and a number of states
do so. This increment subsidizes alternative energy sources, thereby making waste-to-energy plants (which
compete against recycling) more competitive than would otherwise be the case.": We could not quantify this
subsidy for this analysis.
Summary
Table III-4 presents our best-guess estimate of energy subsidies by energy type, including all sources of
federal support (i.e.. not just non-tax subsidies). Since tax subsidies comprised about 70 percent of total
energy subsidies in 1984. the loss of subsidies, such as accelerated cost recovery, investment tax credits.
expensing of construction-period interest, and capital gains treatment of coal royalties, reduced the original
Rocky Mountain Institute estimates substantially.73 However, the remaining total value of federal energy
subsidies of $26.7 billion in 1988 considerably dwarfs all other subsidies discussed in this report. A better
understanding of how these subsidies differentially affect primary versus secondary production would greatly
78 "Utilities Move Closer to Nuclear Decommissioning External Trust Compliance." Public Utilities Fortnightly. March 2.
1989. p. 21.
71 Cynthia Pollack. Decommissioning: Nuclear Power's Missing Link (Washington. D.C.: The WorldWatch Institute. April
1986).
2 Franklin Associates. Ltd.. p. 83
'3 Eliminated statutes from Seymour Fiekowsky. Office of Tax Analysis. Department of the Treasury, personal
communication. July 7.1989.
31
-------
enhance our understanding of the bulk of federal disincentives to recycling. However, conclusions in this
regard are subject to the same difficulty stated in Chapter II and elsewhere -- namely, the pricing issue.
Undoubtedly, recycled materials consume less energy and would benefit far less than primary producers from
reduced energy costs. However, it's not clear that domestic energy subsidies are significantly translated
through the price mechanism.
32
-------
Table II 1-4
FEDERAL SUBSIDIZATION OF ENERGY (Millions of 1988$)
(I 'sine Estimates of Tai Provisions Eliminated in the IfM T«i Reform Act)
Tu Expenditures*
Program Obligations*
Loans and Loan Guarantees'
Other Subsidies
Nuclear Decommissioning
Price-Anderson Act*
T**j*i*irtat**w«
Power Supplied in 19*4'
(quadrillion Btu)
ifraiihMMiif'iiftidtfrf /l it Mil JS-I l,,LLltj-m.
LJ • KJ mu^ csuiikna
ainates
idollais
$IO-$2(l
-------
Impacts of Energy Subsidies on the Aluminum Industry
If we examine Table III-4. it is apparent that tax subsidies alone account for only a portion of total
federal energy' subsidies. We repeated the analysis of energy subsidies in the aluminum industry', but this
time included all energy subsidies. Table III-5 reports energy consumption and subsidies to the aluminum
industry. It includes the same data as Table II-5. but the subsidies are higher to reflect not only tax-based
subsidies but many of the subsidies discussed earlier in this chapter as well.
fable III-5
ESTIMATED ENERGY CONSUMPTION IN, AND SUBSIDIES TO,
THE PRIMARY ALUMINUM INDUSTRY
(ALL SUBSIDIES)
Fuel Type
Source Fuel for Elec.:d
Hydroelectric
Fossil Fuel
Nuclear
Other
Purchased Electric'
Residual Fuel Oil
Distillate Fuel Oil
Natural Gas
LPG
Coal
Coke and Breeze
Other
<•" % ^ ^ •.
T**fti
Smiim and NOBBB
Estimated
Consumption'
(MBtu)
34.100.
56.03«o
9.81°o
0.06°.
100.00%
210.000.000
2.650.000
300.000
2J.OOO.OOO
1.000.000
418.000
2.650.000
10.700.000
m72».«ee
1 Energy consumption data for the primary aluminum industrv are from th
Convumotion Survey Consumption of Enenapt 1985. pp 1". -0 Consul
by EIA to protect proprietary data However, the sum of the two categon
total was 5 3 trillion Btu This figure was divided equally irao the residu
• Initial estimates were provided by Richard Heede. Rocky Mountain Lnst
wen updated by Temple. Barker & Sloane. to reflect changes brought ab
1988 dollars using implicit price deflators for (he Gross National Product.
' Derived by multiplying energy consumption by the estimated subsidy! a
.' The fuel mix used to generate electricity used by the primary aluminum
Bureau of Mines. Minerals Yearbook. 1 986. and data on gate electrical (
Annual Statistical Report.' Electncal World April 1 989. p 63 Plant ca
assume thai aluminum plants u»e the same electricity mix as the state a a
Table B-3. in Appendix B
' The overall subsidy for purchaKd electric power by primary aluminum |
types of electricity generation shown in the second column
Estimated Subsidy*
(1988S/MBIU)
S0.69
$0.68
$9.58
$0.10
$1.56
$0.19
$0.19
$0.11
$0.19
SO. 14
$0.14
$0.10
**44
e L' S. Enen$* InfbnnatiDn Administn
nption fipjra for residual fuel oil and
es. derived by subtracting all released
al oil and coke and breeze categories
itutt. to reflect 1 984 data when he nr
ou by the Tax Retbrni Act ot'1986 1
found in the Department of Commer
ilumn - x column 3)
iroducers is based upon data on alum
meraung capacity', provided in "1 989
acit>- figures for fossil fuels include g
whole. Derivation of eleonciry shan
Toducets is a consumpuorHweiBrited
Total Estimated'
Subsidy
$326.791.920
$503.500
$57.000
$2.530.000
$190.000
$58.520
$371.000
$1.070.000
sm&®£&
tim M^ff*1 i^^nfinBEneiw
coke and breeze were withheld
categories from the industry
ibove.
/isedinl989 These.ii turn
Estimates were scaled.to constant
x Sun-ev of Current Business.
inum production provided tn the
eothermal plants Estimates
s ii presented in more detail in
average based on the shares of
34
-------
Including tax and non-tax benefits, the average subsidy to the primary aluminum is $1.34 per MBtu.74
This value is a consumption-weighted average of the tax subsidies associated with each of the energy types
used by the industry. Using this average subsidy value, and the estimates presented in Chapter II of required
energy for virgin and secondary production, we derived a net subsidy estimate for the primary aluminum
industry.
Energy subsidy per ton for virgin aluminum:
Average energy use per ton - virgin aluminum = 250.7 million Btu/ton
Average energy subsidy = $1.34/million Btu
Energy subsidy- per ton = ($1.34) (250.7) - $336/ton
Energy subsidy per ton for recycled aluminum:
Average energy use per ton - recycled aluminum =11.8 million Btu/ton
Average energy subsidy = $1.34/million Btu
Energy subsidy per ton = ($ 1.34) (11.8) = $ 16/ton
Net energy subsidy for virgin aluminum production:
$336 virgin subsidy/ton - $ 16 recycled subsidy/ton = $320 net subsidy/ton
As reported in Chapter II. the current market price for aluminum is $1,410/ton. delivered. Therefore,
the net energy subsidy for virgin aluminum production equals 22.7 percent of the delivered price.
Caveats
As with the estimate in Chapter II. this estimate is subject to a number of caveats. First, the magnitude
of the subsidy may be understated, since the delivered price for aluminum includes transport costs and
producer markup. Second, as explained in Chapter II. the magnitude of the subsidy is overstated due to the
"cost pass-through" issue. Cost savings resulting from energy program subsidies may not be reflected in
prices due to the dominance of the international market in setting price. Consequently, subsidies to
production are usually income transfers more than reduced prices to final consumers. It is this caveat that
makes our results overstate the amount of total subsidies actually accruing to the energy consumer, as
opposed to being retained by the utility.
Federal Subsidies for Water
As was the case with early timber subsidies, water projects were initiated in large part to speed the
development of the western and southwestern parts of the country where arid climates served as the major
limiting factor to these areas supporting significant human populations. Although federal water sales are
initiated mainly by the Bureau of Land Management within the Department of the ulterior, 18 federal
agencies currently exercise some responsibility for water programs and projects. There are at least 25
14 In contrast, the average subsidy arising from taxes only amounted to $0.49 per million Btu.
35
-------
separate water programs with 70 separate Congressional appropriations accounts. These programs are
governed by over 200 federal rules, regulations, and laws.75
In order to achieve its development goals for may parts of the nation, the federal government has
historically subsidized water deliver and consumption via three means. First, the federal government has paid
for many water control and delivery systems through direct disbursements and through highly subsidized
loans with lenient payback schedules. Special provisions for federally sponsored water projects include no
charge for interest, repayment periods of up to 60 years, and the use of an "ability to pay" criterion (as
opposed to a consumption-based approach76) in determining the share of costs that beneficiaries would bear.
Second, long-term contracts for water sales on water delivered from these projects (which may span forty
years) are generally written for prices below the government's delivery costs. Finally, water pricing by water
utilities is targeted at recovering fixed plus variable expenses plus a profit. Pricing policies do not have any
incentive mechanism which might force the consumer to pay a greater price for greater consumption. Such a
pricing mechanism would relate consumption to the utility's future efforts to replace the used water.
Currently, because of low-cost delivery and sale, water consumption may remain high (even in areas where
non-replaceable water reserves are being depleted), and relatively inexpensive technologies to improve water
efficiencies may not be adopted. The total current federal expenditures on water-related programs and
projects exceeds $5 billion annually.77
Impacts of Water Subsidization on Industry
Federal water subsidies may have significant adverse impacts on recycling industries. Like energy.
recycling generally requires less water than does virgin production. The four largest industrial users of water
are the steel manufacturing, chemical and allied products, paper and allied products, and petroleum refining
industries.78 These industries compete with entities which recycle scrap metal, plastics, paper and used oil.
respectively. These recycling activities can yield water savings (vis-a-vis the virgin analogues) that can reach
as high as 58 percent.79 Moreover, primary petroleum refineries, utilities and mining operations are able to
reduce energy costs and capitalize on what may be an indirect federal subsidy by consuming large volumes of
water. This substitution of less costly water for more costly energy could further hinder the competitiveness
ofrecyclables.
The impact of direct water subsidies on recyclables is affected by a number of factors. Primarily, the
largest water subsidies are found in areas where very little of the water is used for industrial production.
Water is most heavily subsidized in the western and southwestern United States where nearly 91 percent of
Charles H. W. Foster and Peter P. Rogers. "Federal Water Policy: Toward an Agenda for Action." discussion paper E-88-05
of the Energy and Environmental Policy Center. Kennedy School of Government. August 1988. p. 9.
Sandra Postel. Conserving Water: The Untapped Alternative (Washington. D.C.: The WorldWatch Institute. September
1985). p. 47.
Foster and Rogers, p. 9.
Wayne Solley. Charles Merk. and Robert Pierce. Estimated Use of Water in the United States in 1985. U.S. Geological
Survey Circular 1004.1988. p. 30.
Estimated water savings from recycling are 40% for steel. 50% for glass, and 58% for paper. See Robert Cowles Letcher
and Mary Sheil. "Source Separation and Citizen Recycling." in William D. Robinson, ed.. The Solid Waste Handbook (New
York: John Wiley & Sons. 1986).
