The Week That Was
July 19, 2003

1. New on the Web: JUNK SCIENCE REARS ITS HEAD AGAIN IN THE GLOBAL WARMING DEBATE. Nick Nichols and Paul Driessen discuss the perversion of the PR apparatus to send out apocalyptic messages. Iain Murray describes the PR debacle caused by the insertion and then deletion of junk statements from an EPA report.

2.. GORE CRITICIZES BUSH ON CLIMATE CHANGE: Yet another debacle involving a politically inspired EPA report


4. THE FERC MAY GO AFTER "WINDFARMS" THAT MISUSE GOVERNMENT-CREATED ENERGY SUBSIDIES. Good for FERC! And more power to our friend Glenn Schleede for exposing these subsidies that are paid by taxpayers and consumers





2. White House refuses to endorse junk conclusions in an EPA report produced by "the bureaucracy."

Former Vice President Al Gore criticized President Bush for refusing to accept a federal agency report that blames humans for global warming, according to Reuters.

The recently released Environmental Protection Agency report appeared to back the view of many scientists who believe global warming is caused mainly by emissions from automobiles, power plants and oil refineries.

Bush dismissed the report, calling it a product of "the bureaucracy," and said he would continue to press for voluntary efforts and financial incentives for U.S. companies to reduce emissions.

In "Flips, Flops, and Facts About Global Warming," ( ) Patrick J. Michaels explains: "The problem is that the core of the [EPA's] Climate Action Report was produced by the wrong administration. Chapter 6, the section on climate change effects on the U.S., is largely an outtake from the 'National Assessment of Climate Change' (NACC), a politically inspired document rushed to publication some 10 days before the 2000 presidential election."


3. I.R.S. Inquiry Creates Anxiety in Synthetic-Fuel Industry

by Lynnley Browning

For more than two decades, ever since President Jimmy Carter donned a cardigan sweater and challenged Americans to wean themselves of their dependence on imported oil, companies have enjoyed a rich tax credit for investments in so-called synfuels - oil alternatives made from America's abundant stores of coal. Now, though, the government is threatening to rescind billions of dollars' worth of tax credits claimed not just by owners of plants that make synfuel but by their corporate investors like Marriott International, the hotel operator, and the American International Group, the insurer.

The Internal Revenue Service said last week that it was investigating the synthetic-fuel industry, trying to determine whether the credits were justified. Besides Marriott and A.I.G., businesses that have claimed the credit include big energy companies like Teco Energy, the PPL Corporation and DTE Energy; Rex Stores, a consumer electronics retailer; and a host of little known private partnerships and investment firms, including Carbontronics and Palmer Capital. One of the largest synthetic fuel producers, Progress Energy, a utility based in Raleigh, N.C., said that it alone had generated $950 million in tax credits since entering the business in 1998.

Under a 1980 federal law, companies like these that own all or part of synthetic fuel plants can claim a tax credit of about $26 per ton of fuel produced - about the price of a ton of regular coal. Without the tax credits, the plants lose money.

Among other requirements, companies must demonstrate through laboratory tests that their coal-based synthetic fuel has undergone a "significant chemical change" while being made. At the heart of the I.R.S. review is the question of whether such a transformation takes place.

The law was intended for producers to transform a byproduct of coal production into usable energy. Few, if any are still doing that, though. Instead, they manufacture synthetic coal typically by spraying regular coal with substances like latex, asphalt derivatives or pine-tar resin.

In announcing its inquiry, the I.R.S. said that it might decline to grant future credits - Hill & Associates, an energy consulting firm in Annapolis, Md., had projected that about $3 billion in credits would be claimed next year - or revoke past credits. Synfuel producers and most analysts said that revoking credits seemed unlikely. But if carried out, that threat could force companies to restate previous earnings and leave them with bills for back taxes totaling hundreds of millions of dollars.

After the tax credits were created, companies found that production with waste coal was not profitable, even with the credits, and output of the synthetic fuel was mostly dormant until 1998 or so. Then, some producers discovered that using regular coal made the business profitable under the credits. As tax-credit-hungry companies from outside the energy sector bought or built plants, output soared, to more than 50 million last year from around five million tons in 1999, according to Platts Research and Consulting in Boulder, Colo. About 55 plants - mostly in Appalachia, the Midwest and the Southeast - manufacture synthetic coal.