36
-------
the subsidized water is used for irrigation. California and Idaho alone account for 37 percent of all water
used for irrigation, nationally.80 While many of the water subsidies are intended to support agriculture, even if
they were available for all uses, their impact on recycling would most likely be limited. In the nine western
water regions,81 79.4 percent of all fresh water consumed is used for irrigation. This figure increases to 81
percent if livestock watering is included. Industrial use in these regions comprises just 2.0 percent of all fresh
water used.82
Use of water for thermoelectric cooling represents the single largest withdrawal use nationwide.
Virtually all of the water used for cooling (99 percent) comes from surface water sources, and an even larger
percentage is self-supplied by the utilities. Generally, utilities must have a permit to access this water, as well
as a discharge permit to control any potential pollutant problem (e.g.. thermal, radioactivity, corrosion
inhibitors). However, utilities usually do not pay directly for the use of water, although regulations vary by
state.83 While 97 percent of the water is returned to the original surface waterbody after use,84 the cost free
use of water may be viewed as a subsidy to energy production, although we have not quantified it's impact.
Use of subsidized water for mining operations could also adversely impact recycling industries.
However, "except for some washing and milling, water used at mining sites tends to be an impediment to, or a
byproduct of. the extraction process."85 All water used in mining is self-supplied, and regulated at the point
of discharge rather than the point of withdrawal. To the extent that free use of self-supplied water is viewed
as a subsidy, prices of the resulting energy or minerals may be subsidized.
Even if water usage was subsidized or free, pollution control requirements dramatically increase the
costs of consumption. Restrictions on allowable discharges seem to be the force that is currently driving
industrial water usage rates. More stringent restrictions have led to continued increases in water recycling
rates since the 1950's. As shown in Table III-6, despite whatever subsidies may exist for water use, water
recycling rates for all manufacturing sectors have risen from 1.82 in 1954 to 8.63 in 1985. Pollution control
regulations may have played an important role in encouraging this conservation.
10 Solley et al.. p. 23.
" Missouri Basin. Arkansas-White-Red. Texas-Gulf. Rio Grande. Upper Colorado. Lower Colorado. Great Basin, Pacific
Northwest, and California.
12 Percentages are derived from data in Solley et al.. passim.
" Wayne Solley. personal communication. July 6. 1989.
M Solley et al.. p. 38.
* Figures represent the number of times each unit of water is used within the manufacturing process before being discharged.
37
-------
Table III-6
WATER RE-USE RATES IN U.S. MANUFACTURING
INDUSTRIES, 1954-78
(with projections for 1985 and 2000)
Piper and
Allied
Veir Products
Chemical
and Allied
Products
Petroleum
And Coal
Products
Primary
Metal
Industries
All Manu-
fac faring
1954
1959
1964
1968
1973
1978
1985
2000
2.38
3.12
2.66
2.90
3.37
5.30
6.64
11.84
1.60
1.61
1.98
2.10
2.66
2.89
13.19
28.03
3.33
4.38
4.41
5.08
6.36
6.98
18.33
32.73
.29
.53
.46
.55
.79
.91
5.99
12.31
1.82
2.16
2.13
2.31
2.89
3.42
8.63
17.08
NOTE. The figures above represent the number of time*, on average, each unit of water i» med within the
manufacturing process before being discharged.
Sources US Department of Commerce. Butau of the Cemm. Water Uie in Marn't/"*""'!!! 19B1 Projections
for 1985 and 2000 from Cu\p et aL. Water Reuse Recycling E"')vaflon ofNeecfa and Potential Volume 1.
Department or*the Interior Statistics cued in Sandra Pastel Cornerviny Water The Untapped Alternative. The
WorldWatch Irrotute. September 1985
Potential Impact on Recycling
Federal water subsidies do not seem to be a significant factor in inhibiting recyclables in the
marketplace. The highest subsidies support uses that do not compete with recyclable products (e.g..
agriculture). In addition, the largest industrial users of water tend to be located along water sources to
facilitate inexpensive use of self-supplied water for processing. This use is not affected by federal subsidies.
although the fact that users usually do not pay the municipality for water rights may subsidize the resulting
product price. The practice by utilities of pricing water below replacement cost may slightly reduce the cost
of virgin production, although the magnitude is not known.
Transportation Subsidies
Transportation is an integral part of any manufacturing or re-manufacturing process. Raw materials ~
either virgin or secondary - need to be transported from the point of supply to the point of their use. This
can be a significant component of production costs. Subsidies to different transportation sectors may alter
the shipping decisions that are made by factories, shipping goods or materials using a method that is more
expensive or less efficient than the method that would be chosen with no subsidies. Because virgin industries
are generally located in closer proximity to the natural resource feedstock than to their markets, it is possible
that they receive some marginal benefit from these subsidies relative to their recycling counterparts.
38
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Subsidies to Rail Transport
Historically there has been concern that recyclers shipping by rail were subject to discriminatory freight
rates against recyclables relative to virgin feedstocks and products, and that such discriminatory pricing put
them at a competitive disadvantage. Our general findings do not indicate that this concern is valid with
respect to federal regulation.
•*
Railroad rates for both inter- and intra-state transport are governed by the Interstate Commerce
Commission (ICC). In the 1970's. there was much debate regarding discriminatory pricing for transport of
secondary materials, and in 1977, Congress ordered the ICC to conduct a study on this topic. The initial
results, made available in February 1977. indicated that there was discriminatory pricing against reclaimed
rubber, copper matter, zinc dross, aluminum residues, cullet (glass scrap), and miscellaneous non-ferrous
residues.
In 1978. the National Association of Recycling Industries and the Institute of Scrap Iron and Steel
Challenged the results of this study in court, resulting in a new study that was completed in April 1979. The
results of this analysis showed that discriminatory pricing was found in parts of the country against ferrous
metals, aluminum scrap, and wastepaper.88 While the courts ordered that such discriminatory pricing cease
within 90 days, action was so slow that the affected industries sought legislative changes.
The Staggers Rail Act of 1980. Section 10731. ordered the ICC to determine a revenue-to-variable cost
ratio for all non-ferrous recyclable or recycled materials that was less than or equal to the average revenue-to-
variable cost ratio necessary to "provide a sound transportation system in the United States." The ICC
determined that a revenue-to-variable cost ratio of 146 percent was a reasonable cap for recyclable materials.
The ferrous industry was excluded from Section 10731 because it opted not to be included in this
provision. At the time of the Staggers Act. and even today, rail freight rates for ferrous materials were low.
and a cap may have actually increased rates.89 Based on a recent conversation with the Institute for Scrap
Recycling Industries, discriminatory rates in transportation are not a major concern of members today.
Other Subsidies to Transportation
If virgin materials production relies more heavily on transportation than secondary materials, additional
federal policies may subsidize primary production. For example:
Highway construction costs are paid primarily by highway users. The Federal Highway Trust Fund
was created by Congress to facilitate the necessary financial support. This Trust Fund is financed in
large part, through a portion of fuel taxes. However, a sizable portion of highway construction is paid
w History information is from Senator Joseph L. Bruno. Legislative Commission on Solid Waste Management. Incentives for
Recycling. January 1988. pp. 10-13.
17 Interstate Commerce Commission. Investigations of Freight Rates for the Transportation of Recvclables or Recycled
Commodities. Ex Parte 319. Washington. DC. 1977.
* Interstate Commerce Commission. Ex Parte 319. Sub-No. 1. Washington. DC. April 16.1979.
w Personal communication with Deb Levin. Institute for Scrap Recycling Industries. June 1.1989.
39
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via direct state and federal funding. Between 1991 and 1995. taxes from highway users are estimated
to provide $71.5 billion to the highway account of the Highway Trust Fund. Over the same period
$81.5 billion is projected to be spent on current highway programs.90 representing a net shortfall of $10
billion. The general taxpayer will pay the difference and not the highway user. Thus, this method of
financing acts as a subsidy to the major users of the road system.
Inland water transportation, mainly by barge, is used extensively to move bulk items (such as oil)
within certain parts of the United States. Operating, maintaining, and developing the inland waterway
system in this country was estimated to cost $700 million in 1990. Operation and maintenance costs
(such as for locks, dams, and maintenance dredging) accounted for approximately $300 million, and
new construction costs were expected to account for the remaining $400 million. These costs are not
typically borne by the users, thus the $700 million acts as a federal subsidy to barge transport.91
Ports must be maintained so that the channel depths are sufficient to support the desired type of
shipping. United States ports are maintained by the Army Corps of Engineers, which provide this
service for 180 ports at the cost of nearly $500 million per year. Only about 30 percent of this cost is
recovered through a tax on the value of commercial cargo loaded or unloaded at ports that are not part
of the Inland Waterway System.92 The remaining 70 percent of the costs, or $350 million per year is a
subsidy to the users of these ports.
The Coast Guard provides numerous sen ices for civilian navigation, including aids to navigation (e.g.,
buoys and channel markings, search and rescue sen-ices, and marine safety programs). These semces
account for nearly half the Coast Guard's operating budget, or about $910 million in 1989. An
additional $80 million annually is appropriated for related capital expenditures on marine safety and
navigation program,93 for a total of $990 million. Almost of all these costs are borne by the general
taxpayer, and thus represent a subsidy to civilian navigation and to the commercial shipping industry in
particular.94
Impacts on Recycling
The total subsidy to transportation provided within these four categories is slightly over $4 billion
annually. Their impact on recycling depends upon the relative use of transportation modes by virgin versus
secondary industries. Because virgin industries are generally located close to the natural resources, and
therefore farther away from their markets, it is likely that they receive some marginal benefit over recycling
industries from transportation subsidies. Secondary materials, at the same time, require additional
transportation for collection and processing. The relative advantages will van' by plant and possibly by
commodity as well. A number of federal policies affecting road, rail, inland waterway, and ocean shipping
90 Congressional Budget Office. Reducing the Deficit: Spending and Revenue Potions (February 1990). p. 277.
" Ibid., p. 272: T. Allan Comp. ed.. Blueprint for the Environment 1989. pp. 332-33.
n Congressional Budget Office, p. 244.
M Ibid.. CBO; p. 275.
94 Ibid.. CBO. p. 275.
40
-------
have been identified. While we did locate some estimates of the overall magnitude of transportation
subsidies, we were not able to estimate the net impact on recycling.
Conclusions
Timber subsidies
In comparison to the size of the U.S. paper market, below-cost timber sales comprise approximately
4% of total production in the United States. Thus, timber subsidies should not have a significant impact on
timber prices.
Mining Subsidies
Below-cost mining leases are the major non-tax subsidy currently available for minerals development.
Based on available information, it appears that most of these leases are used today because of speculation on
the value of the land, and not the minerals. Thus, at present, below-cost mining leases appear to have only a
minimal impact on the reclamation of minerals.
Energy Subsidies
There are numerous federal policies which act as subsidies and encourage development of energy
resources. These programs totalled a staggering $26.7 billion in 1988. Inasmuch as primary production is
far more energy intensive than secondary production, these subsidies almost certainly provide a disincentive
to recycling. However stating the precise magnitude of this disadvantage is difficult, due to the international
derivation of energy prices.
Water Subsidies
Water is subsidized primarily for agricultural uses in areas of the country with low industrial
development. Thus, we would not expect that water subsidies would have any significant impact on recycling
for the commodities of concern. The most significant impact could result from some water utilities using
pricing schemes that do not include replacement costs.
Transportation Subsidies
Rail transportation rates, since the Staggers Rail Act of 1980, do not seem to discriminate against
secondary industries. Other modes of transportation receive subsidies for maintenance and construction.
While in each case some of the money to support the transportation network is paid by the industry, some
subsidies come from general revenues. The impact of these subsidies on recycling is unclear because we do
not know if primary producers, on balance, rely more heavily on transportation than do secondary producers.
41
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IV. THE MAGNITUDE OF FEDERAL SUBSIDIES:
CASE STUDY OF THE PAPER INDUSTRY
Industry Overview
In 1986, the United States consumed 78.8 million tons of paper and paperboard. Of this, about 22.3
million tons, or approximately 28 percent of total use (including converting scrap),95 were recovered for
recycling, with much of the remainder sent to landfills for disposal.96 Paper and paperboard discards in 1986
constituted 35.6 percent (by weight) of the municipal waste stream, the largest category of discards.97
The paper and paperboard industry in the U.S. includes about 600 paper and paperboard mills, of
which about 200 mills use feedstocks comphsed of only reclaimed paper.98 Another 300 mills use at least
some wastepaper in their manufacture of paper and paperboard.99 Overall rates of the domestic industry's use
of wastepaper have been edging slowly upwards over time. For example, the proportion of recyclable paper
consumed to total paper and paper board production rose from 22.8 percent in 1970 to 25.0 percent in 1987,
an increase of only 2.2 percentage points (or 9.6%) in 18 years. Including exported wastepaper, this figure
increases to 28.5 percent in 1987.'°° However, both of these use rates include converting wastes (i.e., wastes
created during paper processing at the mills).
In 1986, post-consumer paper recovery as a percent of gross discards stood at 22.6 percent. Table IV-I
presents the recovery rates for various types of paper. The post-consumer recovery rates are highest for
corrugated paper and newsprint. Printing and writing papers, which account for the highest consumption,
have a below-average recycling rate of 21.9 percent.
95 Converting scrap refers to production wastes that are recycled before ever reaching a consumer, as compared to post-
consumer paper products that are recycled after they have been used by the consumer.
* SeeTableIV-1. See also "The Federal Paper Guideline." Waste Age. October 1988. p. 158 More recent data indicate that
in 1988 recovery was over 30 percent at 26.2 million tons (Franklin Associates. Ltd., Paper Recycling: The View to 1995
Summary Report, prepared for the American Paper Institute, February 1990. Table 1-2).
91 U.S. EPA. The Solid Waste Dilemma: An Agenda for Action, p. A.A-2. from U.S. E.P.A.. Characterization of Municipal
Solid Waste in the United States. 1960 to 2000 (Update 19881 March 20.1988. Note that this percentage increased to
37.5 % in 1990 (U.S. E.P.A.. Characterization of Municipal Solid Waste in the United States: Update 1992. July. 1992.)
" Cynthia Pollack, Mining Urban Wastes: The Potential for Recycling (Washington. D.C.: The Worldwatch Institute. April
1987), p. 22. According to the American Forest and Paper Association (AFPA) the number of mills has decreased to 547.
The*number of mills that use solely reclaimed paper as a feedstock remains at about 200. Recent estimates indicate that
more than 425 mills use at least some wastepaper in their manufacturing processes. Personal conversation with AFP A,
June 1,1994.
M American Paper Institute, "Facts About Waste Paper Recycling/(pamphlet)". 1988.
108 American Paper Institute (henceforth cited as API), "Recyclable Paper Utilization and Recovery," 1988 Statistics of Paper.
Paoerboard. & Wood Pub New York. 1988), p. 50.
42
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Table IV-1
SUMMARY OF CONSUMPTION, DIVERSIONS AND RECOVERY, AND NET WASTE
DISCARDED FOR PAPER AND PAPER AND PAPER PRODUCTS, 1986
In thousand short tons and percent)
Paper Category
Paper
Newsprint
Printing- Writing Papers
Paper Packaging and
Industrial Converting
Tissues
T^af.^Wt
Paperboard
Containerboard
(corrugated)
Boxboard and Other
Paperboard
Total Papertwsid
Construction Paper
TOTAL
Percent of Total
Consumption
Consumption
12,994
21,989
5,076
5,144
**,m
21,604
10,963
32.567
2,046
7*,*i*
100%
Converting
Scrap
325
2.618
254
257
&4S4
2,160
1,864
4,034
143
?,62t
9.5%
Diversion
63
1,347
289
1,906
3,60
0
2,002
2J02
1,903
"MM*
9.4%
Gross
Waste
Discarded
12,606
18,024
4,533
2,981
$8444
19,444
7,097
2&,S4l
0
64,6SS
81.0%
Total
Recovery
4,125
4,806
514
257
9,-W
10,160
2,264
12,434
143
n>m
27.9%
Post-
Consumer
Waste
Recovery
3,800
2.188
260
0
6J4*
8,000
400
2,400
0
14,64*
Net Waste
Discarded
8,806
15,836
4,273
2,981
n&&
11,444
6,697
18,1:41
0
50.03?
62.7%
Total
Recovery
(as a •/. of
consumption)
31.7%
21.9%
10.1%
5.0%
$13%
47.3%
20.6%
m«%
7.0%
aro%
Post-
Consumer
Recovery (as a
'/» of gross
discards)
30.1%
21.1%
5.7%
0.0%
1*4**
41.1%
5.6%
31.6%
0.0%
n,w>
•Includes converting icrap.
Soun«:Amerk^PaJJ Institute (coreumpdm 1; ^ From US EPA,' Appendix A: Paper, The Solid W»te
Dilemma: An Agenda for Action.
-------
The rate of growth in wastepaper use is slight when compared to the rapid growth in wastepaper
exports, which increased more than tenfold over the same 1970-87 period.101 Additionally, wastepaper use
rates in Japan and most of Western Europe are substantially higher than those in the United States.102
The slow growth in domestic consumption of wastepaper is difficult to understand, since a number of
production factors favor recycled production relative to virgin production. Paper production from recycled
pulp can save both energy and water. In addition, large population centers provide both major sources of
wastepaper and major markets for recycled products. This should reduce transportation costs relative to
virgin production. Finally, recycling mills tend to be smaller-scale operations than virgin mills, and are
therefore less expensive to build.
A number of factors have been suggested as causes for the slow growth in the utilization of post-
consumer wastepaper. These include:
A volatile and irregular supply of wastepaper:
Federal subsidies for virgin production:
Low pulp costs in the United States compared to more expensive pulp in the countries to which we
export wastepaper: and.
Product specifications that make the use of recycled wastepaper difficult or impossible.
To some degree, all of the above factors probably play a role in the use rate of recycled paper.
However, this chapter examines only the impact of federal subsidies on the costs of producing virgin paper,
and the resulting effect on paper recycling. Specifically, we focus on six federal programs identified in
Chapters II and III that apply to virgin pulp production: federal tax policies, below cost timber sales,
energy subsidies, water subsidies, federal pollution control requirements, and export restrictions.
Method
To measure the impact of the federal subsidies, we computed the size of each subsidy and then
compared the level of subsidization with a measure of production costs in the paper and paperboard industry.
This approach relies on two simplifying assumptions.
First, we assumed that federal subsidies that reduce the cost of factors of production (e.g., percentage
depletion allowances for independent oil and gas producers) are passed through as lower energy prices, not
retained as increased profits by the primary beneficiary. In other words, if an energy subsidy amounting .to 19
101 API, "Recyclable Paper Utilization and Recovery," p. 50.
102 Pollack, p. 26.
44
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cents per million Btu were implemented, the price of energy would fall by 19 cents per million Btu.103
Conversely, if the subsidy were removed, the price of energy would rise by the same amount.
The second assumption was that decreases in virgin material production costs (brought about by
subsidies) adversely affect the share of recycled versus virgin inputs, and that the removal of the subsidies
would increase the pnce of virgin paper and paperboard products, compared to those made from recycled
fiber.
One additional comment on method relates to the measurement of impacts; we compare the subsidies to
the cost of materials for those portions of the paper and paperboard industry (Standard Industrial
Classification, or SIC 26) that produce or use pulp as a raw material. We included SICs 261 (pulp mills).
262 (paper mills except building paper), 263 (paperboard mills), and 266 (building paper and board mills).
We excluded SICs 264 (miscellaneous converted paper products) and 265 (paperboard containers and boxes)
because they purchase paper or paperboard for fabrication or conversion. Because their cost of materials
included purchases of finished products from these other sectors, it would be inappropriate to incorporate that
cost.
The industries analyzed expended $25.8 billion for materials in 1988.IM We used total cost of
materials as the basis for our impact analysis because it provided an aggregate estimate of expenditures on
the industry inputs that receive federal subsidies. Once paper mills are constructed, it is relatively expensive
to switch from trees (virgin pulp) to wastepaper (recycled pulp) as a feedstock, because of different
equipment requirements and because plant locations are chosen so as to minimize the costs of obtaining the
raw materials for which the plant was initially built. The substantial capital investments required for a mill
are presumably based on the likely production costs of using either recycled or virgin raw materials and the
demand for the final products. Because one of the main factors influencing capital decisions is the cost of
inputs, it is appropriate to examine the impact of the subsidies on the total cost of production.
Federal Tax Policies
Federal tax policies favoring virgin timber production fall into two main categories: tax benefits for
timber production and harvesting, and tax benefits for plant construction, in the form of private activity
bonds (PAB's). These categories will be addressed separately.
103 For some factors, subsidies may only result in increased profits because prices are set on a broader market (e.g., a world
price for oil). In these cases, our approach will overstate the impact that a subsidy has on prices and, therefore, on the
choice of inputs to production.
104 U.S. Department of Commerce. Bureau of the Census. 1987 Census of Manufactures. Preliminary Report. Industry Series:
Pulp. Paper, and Board Mills. August 1989. 1987 data were scaled to 1988 using the producer price index for pulp, paper.
and allied products (SIC 26). found in U.S. Department of Commerce. Survey ot'Current Business. August 1989. SIC 266
(building paper and board mills) was not included as a category in the 1987 Census, and therefore was only partially
included in our cost of materials figure. We do not believe that this introduces any serious errors for two reasons. First, SIC
266 in the 1986 Annual Survey of Manufactures represented only 2.2 percent of the cost of materials for SICs 261,262.
263. and 266. In addition, all construction papers have been reclassified into SIC 2621. and are therefore included in our
estimate. Only insulating papers, reclassified under SIC 2493 (reconstituted wood products) are not included. However.
the Bureau of the Census at this time had no more specific information regarding what proportion of SIC 2493 was
previously classified as SIC 266. (Al Forman. Bureau of the Census, personal communication, October 11. 1989).
45
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Tax Benefits for Timber Production and Harvesting
Current tax policies subsidizing the production and harvest of timber include three major provisions:
expensing of multi-period growing costs, reforestation investment tax credits, and 7-year amortization of
reforestation expenses.105 The benefit to the timber industry from expensing of multi-period timber growing
costs was $256 million in FY 1988; reforestation investment tax credits and rapid amortization that year
provided the industry with an additional $203 million subsidy."* Total tax subsidies for timber production
and harvesting in FY 1988, therefore, were $459 million.
Only a portion of these subsidies is available to the paper and paperboard industry, however. The most
recent data we collected indicates that 33.1 percent of total timber harvests is converted into pulp products.
We therefore assumed that an equal share of the tax subsidies could be attributed to timber harvests for
pulping purposes. Thus, 33.1 percent of the $459 million subsidy, or $152 million in tax benefits, goes to
virgin paper and paperboard production Assuming conservatively that this entire savings is passed on to the
paper manufacturer, rather than retained by the timber producer, savings from these tax policies amount to
0.59 percent of the cost of materials in 1988. These policies alone seem unlikely to significantly affect paper
recycling efforts.
Tax Benefits for Plant Construction
Prior to the 1986 Tax Reform Act. a host of tax benefits subsidized borrowing and investment for
capital projects. To the extent that virgin mills are typically larger than recycled fiber mills and are integrated
into timber and pulp processing, virgin mills require more capital, and these incentives could have promoted
the use of virgin fiber. However, the Tax Reform Act eliminated all federal subsidies that we could identify
as subsidizing large, wholly private, capital investment projects,108 and we do not believe capital subsidies are
an issue affecting paper mills today.
Below-Cost Timber Sales
The federal government sells a great deal of timber from federally owned timberland. Many of these
sales fail to earn enough revenue to meet the government's costs of developing and managing the timber
stands. Some sales do not even earn enough revenue to cover the government's costs of planning the sales.
These "below-cost timber sales" subsidize timber buyers because the price that is charged for the cutting
105 Capital gains benefits were eliminated in the Tax Reform Act of 1986 and are discussed in Appendix A.
106 See Table D-l for more detailed information.
107 We assume that the fraction of timber sales going to pulp and paper end uses in 1988 is the same as it was in 1986. Timber
sales data from the United States Department of Commerce. "Timber Products - Production. Foreign Trade, and
Consumption, by Type of Product: 1960 to 1986." Statistical Abstract of the United States. 1989. Table 1146.
'" The Tax Reform Act reduced the subsidy to borrowing in a number of ways. Among the changes alTecting the
construction costs of a virgin paper mill: an increase in the depreciation periods for most capital equipment from five to
seven years: the repeal of the 10 percent investment tax credit, the elimination of tax-exempt bond status for many uses that
had received such status as industrial development bonds (the predecessor to private activity bonds): a lower annual capital
cap on private activity bonds: and. the elimination of provisions which allowed the expensing of plant construction costs.
46
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rights is below what would be required'to induce similar sales if the sales were managed bv pnvate
enterprises. e . F
The magnitude of the subsidy associated with below-cost timber sales may be approximated bv the
Forest Services total losses on the sales. Realistically, a private timber owner would not sell tunber cutting
rights just to cover the costs of the sale; the firm would also seek a profit. Since we had no wav to estimate a
reasonable profit from Forest Service's sales, we used its losses alone as our lower-bound estimate for the
industry subsidy. This probably underestimates the true subsidy to some degree, since adding an expected
profit component to timber sales would increase the losses. Therefore, as an upper bound, we assumed that if
it were a pnvate owner, the Forest Service would seek a 4.6 percent profit on sales.I09
U.S. Forest Service timber sales accounted for, on average. $874 million annually in gross receipts
between 19*2 and 1988.110 During the same time period, the Forest Service spent $1.2 billion annually on
road construction, sales administration, reforestation, and other timber program costs. Thus, the Forest
Service realized an average annual loss of $326 million.111 We used this as a lower bound estimate of the
timber subsidy. If the Forest Service were operating as a private owner, it would seek to price its product
such that sales exceeded expenditures by 4.6 percent, or $ 1,255 billion As actual receipts totaled only $874
million, the Forest Service lost $381 million in potential revenue annually. We used this figure as our upper
bound estimate of the timber subsidy.
The impact of this subsidy on the pulp and paper industry is diluted by a number of factors, including.
The percent of total commercial timberland owned by the federal government:
The fraction of federal sales that go into pulp instead of timber:
The total pulpwood and pulp from federal lands as a percent of total demand by the paper industry:
and,
Pulp costs as a fraction of total materials costs 10 paper mills.
Timberland Ownership
Of the total amount of commercial timber harvested in the United States in fiscal 1988, 25 to 35
percent, or approximately 4 percent of production, was sold at below-cost prices.": Thus, the impact on
'** This figure represents the average return on sales ratio for the logging industry in 1988; Industry Norms and Key Business
Ratios. 1987-88. Dun & Bradstreet Credit Services. •,.
110 . TheWilderness Society, testimony before the Interior Subcommittee of the House Appropriations Committee. February I.
1989
111 Alice Rivlin. Chair of the Governing Council of The Wilderness Society and Senior Fellow in the Economic Studies
Program of the Brookings Institute. Statement before the Senate Budget Committee. March 15. 1989, p. 5.
111 Data in this paragraph from: Forest Statistics of the United States. 1987. USDA Forest Service. Pacific Northwest Division.
Resource Bulletin »PNW-RB-168. September 1989. fighting Forest Fire and Forest Fire Protection Expenditures. 1978-Sjj
unpublished data on file. USDA Forest Service. Office of Fire and Aviation Management. 1988 Forest Help Through
Silviculture and Integrated Pest Management. Supporting Appendices. Government Printing Office. Washington. DC.
47
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timber prices of below-cost sales is almost negligible. Since the federal government controls only a small
fraction of all domestic commercial timber sales, its ability to influence paper prices is limited. This
influence is further reduced when we look at the fraction of federal timber going into pulp, as opposed to
other timber uses.
Fraction of Federal Sales Going into Pulp
In fiscal year 1988, total federal government timber sales were 12.588 million board feet,113 with a
small fraction going primarily into pulp. Table IV-2 presents data on the FY 1988 federal timber harvests.
Timber going primarily into pulp is classified under the category of roundwood sales.114 However.
using sales of roundwood as a proxy for federal timber going into pulp is likely to underestimate the true
volume used for pulp; lumber mills that purchase saw timber generate wastes that are a supplemental source
of pulp for integrated timber/paper mills, hi addition, the Forest Service's Timber Sale Program Information
Reporting System (TSPIRS), from which we gathered these harvest figures, is currently in a trial phase.
Thus, there may be some errors in the classification of sales going into saw timber versus roundwood.
Table IV-2
TIMBER HARVESTS FROM FEDERAL LANDS, FY 1988
(Millions of Board Feet)
End Use
Sawtimber
Roundwood Sales
Other
tot*! Harvest
Volume H»rvested
10.163
1.667
758
Percent of Harvest
81°.
13°o
6",
LUted States Department of Agriculture. Forest Service. Timber Sale Program Annual Report Focal Ye
1988 Teat National Summary. 'Other" refers to pent and pole me. and other mncellaneom me».
While our estimates indicate that 13 percent of timber from federal lands is slated for pulp use, 33.1
percent of all timber produced domestically in 1986 ended up in paper (see footnote 101). Because total
roundwood sales are likely to underestimate federal timber sales for the reasons stated above, we used the
federal harvest data and the overall domestic production data to develop low- and high-end estimates of the
impacts of timber subsidies. The low-end estimate accounts for the share of total federal harvests going to
paper (13%), and assumes no return on sales. The high-end estimate represents the national average of pulp
going to paper (33.1%), with a 4.6 percent return on sales.
114
United States Department of Agriculture. Forest Service. Timber Sale Annual Report. Fiscal Year 1988 Test. National
Summary, p. 8.
Bill LeVere. United States Department of Agriculture, Forest Service, personal communication, June 16.1989. According
to Mr. LeVere. the roundwood classification is as good a proxy for timber going into pulp as is available, although it is not
equally good in all Forest Service regions. Other timber uses, such as utility poles, are counted as "Other."
48
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We estimate that the timber subsidy ranges from 0.16 to 0.49 percent of the cost of materials for pulp
and paper mills (see Table P/-3). This figure also assumes that the entire subsidy will be passed through to
the timber mills, which is an unlikely prospect. Therefore, it does not seem as though below-cost timber sales
are a significant barrier to recycling. Because federal timberland and pulp demand patterns vary regionally.
below-cost timber sales may play a more significant role within certain industrial sub-sectors, although which
sub-sectors is unclear.
Table IV-3
BELOW-COST TIMBER SALES
AVERAGE ANNUAL SUBSIDY FOR FY 82-88
($ millions)
Lower
Bound
Upper
Bound
Forest Service Losses/Subsidy to Timber Industry
Share Credited to Paper and Paperboard
Subsidy to Paper and Paperboard
Cost of Materials to SICs 261.262.263. 266
Subsidy «» Pefwar of Cost of Materials
$326 S381
13.0«-b 33.1%
$42 $126
$25.808 $25.808
0.49%
In developing these estimates, we assume that the federal share of total commercial omboiand in 1987 and
the fraction! of total timber consumed for pulp products in 1986 are valid proxies for these variables in 1988.
Energy Subsidies
Paper and paperboard manufacturing uses an enormous amount of energy, ranking fourth in industrial
energy use behind steel, oil refining, and chemicals. In fact, energy use by paper and allied products
industries (SIC 26) in 1985 amounted to 12.6 percent of all industrial energy use.115 Recycling paper may
save between 22 and 64 percent of the energy- necessary to manufacture paper from virgin feedstocks (see
Table B-l in Appendix B), depending upon the type of paper being recycled.
Using data from the American Paper Institute (energy consumption by energy type in the Paper and
Allied Products sector) and the information developed in Chapter III (subsidies per million Btu), we derived
an estimate of the energy subsidy going to the industry as a whole. This derivation is presented in Table IV-
4. Note that the subsidy scenario presented is a best estimate. As mentioned in Chapter III, our subsidy
estimate assumes a complete loss of tax provisions eliminated in the Tax Reform Act of 1986, rather than a
substitution of underused tax benefits, and a retention of some portion of the revenues. To the extent that
such substitution exists, our estimates of tax subsidies to energy, and therefore to energy used by the paper
industry, will be understated.
115 U.S. Department of Energy, Energy Information Administration, Manufacturing Energy Consumption Survey:
Consumption of Energy. 1985. November 1988. p. 17.
49
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Table IV-4 shows energy consumption in the first column. The industry relies on self-generated energy
for about 57 percent of its needs in these sectors. The subsidy estimates for different types of purchased
energy are taken from Chapter III and multiplied by energy consumption to arrive at total subsidies. Overall
energy subsidies to the paper industry are estimated to be $486 million in 1988. Also in 1988, the American
Paper Institute estimated a recyclable paper use rate of 24.4 percent.116 Since energy subsidies are available
to both virgin and recycling industries, only the net value of the subsidy is important. This net value is
calculated by subtracting the percent of total estimated energy use for paper made using recycled fiber from
the percent of total energy use attributable to virgin production. The net subsidy also depends on the level of
energy savings from recycling, as discussed below.
To compute the share of the energy subsidy received by virgin producers, we used the recycled paper
use rate of 24.4 percent and a range of energy savings from recycled fiber (from 22 to 64 percent). This
range defines the continuum of subsidies: the more energy saved by use of recycled fiber, the higher the
subsidy to virgin producers. Table IV-5 shows the steps in the calculation of the net subsidy. Based on these
figures, we computed that the net subsidy to virgin producers of paper and paperboard is between 60 and 79
percent of the total energy subsidy.117
Of the initial $486 million in energy subsidies to paper production, between $291 and $385 million
may be classified as net subsidies to virgin production. If the full impact of energy subsidies were reflected in
prices to the consumer, the subsidy would account for 1.1 -1.5% of the industry's total material cost of $25.8
billion in 1988. However, the "cost pass through" issue again haunts our conclusions. Given the
international derivation of most energy prices, it is not clear how much of the subsidy is reflected in price and
is thus passed through to virgin paper producers.
116 The recyclable paper utilization rate equals the ratio of recyclable paper consumption to total production of paper and board.
American Paper Institute. Economics Department. "The Paper & Allied Products Industry in the United States," March 3.
1989.
117 Derivation of net shares is shown in Appendix B. pages B-4 and B-5.
50
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ENERGY USE
FUEL TYPE
PURCHASED ENERGY
Electricity4
Fossil fuel-derived
Nuclear-derived
Hydroelectric-derived
Other renewables-derived
Electricity Totals
Steam5
Coal
Residual Fuel Oil
Distillate Fuel Oil
Liquid Propane Gas'
Natural Gas
Other Purchased Energy
Energy Sold7
.... >I^M!*l?!ii**$n^sie.fl' XM&Tfy~ _
SELF-GENERATED ENERGY1
Hogged Fuel (50% Moisture Content)
Bark (50% Moisture Content)
Spent Liquid (Solids)
Self-Gen. Hydro-electric
Other Self-Generated
TOTAL ENERGY CONSUMED
NOTES:
PaDerboard & Wood Pub. New York, NY. 1 989. p. 51 . DaB r
communication, September 15. 1989X
'Subsides per million Btu were developed h Chapter IE
Total subsidy equals (iubndy/MBtu> x (MBtu consumed).
' Total electricily consumed is from API Relative contribution!
the Department of Energy. US. Energy Information Administra
'Subsidies for steam power may exist through co-generation cla
Whereas these subsidies, if Ihey van to exist, would be state, n
benefits &r purchased steam were retained by the seller, and sel
"Liquid Propane Oa» (LPG) is a petroleum product, and was th
•We assumed that subsidies to energy sold by the paper mills w
retained by the mills, rather than passes on to the energy consul
than negative (ie.. the paper mill loses some subsidies).
'Self-generated power was (Rated as unsubsidized Mostsubsic
rJmbjj subsidies and tax benefit
Table IV-4
IN THE PAPER INDUSTRY, 1988
(1988 Dollars)
Est. 1988 Energy
Consumption (Ma Btu)1
1 13.368.954
28.772.065
17.596.574
1.426.907
161.164.500
21.388,200
338,192,300
178,507,100
10.496.200
2,707.600
339.429.300
2.270.100
(39,868.700)
267.585.100
123.915.200
935.121.900
11.558.300
11,965,500
2.364.432.600
Subsidy Per
Million Btu1
$0.68
$9.58
$0.69
$0.10
$2.26
$0.00
$0.14
$0.19
$0.19
$0.19
$0.11
$0.10
S«.4»
$0
$0
$0
$0
$0
$•
$0.21
\ilp.PaperPaperboard Industry. Esomated Fuel and Energy Use." hli
eferto paper febricatois only tSCs 26}, 252. 253, 256). (AndyEcheU
to electric energy are based on consumption rates by electric utilities in
lion. Monthly Energy Review. February 1988.
uses tinder PURPA. by which states can require utilities to buy such pew
at federal and shoe we had no way to estimate their magnitude, we anu
the subsidy at zero.
a attributed the subsidy rate of crude oil and natural gas liquids (KOL).
m capture ihrough the subsidies on the initial fuel*, and that the benefit
nor. Itiii conservative snuntption • reflected in that the subndy on ma
iies on wood used as fuel (hogged fuel berk spent liquors) have already
Total Subsidy1
(SMillions)
$77.1
$275.6
$12.1
$0.1
$365.0
$0.0
$47.3
$33.9
$2.0
$0.5
$37.3
$0.2
$0
$0
$0
$0
$0
$0
$486.3
w siaritfiCT of Paper
u?L personal
1988. Information is tern
rer at above-market rates.
died that most of the
s (mm these subsidies were
feeted power is zero, rather
been counted through
51
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Table IV-5
DERIVATION OF THE SHARE OF TOTAL ENERGY SUBSIDIES
THAT ACCRUE TO PRODUCERS USING VIRGIN FIBER
Savings from Use of Recycled Fiber
Energy Savings from Recycling (1)
Paper Produced (million tons) (2)
From Virgin Fiber
From Recycled Fiber
Energy Consumed (trillion Btu) (3)
For virgin production
For recycled production
Low
22°/o
88.8
67.1
21.7
2.364
1.888
476
High
64%
88.8
67.1
21.7
2.364
2.118
246
NOTES:
(1) The tugh-end subsidy estimate assumes that recycling saves 64% of the erier^ required for virgin paper prcriucO'on. and
corresponds to the estimated energy savings from recycling tissue and unitary paper. The low-end estimate assumes ramp of
cnly22«^ and coire^xincb to the average eno^ysavinp fixm recycling ne^nrt. These figures are the high and low points
on the estimated range of energy saving! presented in Tab leB-l
(2> Total production for 1988 represents total production of paper, papenboard and pulp, and is 6om Amencan Paper tutitute.
1989 Statistics ofPaoer. Paoeifeoard. & Wood Pulp, p. 51 - froduction is allocated antonovnin and recycled secton based
upon a 24.4 percent recyclable paper utilization rate for 1988. as described in the text above
(3) Total enenn/use bv SIC. 261.262.263. and 266 for 1988 are from API 1989 Statistics of Paper. PanBfaoani& Wood
Pub, o. SI. Total energy UK was divided into virgin and recycled shares based upon the tonnage production of each, and the
energy savings from recycling More detailed information on the derivation of the relative shares of energy to each Motor may
be found h Appendix B.
(4> Net enemy subiidy to virgin production i» derived by subtracting the percent of total enenjy use by recycled productiEn
from the percent of total energy me by virgin production.
Water Subsidies
Recycling operations use 42% less water than facilities that rely on virgin feedstocks. As a whole,
water use (i.e., withdrawals) by the paper industry in 1982 ranked third among all industries after primary
metals and chemicals. The paper and allied products sector accounted for 18.9 percent of all water used for
industrial manufacturing uses (including processing, cooling, and other uses; thermoelectric cooling is a
different category) and 37.3 percent of all water used for industrial processing. This made the industry the
largest water consumer for processing purposes in 1982.118 Of the total amount withdrawn by the paper
industry, only IS percent was supplied from public water systems: 64 percent was self-supplied surface
water, 18 percent self-supplied ground water, and 3 percent self-supplied tidewater. Overall, 85 percent of
the industry's water demand was met by self-supplied sources not usually subject to federal pricing
subsidies.119
"* U.S. Department of Commerce, Bureau of the Census, Water Use in Manufacturing. 1982 Census of Manufactures. March
1986.
"' Ibid.. Table 3a.
52
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We could not identify more recent industry-specific water-use data, and because of the increasing water
reuse rate in the industry (see Table HI-6), we did not feel it appropriate to estimate 1988 water usage using
industrial activity indicia. Therefore, we combined 1988 water subsidies with 1982 use rates. These results
therefore, should be viewed as a worst-case scenario of the subsidies' effects. Since the worst-case subsidy as
a percent of the industry's cost of materials is so small, we do not believe that the errors introduced by this
assumption affect the final results of our analysis.
j)
While the paper industry is a large industrial water consumer, compared to other uses such as
thermoelectric cooling and agriculture, the paper industry accounts for a much smaller share of total water
consumption (only 1.2 percent in 1982). Table IV-6 presents the relative use of water among different
sectors of the economy.
We do not believe that water subsidies are an important factor affecting the paper industry for four
reasons. First, water subsidies are generally targeted at agricultural uses (see discussion in Chapter III).
Second, even if the subsidies were evenly distributed among all sectors, the paper industry uses a small
fraction of all water withdrawals. Third, 85 percent of all the water the paper industry does use is self-
supplied and, therefore, not generally subject to federal subsidies. Finally, since use of most of the water is
self-supplied, water pollution control expenditures120 and related pollution liability exposure seem to be more
important factors driving industry water use. These other concerns probably explain, at least in part, the
increase in water recycling for paper and allied products from 2.38 uses in 1954 to 6.64 uses in 1985.121
If we assume that all users of federally supplied water receive subsidies in proportion to their use of that
water, the entire paper and paperboard industry receives a relatively small benefit. Since the entire paper
manufacturing sector (SlCs 261,262,263,266) accounts for 1.2 percent of withdrawals and 15 percent of
those withdrawals are water for which federal subsidies exist, the industry would receive 0.18 percent of the
total federal water subsidy, or about $9 million per year in 1988. However, since the water subsidies benefit
both primary and secondary producers, the net subsidy to virgin production would be even lower. Assuming
that recycling operations use 42 percent of the water use that primary operations use.122 and using the 1988
recycled paper use rate of 24.4 percent with 1982 water use rates, a net subsidy of 76% accrues to virgin
production.13 Hence, of the estimated $9 million in water subsidies, virgin production receives a net subsidy
of $7 million, or 0.03 percent of the 1988 cost of materials.
120
121
Water pollution control expenditures totaled S3.23 billion between 1966 and 1986, according to the American Paper
Institute (API, p. 59).
See Table QI-6.
122
Robert Cowles Letcher and Mary Sheil. "Source Separation and Citizen Recycling." as cited in WorldWatch Paper #16.
Mining Urban Wastes: The Potential for Recycling. Cynthia Pollock. April 1987.
123 Derivation of net shares is shown in Appendix B. page B-6.
53
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Table IV-6
WATER WITHDRAWALS, BY SECTOR
(Billions of Gallons per Day)
Public Supply
Irrigation and Livestock
Industrial Use
• Thermoelectric
• Other Industrial Users Except SICs 261.262.263.266
• Paper (SICs 261.262.263.266)
1982
35
150
200
34
J.
424
Percent of Total
Withdrawals
8.3%
35.4%
47.1%
8.0%
_L2%
SOURCE: Wayne SolleyetaL Estimated Use of Water in the LYiited States in 1985. United States Geological Survey (TJSOS)
Circular 1004.1988.p. 69. Water use in the pacer indmnv from Department of Commerce. Estimated L'se of Water in Manufacturing.
1982 data were interpolated torn 1980 and 1985 data. Estimates were scaled to match fSGS total withdrawals to reduce rounding
Pollution Control Requirements
There have been concerns that federal pollution control requirements may be less stringent for primary
producers, thereby acting as a disincentive to recycling. We did not find any evidence that this is the case in
the paper and paperboard industry. In cases where emissions of a pollutant are higher from a recycled paper
mill, the controls should be more stringent, and we found no arguments that control requirements
incorporated any bias against recycled paper mills. Plant size is one factor that may discriminate against
recycled mills because virgin mills are typically much larger. This may allow for greater economies of scale
in control expenditures, but it does not reflect a systematic bias against recycled fiber as an input. Additional
discussion of pollution control requirements for the paper and paperboard industry may be found in Appendix
A.
Export Restrictions
Export restrictions on logs from federal lands have been in effect since 1968. Provisions prohibit the
export of all logs from federal land west of the 100th meridian (which bisects Texas and the Dakotas) except
for species declared by the Secretary of Agriculture and the Secretary of Interior to be surplus to domestic
needs.124 Initially enacted in 1968, the export ban was set to expire at the end of 1971, but has been renewed
on an annual rider to the Interior and Related Agencies Appropriation Acts every year since then. In addition,
legislation has been introduced to make this ban law so that it needn't be renewed each year.125
114
115
Between 1960 and 1968. log exports from Oregon and Washington increased twenty-fold, from 100 million board feet to
more than 2 billion board feet. The export restrictions were initiated under pressure from the domestic wood products
manufacturers, who were being forced to compete with the export market for timber. (John H. Beuter. Federal Timber
Sales. Congressional Research Service. February 9, 1985. p. 19).
One bill sponsored by Sen. Packwood (OR) seeks to convert the rider into a permanent federal law. The other, sponsored
by Rep. Williams (MT). seeks to provide states with the authority to restrict timber exports from state lands. Information
from Ron Lewis. USDA Forest Service, Timber Management Division, personal communication. July 21. 1989.
54
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Restricting log exports reduces aggregate demand for timber, thereby depressing the price of that
timber in the remaining domestic markets. Should the export ban depress prices significantly, timber
resources would be underpriced on the marketplace, reducing the incentives to use pulp substitutes such as
wastepaper. While we do not have the necessary data to quantify the impacts of the export restrictions on
paper recycling, we would expect their impacts to be small for most of the same reasons that below-cost
timber sales were of limited impact:
the United States is a net importer of logs, even with prices that are, perhaps, reduced by export
restrictions,126 and
the federal share of timber used in pulp and paper ranges from 13 percent (low-end estimate) to 33.1
percent (high-end estimate).
Federal Subsidies Of Virgin Paper In Perspective
We estimate total subsidies to virgin paper and paperboard in SICs 261,262,263, and 266 of between
$491 million and $669 million in 1988 (see table IV-7), although the relative shares of the subsidy will vary
by end-product and production process. While large in dollar terms, even using worst-case assumptions (i.e.,
the full magnitude of the subsidy is reflected in prices), this subsidy represents only 2.6 percent of the cost of
materials for these industry sectors. Furthermore, subsidies for virgin paper are offset at least in part by
existing subsidies for recycled paper, such as procurement policies and state or local taxes levied on timber
cutting. While federal subsidies of virgin paper production undoubtedly cost the taxpayer hundreds of
millions of dollars and may reduce the incentives slightly to switch from virgin to recycled paper production,
their overall impact on paper recycling seems minimal.127
126 U.S. Department of Commerce. Bureau of the Census. "Timber Products- Production. Foreign Trade, and Consumption.
by Type of Product: 1960 to 1986," Statistical Abstract of the United States 1989. Table 1146.
127 There has been some speculation that inexpensive imported pulp might be hindering the use of recycled fiber. However, in
1986. net pulp imports represented only 14.8 percent of total U.S. pulp consumption (Bureau of Census, "Timber Products
- Production, Foreign Trade, and Consumption, by Type of Product).
55
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Table IV-7
SUMMARY OF SUBSIDIES
FOR VIRGIN PAPER PRODUCTION
Subsidy Type
Tax Benefits
Below-Cost Timber Sales
Energy
Water
TOTAt
LOW-END ESTIMATE
0 o of Industry
Cost of
SMillions Materials
$152 0.59%
$42 0.16%
$291 1.13%
$6 0.02%
S491 1.90V*
HIGH-END ESTIMATE
SMillions
S152
$126
$385
$6
*«*>
% of Industry
Cost of
Materials
0.59%
0.49%
0.02%
tMV*
As a final point, some federal subsidies that hinder recycling may also confer public welfare benefits.
For example, reforestation tax credits, with their ceilings of $ 10,000 of expenditures per year and a $ 1.000
tax credit, are aimed primarily at smaller landholders. While these subsidies reduce the cost of timber
production slightly, they also reduce the pollutant impacts on surrounding waterways (such as from
silvicultural runoff) and reduce government and private expenditures in other areas (e.g., by retaining
topsoil). The elimination of some special policies may reduce the value of standing timber and with it the
value of holding the land for timber production. Landowners may find an increased incentive to use the land
for other, more profitable purposes. Perhaps, in pan as a response to losses of tax benefits in the Tax
Reform Act of 1986, there have been a number of large timber sales in the past few years aimed at
developing the land, rather than using it for sustainable timber production. Since timber companies may own
large amounts of land within a state,128 changes in landholding decisions can have rapid and severe impacts
on a state or region. We have not conducted a benefit-cost analysis of these subsidies, which would indicate
whether they provide net benefits to society: we have only computed the cost side of the equation for an
aggregated group of related firms in the paper industry.
No federal policies seem individually to subsidize virgin production enough to significantly affect paper
recycling. Even when combined, their impacts do not appear to be the major factor limiting the demand for
recycled fiber in the marketplace. Because a steady supply of post-consumer paper as well as an increased
demand for paper with recycled content are both recent occurrences, the markets will most likely need a
number of years to properly adjust to these changes.
128
For example, nine companies owned 9.435.000 acres of Maine timberland in 1986. representing 53 percent of total forest
land in the state, and 47.6 percent of total land area (Phyllis Austin, "Are Paper Companies Destroying the Maine Woods."
Business and Society Review. Fall 1986. *59. p. 23).
56
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APPENDIX A: HISTORY OF FEDERAL POLICIES AND SUMMARIES
OF POLICIES NOT COVERED IN THE MAIN REPORT
Federal Tax Policies
History of Percentage Depletion
^Congress first authorized depreciation deductions for minerals in the Internal Revenue Act of 1913 (the
term "depletion" was first coined in a subsequent 1916 revenue act). The cost of depletions were based on
the acquisition costs of the mines, including funds needed to develop the property. This was the counterpart
to depreciation schedules for capital equipment, and it still remains in the current tax code. For mines
discovered before 1913, an attempt was made to value the asset. For mines discovered after 1913,
investment costs were used in the cost depletion calculations.
Problems soon arose because, in many situations, especially in oil and gas, the 1913 calculated asset
values were significantly higher than the investment costs for new developments after 1913. Thus, tax
benefits resulting from cost depletions were much higher for existing properties than for new, which was
argued by industry to discourage new development. In response. Congress introduced the concept of cost
depletion based on "discovery values" for the oil and gas industry in the Revenue Act of 19 1 8. This
modification allowed depletion deductions to be based on the fair market value of newly discovered wells,
assessed within 30 days of acquisition.
Discovery depletion presented two major problems that caused numerous administrative burdens for
both the taxpayer and the federal government: (1) how to assess fair market value, and (2) how to limit the
tax benefits when prices fell. The difficulties encountered in assessing a fair market value of a new project
stemmed from data gaps, the absence of guidelines, and frequent litigation over the Department of Treasury's
appraisals. The impact of price changes was first evidenced in 192 1 when prices dropped. There was a
general concern that well owners would minimize, or possibly avoid, tax payments using the depletion
deductions that were still based on pre- 192 1 assessed discovery values. In response to the latter, Congress
limited the maximum deductions to the.net taxable income derived from the well. (This limit was further
reduced to 50 percent of the net taxable income, which still applies.) Congress also authorized the use of
percentage depletion on gross income for the oil and gas industry in the Internal Revenue Act of 1926.
In 1932, the percentage depletion allowances were extended to all primary metal industries, coal, and
sulphur extraction industries to aid in their post-Depression recovery. Other nonmetallic commodities began
receiving percentage depletion benefits during World War II. By 1954, all minerals (except those derived
from the air) were given some form of percentage depletion allowance, with the actual allowable percentage
varying by mineral and mineral location.130 In the Tax Reform Act of 1969 (section 501), the allowable
percentage deductions were reduced in a number of cases and increased in a few (the maximum percentage
129 Primary source for history information: Anderson. Robert C. and Richard D. Spiegelman, Impact of the Federal Tax Code
on Resource Recovery, prepared by the Environmental Law Institute for EPA. December 1976. pp. 9-15. and personal
communication with Seymour Fiekowsky, Office of Tax Analysis. Department of the Treasury. June 28. 1989.
130 Franklin Associates. Ltd. and the Center for Economic Policy Analysis, Economic Incentives and Disincentives for
Recycling of Municipal Solid Waste DRAFT. December 1988. p. 5. Prepared for the Office of Technology Assessment.
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depletion allowable was set at 22 percent). In 1975. the percentage depletion allowances were eliminated for
large oil and gas operators.
The only major change brought about by the Tax Reform Act of 1986 involved whether a firm could
qualify for depletion allowances under the newly-created alternative minimum tax payment schedule. To
determine the amount of taxes that a company must pay, the firm must calculate a standard tax figure,
factoring in various deductions (e.g., depletion allowances) and an alternative minimum tax. The firm must
pay whichever tax estimate is higher.131 In some industries, such as oil and gas, this change in the tax
calculation method could reduce the usage of depletion allowances. Estimates from the Department of
Treasury show substantial drops in the costs to the federal government associated with depletion allowances
for minerals and oil and gas after 1987 (Table II-1).
Capital Gains Allowances
Description
Capital gains are revenues generated from the sale of personal and business assets, such as real estate
and factories. The rationale was that taxing such gains as ordinary income discouraged individuals from
selling their capital assets (farms, mineral properties, etc.). The lower tax rate on gains from the sale of fixed
assets would, in theory, help to facilitate property transfers of capital goods from less productive to more
productive ownership, as well as to encourage investments into new capital stock.
History
Long-terra capital gains were separated from ordinary income for tax purposes in the Revenue Act of
1922. In 1944, the timber industry successfully petitioned Congress to enact a special tax ruling that treated
the income from timber sales as capital gains income, rather than as normal income derived from the sale of a
product.132 These provisions are discussed in Section 117(k) of the Internal Revenue Code (now Section
631).133 These benefits were available even if the timber was being used in the owner's business.
Opponents to the capital gains allowance for timber revenue believed that it should be treated as normal
income because it is essentially the same as revenue from the sale of agricultural commodities (which did not
get capital gains exclusions) except for timber's longer growing period. Proponents argued that the longer
growing period creates large uncertainties and risks and, therefore, differentiates timber production from
agriculture.134
Prior to 1986, capital gains were taxed at a rate of 28 percent, versus the maximum 46 percent tax rate
for ordinary corporate income. In the Tax Reform Act of 1986, these capital gains benefits were eliminated.
131
U.S. EPA, The Solid Waste Dilemma: An Agenda for Action." Background Document, p. 3.F-4.
131 Ross Gorte and Jack Taylor. Timber Industry: Possible Effects of Various Tax Reform Proposals. Congressional Research
Service, Updated 12/1/86, p. 1.
133 Anderson and Spiegelman, pp. 20-25.
134 Franklin Associates, et at.. December 1988, p. 7.
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How the Capital Gains Allowances Worked
Revenues earned from the sale of timber were treated separately from normal income Rather than
offsetting these earnmgs with day-today business expenses, capital gains were off-set with capital losses for
a given year. The net capital gains were then taxed at a maximum rate of 28 percent, regardless of total
corporate or individual earnings. Normal income was taxed at a higher maximum rate of 46 percent.
Since 1986, capital gains have been treated in the same manner as normal income. However, some
benefits may still be obtained by differentiating capital gains from normal income. For example, a maximum
of $3,000 per year of capital losses may be offset against normal income for a firm that does not differentiate
between capital gains income and income from product sales. However, a firm with large capital losses is
allowed to deduct unlimited losses against corporate capital gains, as long as the capital gains income is
differentiated from product-derived income.135
While capital gains allowances were eliminated by the Tax Reform Act of 1986, there has been talk
about reinstating this tax benefit for a few years. Should such benefits be reinstated, they would benefit all
industries with fixed assets to some degree. However, mature industries, likely to have more fixed assets in
the form of plants and land would be more likely to have capital gains than would a new industry, such as a
recycling facility. In addition, the timber industry, which since 1944 has been eligible for capital gains
deductions, would also benefit substantially.
Foreign Tax Credit
Any U.S. corporation doing business internationally is eligible for a foreign tax credit which reduces
U.S. taxes by the amount of taxes already paid to a foreign government.136 The purpose of this provision is to
avoid double taxation of income earned in foreign operations. A taxpayer has the option of treating foreign
income taxes either as a credit or as a deduction from domestic taxes, although all foreign taxes must be
treated in the same manner. Foreign taxes taken as credits may generally be subtracted directly from U.S. tax
liabilities, while taxes taken as deductions simply reduce domestic taxable income.
While income tax payments can be credited, other operating expenses (including natural resource
extraction) are subject only to deductions as operating expenses. Hence, a multi-national may have an
interest in minimizing domestic tax burdens by substituting foreign income taxes for other foreign payments,
such as mineral extraction royalties, which may only be deducted from taxable income. Firms in the
extractive industries often pay royalties to the owner of the land where the resource lies. If the owner of the
land is a foreign government and if the government chooses to label the royalty as a tax payment, then what
would have been a conventional cost of doing business (deductible at the prevailing tax rate) becomes a full
tax credit.
Because secondary producers do not generally receive their inputs from foreign operations (e.g., we do
not import raw or processed wastes from other nations), they are not as likely as primary producers to receive
135
Franklin Associates, et al.. December 1988. p. 8.
136 Charles W. Russell and Robert W. Bowhay, Income Taxation of Natural Resources 1989. Paramus. NJ: Prentice Hall. Inc..
1989 pp. 2905-2908: Booz-Allen and Hamilton. Inc. An Evaluation of the Impact of Discriminatory Taxation on the Use of
Primary and Secondary Raw Materials. Prepared for the U.S. EPA. 1975. NTIS #PB-264-886. pp. 11-15.
63
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benefits resulting from foreign tax credits. This may indirectly act to place secondary producers at a relative
disadvantage.
Major Subsidies to Natural Resource Extraction and Energy Eliminated in the Tax Reform Act of 1986
Prior to the Tax Reform Act of 1986, energy was more heavily subsidized than is now the case.137 The
tax amendments eliminated a number of investment incentives, including the 10% investment tax credit and
the energy tax credit. The Act also lengthened capital depreciation schedules from 5 to 7 years and reduced
the availability of tax-exempt industrial development bonds (or IDE's, now called private activity bonds, or
PAB's).138 Other important changes included the elimination of accelerated cost recovery, expensing of
construction-period interest, and the institution of the alternative minimum tax.139 The loss of these
provisions, in some instances, may have helped recycling by reducing the attractiveness of waste-to-energy
plants, as well as by reducing subsidies to energy, of which primary industry consumes in much large
quantities.
In addition to being a potential competitor with recycling for the solid waste stream, waste-to-energy
plants are long-term, capital-intensive construction projects. As a result, they benefitted substantially under
federal subsidized borrowing schemes eliminated in the Tax Reform Act of 1986. The elimination of these
subsidies has been estimated to increase the costs of incinerator disposal by SO to 65 percent.140 Therefore, a
subsidy of such magnitude may have led to the development of incineration capacity in some areas of the
country that will compete with recyclables for many years to come.
Federal Timber Sales - History
The U.S. government has sold timber from federal lands for more than 90 years. The first federal forest
reserves were set aside in 1891. Timber sales from these lands were authorized in 1897. and the first sale
was made in 1899. Two federal agencies are responsible for managing federal timber sales. The Forest
Service, Department of Agriculture, oversees the vast majority of federal forest land (88.7 million acres).
The Bureau of Land Management, Department of the Interior, manages a much smaller amount of land (6
million acres) in the western United States. The federal government initially supported the production of
timber from federal lands to encourage the settlement and development of the West. The government
envisioned many benefits ensuing from its timber policies including: attracting new settlers, providing jobs,
increasing industrial activity, and developing transportation systems. The most significant attempt to use
timber as the means to spur economic development occurred in southeast Alaska.
As early as 1914, the Forest Service began to assess the prospects of selling timber to induce the
construction of a pulp mill in Alaska. The goal was to establish "working circles" throughout Southeast
Alaska, with a pulp mill at the center point of each circle providing employment for surrounding residents and
137 Congressional action may ultimately restore or increase these subsidies. This could have some impact on recycling.
131 Franklin Associates, Ltd.. et al.. p. 80.
139 The alternative minimum tax establishes a minimum tax payment required by firms, irrelative of eligible deductions, to
ensure that all profitable firms pay at least some taxes.
140 Smith-Barney, The President's Tax Proposals: An Analysis of the Effect on Resource Recovery Financing. June 3,1985.
cited in the Environmental Defense Fund. To Bum or Not to Bum. August 1985.
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settlers.141 The federal government targeted the Tongass National Forest as the site for this development.
The first timber sale in this region was the Juneau Unit Sale in 1927 for 5 billion board feet of timber.
although timbering never took place. Other timber sales completed in 1921,1922, and 1927 were also
unsuccessful and thus cancelled for economic reasons.142
Until the 1940s, timbering remained a local activity to meet local uses. World War II then created new
impetus for expanded timbering. During this decade, the two mainstays of the Alaskan economy collapsed.
Over-fishing led to the collapse of the salmon industry between 1941 and 1950, and the gold mining industry
was closed down as a "non-essential" activity by the War Production Board in the early 1940s, with the last
mine closing in 1944. Finally, military bases in the area were of strategic importance, increasing the federal
desire to settle the area.143
All of these forces greatly increased pressures to employ and anchor residents with a new industry, and
timber was seen as the most promising opportunity. The Tongass Timber Act passed in 1947. authorized
timber sales in Tongass despite Native Eskimo claims to land rights, hi 1951, the Ketchikan unit sale was
signed for 8.25 billion board feet of timber over a 50-year contract length, hi 1954 and 1955, two additional
long-term sales for 10.5 billion board feet were approved,144 and in 1955, the Juneau unit sale, made
originally in 1927, was re-offered, although it again was unsuccessful.145
The 50-year contract lengths were unprecedented in Forest Service history, although the companies that
received them said that they were necessary in order to compensate them for the risks associated with putting
a pulp mill in a sparsely populated region with a harsh climate. For a total investment of $50 million for the
Ketchikan and Sitka pulp mills, industry received 50 years of guaranteed timber sales at low stumpage fees.146
From the period after 1914 through the 1930s, the federal government succeeded in spurring
development in various sections of the West. However, after this period the initial goals to be achieved with
below cost wood sales began changing. By about 1940, in all areas except Southeast Alaska, the timber sales
were viewed as a way to stabilize and anchor the rural communities that had grown dependent on federal
timber for their livelihoods, hi 1969, with the passage of the National Environmental Policy Act,
environmental protection finally became a factor in Forest Service decision making. In 1976. with the
passage of the National Forest Management Act, timber sale economics also became a stated criteria of
timber sales (i.e., The Forest Service was forced to consider the costs associated with sale decisions (e.g.
where, and for how much, to sell timber).
141
1986. p. 28.
The Wilderness Society, America's Vanishinf Rain Forest: A Report on Federal Timber Management in Southeast Alaska.
1986. p. 28.
142 The Wilderness Society, p. 28.
143 The Wilderness Society, p. 28.
*
144 The Wilderness Society, p. 34.
The Juneau sale was bought and defaulted on twice between 1955 and 1975, and in 1976 was finally cancelled when a
third bidder withdrew because of environmental litigation. (John H. Beuter, Federal Timber Sales. Congressional Research
f, •__ »-•• _. f\ i f\of s*n& oe t\£ cvro •> ^*>\
146
U11IU l/|UUvl WllltUIVV* i/w»*»»»* w* "•• » ••**«i»nw«»»™» **"O
Service, February 9.1985. CRS 85-96-ENR. p. 32).
The Wilderness Society, p. 34.
65
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Today, most timberland is roaded, and the necessary market, infrastructure, and services are in place to
adequately harvest and process timber. Occasionally, the federal government will sponsor timber sales that
are aimed primarily at community development. However, most federal timber sales are made to support
existing mills and the stability of timber-dependent communities and regions. In many situations, these sales
are non-economic, resulting in revenue tosses to the government. Such sales have resulted in clashes between
the Forest Service and environmentalists.
66
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APPENDIX B: DERIVATION OF VALUES USED IN THE BODY OF THE REPORT
Table B-l
ENERGY SAVINGS FROM RECYCLING, BY MATERIAL ll)
Material
Aluminum
Average
Paper
Newsprint
JL ff T ijf -*--*- HA^&atf ^.d«fr£
^kvvxa^ff * Mrwfpruu
Linerboard
Corrugated
Tissues and Sanitary
Cullet
White
Green
Plastics
PET
HOPE
LDPE
PVC
Polystyrene
Steel - high estimate
- low estimate
Rubber
Retreads - Cars
Retreads -
C oinmorct&i
ie«y. virgin
GJ/ionne GJ/ton MBtu/ton
219.0 241.3 229.0
251.0 276.6 262.5
250.6 276.2 262.1
238.3 262.6 249.2
239.7 264.2 2SOJ
21.0 19.9
20.2 22.3 21.1
32.5 35,8 34.0
*5,0
28.4 27.0
35.2 38.8 36.8
65.2 71.9 68.2
15.6
23.0 25,3 24.1
20% cullet to 100% cullet
30% cullet to 100% cullet
98.0
52.7 58.1 55.1
49.6 54.7 51.9
28.5 31.4 29.8
65.5 72.2 68.5
99.0 109.1 103.5
1>0% Recycled
GJ/tonne GJ/ton MBtu/ton
9.0 9.9 9.4
17.0 18.7 17.8
7.2 7.9 7.5
12.1 13.3 12.7
tl.3 12.5 11. 8
14.5 13.8
16.7 18.4 17.5
27.0 29.8 28.2
I*.*
21.4 20.3
21.3 23.5 22.3
23.7 26.1 24.8
14.8
17.0 18.7 17.8
12.0
55.0 60.6 57.5
Savings
96%
93%
97%
95%
Wfc
31%
17%
17%
22*i
25%
39%
64%
5%
26%
4-32%
26%
6-12%
88%
47%
74%
44%
63%
30%
(2)
(2)
(3)
(4)
(5)
(6)
(?)
(8)
(7)
(7)
(9)
(10)
(11)
(12)
(13)
(14)
(IS)
(15)
(15)
(15)
(11)
(11)
(16)
(17)
(17)
67
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Convendon Factor* 1 tonne - 1 .1 02 Aw I MBtu - .949 Oigajoulei (O/l
(1) The* number* ito^ be vit^aiindkalcn of thereto^
appraoali of the energy required in each procen.
(2) Rkh«dPc»terariTiniRobBti.eck.EnaByS«viMibvWTTtffji|yYtlinB fhn'' P-1""^ Applied Sdem PiJiliAm I9BS\ p 64 High and low
(3) RnhatFUmi.. -T>». Fne^ rni^v^ in Pmrtuctif Enpnemry \lflteriak" Proc tarn. Mechfr»l ^TBlBff Vnl I9°- 29"& aiPorW and Roberto, p. 60. Enow
lavinp fa- alunmum ingot production.
(4) RPautt«ndHJ.PieliDZBiiiid4 J&0S- $El06. SEM)$- $P^fi
68
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Table B-3
ESTIMATED FUEL INPUTS TO ELECTRICITY USED FOR PRIMARY ALUMINUM
State
AL
IN
KY
LA
MD
MO
MT
NC
NY
OH
OR
SC
TN
TX
WA
WV
f«rt«l
Primary Alum. Prod.
Capacity. UK
Metric Tons % of
(IQOO'sj US Prod.
105 2.6%
270 6.7%
335 8.3%
105 2.6%
160 4.0%
204 5.1% .
163 4.0%
115 2.8%
241 6.0%
245 6.1%
200 5.0%
181 4.5%
160 4.0%
205 5.1%
1201 29.7%
148 3.7%
.•;•:'•: :: \; :':i'- ,:.:;:;:>;;:;•::..: ••:.:-' : :' v:'' ;
:V :';:•';: /*l3f 1:V ii;p;- ::; ^ JIM W- - '•'
PRODUCTION
Eiistinc Electrkirv Canacitv
Hydro-
electric Nuclear Fossil Total
2857 5233 11900 19989
94 0 21435 21528
746 0 15860 16608
0 2236 15967 18204
531 1829 8097 10457
1064 1236 14353 16653
2207 0 2595 4866
1949 5125 13815 20889
5037 5234 22904 33174
119 221$ 25279 27613
7873 1216 1277 10366
2348 6799 7179 16326
3714 2441 12124 18279
600 1250 60623 62473
19859 2060 2217 24136
174 0 14988 15163
'.:' :. ;/•-.- : ; ''••:.•''' ••;: ': ••'•'. v- •'.- :: • • ::- •- :: • •: '•'••. • v .' :' 0;- ;• : • < '• i" :p;Ls¥:S|?
Existing Shares of
O
State Capacity
% % %
Hvdro Nuclear Fossil
14.3% 26.18% 59.53%
0.4% 0.00% 99.57%
4.5% 0.00% 95.50%
0.0% 12.28% 87.71%
5.1% 17.49% 77.43%
6.4°. 7.42% 86.19%
45.4% 0.00% 53.33%
9.3% 24.53% 66. 14%
15.2% 15.78% 69.04%
0.4% 8.02% 91.55%
76.0% 11.73% 12.32%
14.4% 41.65% 43.97%
20.3°.. 13.35% 66.33%
1.0% 2.00% 97.04%
82.3% 8.53% 9.19%
1.1% 0.00% 98.85%
1 <-M: -.;•;. ^^M^^^i^-^^mmi^im
- '•'•'• ''.' '. •''•-'-. •-: '• :' '-'? :•£••':£ !':-:vS-:Sv:- - S-::;:S-:£3£SS3
Percent of Tot. U.S. Primary
Production Supplied by State
Capacity Facied Bv:
Hydro-
Electric Nuclear Fossil
0.37% 0.68% 1.55%
0.03% 0.00% 6.66%
0.37% 0.00% 7.92%
0.00% 0.32% 2.28%
0.20% 0.69% 3.07%
0.32% 0.37% 4.35%
1.83% 0.00% 2.15%
0.27% 0.70% 1.88%
0.91% 0.94% 4.12%
0.03% 0.49% 5.55%
3.76% 0.58% 0.61%
0.64% 1.87% 1.97%
0.81% 0.53% 2.63%
0.05% 0.10% 4.93%
24.47% 2.54% 2.73%
0.04% 0.00% 3.62%
f**lAff::x^K&f+\^Six'Mf^t:jt'Xi^-:-.f
Sms.
AL
IN
KY
LA
MD
MO
MT
NC
NY
OH
OR
SC
TN
TX
WA
WV
(i f Primly .limimm pmAiainn capacity n fcr 1986. and a Sam the Bureau of Ming. Minerals Yearbook. Volume 1 : Metals and Minerals. I9H6. Washington. D.C.: US Qovemment Printing Office. 1988 p 97
( -i \ •&*» ..U^rirel p-nrraung r^aciiy i. Gnm '1 988 Annual Statistical Report' Elecdkal Wald. Airi 1989. o. 63. Estimates asatne that all planu operate at 100 capacity Plant capacity 6gures for fond fijels include geothennal
piano. d> well ai Ele^TcjJWorld categores (of fcfflil stream, combustion turbine, and internal annljusuon planti.
(3l National shares of «ouroe» ofelectncity consumed by the primary alurnhura sector arc produ*ion weighted averages
(4lTtieraUMiaJniixfcallusenUincluo^lforaimpiii«aairiBfitjmtheDepartinatofEiiaB'. US &MS' Inforrr^on Ao^7iin«radc^. Montrdv Ererm Review. February, 1988
-------
Derivation of Net Energy Subsidy to Virgin Paper Production
A) Knowns:
Total production in 1988: 88.8 million tons
Recycled paper utilization rate in 1988: 24.4 percent
Total energy consumed in paper production in 1988: 2,364 trillion Btu
(24.4% recycled fiber content in new production)(88.8 million tons total production) = 21.7
million tons recycled
(75.6% virgin fiber content in new production)(88.8 million tons total production) =
67. 1 million tons virgin
Low-end energy subsidy estimate for paper:
1) Paper recycling saves 22 percent of the energy required to make virgin paper.
2) Energy^ = (Energy^ toIHB(v:led)(Ton^ted) + (Energypertnn.vilgin)(Tonsvigin)
3) Energyrecycfcd = (.78)(Energyvil?jn)
a =
b =
a=.78b
2,364 trillion Btu = (a)(21.7 mil. tons recycled) + (b)(67. 1 mil tons virgin)
= (.78b)(21.7)
= 84.03b
b = 28. 13 trillion Btu = Energy^ ^HO..*^^
a = (.78)(28.13) = 21.94TBtu = EnergyperniillbntonMBCycled
4) Total energy use by recvded sector = (Energy^ .
(2 1 .94 TBtu/million tons)(2 1 .7 million tons) = 476 trillion Btu =
20. 1 percent of total energy use
Total energy use by virgin sector =
(28. 13 TBtu/million tons)(67. 1 million tons) = 1,888 trillion Btu
79.9 percent of total energy use
5) Net subsidy to the virgin sector =
(Percent of Total Energy X^*^ - (Percent of Total Energy ^M
79.9% -20.1% = 59.8%
70
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(.598)($486 million) = $291 million
High-end energy subsidy estimate for paper:
1) Paper recycling saves 64 percent of the energy required to make virgin paper.
2) Energy,^ = (Energy^ tt>Mfxys^^onsm^ + (Energ>-permwbgjn)(TonsvilgjJ
3)
b -
a=.36b
2,364 trillion Btu = (a)(21.7 mil. tons recycled) + (b)(67.l mil. tons virgin)
= (.36b)(21.7)
= 74.9 Ib
b = 31. 56 trillion Bm = EnergypermtotnnMilBjn
a = (.36)(31.56)= 11.36 TBtu = EnergyperraUliontflnMieycled
4) Total energy use by recycled sector = (EnergypCTtoIM^edXTonSn!(,lcifid) =
(1 1.36 TBtu/million tons)(21.7 million tons) = 246 trillion Btu =
10.4 percent of total energy use
Total energy use by virgin sector = (Energy,^ ton*iigin)(TonsvuBin) =
(3 1.56 TBtu/million tons)(67. 1 million tons) = 2,1 18 trillion Btu =
89.6 percent of total energy use
5) Net subsidy to the virgin sector =
(Percent of Total Energy)^*,*,, - (Percent of Total Energy),^,,.,,,^ =
89.6% - 10.4% = 79.2%
(.792)($486 million) = $385 million
71
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Derivation of net Water Subsidy to Virgin Production
A) Knowns:
Total production in 1988: 88.8 million tons
Recycled paper utilization rate in 1988: 24.4 percent
Total water consumed in paper production in 1982: 5.03 billion gallons/day
B) TonSrecyded = (24.4% recycled fiber content in new production)(88.8 million tons total production) = 21.7
million tons recycled
(75.6% virgin fiber content in new production)(88.8 million tons total production) =
67. 1 million tons virgin
Estimated net water subsidy to virgin paper producers:
1) Paper recycling uses 42 percent of the amount of water required to make virgin paper.
2) Water^ = (WaterpertDrMB(.ycled)(Tonsre^led) +
3)
a =
b =
a = .42b
5,030 million gallons/day = (a)(2 1 . 7 mil. tons recycled) + (b)(67. 1 mil. tons virgin)
= (.42b)(21.7)
= 76.2 Ib
b = 66.00 Mgal/Mtons-day = WaterpermilliontonMrUgin
a = (.42)(66.00) = 27.72 Mgal^vltons-day = WaterpermilliontoniH^ded
4) Total water use by recycled sector =
(27.72 Mgal/Mtons-day)(21.7 million tons) = 602 Mgal/day =
12.0 percent of total water use
Total water use by virgin sector = (Watertol>vils,in)(TonsViIFi,) =
(66.0 Mgal-Mtons/day)(67. 1 million tons) = 4,429 Mgal/day
88.0 percent of total water use
5) Net subsidy to the virgin sector =
(Percent of Total Water )vilBin!l<.ctor - (Percent of Total Water),^,,,,
72
-------
88.0% -12.0% = 76.0%
(.76)($9 million) = $7 million
Source: Charles W. Russell and Robert W. Bowhay. Income Taxation of Natural Resources. 1989, Paramus. NJ: Prentice
Hall, Inc., 1989, pp. 806-07.
73
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