Critics of the credits, including some traditional coal mining concerns, criticize the manufacturing methods as alchemical chimera that does nothing to improve or substantially change already-usable coal. Nor, they say, do these plants provide the environmental benefits contemplated by the Carter-era legislation. "We're really not generating the benefits that the law intended," said Jim L. Thompson, manager of Coal and Energy Price Report and U.S. Coal Review, two trade publications. Producers counter that they are following the letter of the law regarding chemical change, adding that they provide utilities with a good energy source.

The I.R.S. review began with questions over test results at two Kentucky plants owned by Progress Energy's Colonna synthetic-fuel subsidiary. Progress's synfuel output accounted for 15 percent of earnings last year. Twice over the last 10 or so years, the I.R.S. announced similar or related investigations but backed down. Still, some producers have revised their earnings and dividend forecasts downward in recent months. Equity and credit analysts have downgraded the ratings of some operators of synfuel plants, including Teco, and several companies have attracted short sellers, who bet that stocks will fall.

A less-noted effect of the new I.R.S. scrutiny is that the once-booming market for sales of synthetic coal plants or interests in them has frozen up. Producers often generate more tax credits than they can use, and so they have sought in recent years to sell portions of their interests, a process known as monetization. By increasing revenues, such sales also allow producers to use more of the credits generated by their remaining interests. Perhaps half of all tax credits are for sale, Mr. Thompson, the trade publication editor, said. The halt in sales of plant interests has come because the I.R.S., in its announcement last week, said it was not going to issue so-called private letter rulings, or P.L.R.'s, to synfuel producers during its investigation. Such letters certify that a plant performs "substantial chemical change" on coal, as required by law, and is eligible for the credits. Though a letter is not required for a company to claim the credit - and while far from all producers have one - no potential buyer now wants to be without one.

SEPP Comments: Syn Fuels get hit by IRS. Remember Jimmy Carter and his fantasy of Energy Independence? This created the Synfuels Corporation, the giant industrial enterprise to produce synthetic oil and gas from coal, with the help of subsidies and tax breaks.

[That was also when he declared an embargo against the import of oil from Iran! But what does a "nucular" engineer know from oil?]

Lucky thing that Synfuels disappeared when Carter left the White House - or we'd be stuck with $100-a-barrel oil and oodles of pollution, plus megatons of CO2. Will we ever learn to leave energy to the market? No govt policy is better than a bad one.

Anyway, the chickens are coming home to roost. The IRS is now going after companies that are diddling the government by misusing the tax breaks (Yes, they are still on the books -- after a quarter century!). Instead of the chemical change of the coal (as envisaged by the 1980 law), companies are just spraying pulverized coal with fuel oil and claiming huge tax breaks. According to the WSJ (6/30/03), the cost to the Treasury is from $650 to $850 million a year.

Hooray for the IRS and shame on Congress for legislating tax breaks. Will wind power be next? See below.


4. FERC to review misuse of wind-farm tax credits

WASHINGTON, July 10 (Reuters)- Staff lawyers with the Federal Energy Regulatory Commission yesterday urged the agency to investigate 17 wind farms and cogeneration plants that may have been improperly used by Enron Corp. to boost its profits.

The FERC has already begun reviewing Enron's ownership of five cogeneration facilities in Nevada and New Jersey.

A 1978 federal law requires U.S. electric utilities to buy renewable wholesale electricity from so-called "qualifying facilities," which must be owned by independent power producers. The law allows such plants to charge premium prices for their power.

"The ownership status of every qualifying facility cited by Enron is in question," FERC lawyers said in a filing.

"There has been insufficient time to date to ascertain with certainty that any specific qualifying facilities has fully complied with the qualifying facility-ownership criteria throughout the period of time in which it has been affiliated with Enron and/or its affiliates," the lawyers added.

Last month, California energy officials announced that 10 wind-energy plants owned by affiliates of bankrupt Enron agreed to refund the state nearly $634,000. The refunds are linked to production incentives the state gave the plants to encourage renewable energy projects.


Our friend Glenn Schleede sent us a letter about wind-farm tax credits, which is excerpted here:

Recently, an official of Meridian Investments in Massachusetts wrote to inform me that his firm was "the largest independent broker in the tax credit industry," and asked that I answer questions about wind energy. I declined to help him because I believe most tax credits are an abomination from a national and public interest point of view -- despite the fact that tax credits for favored interest groups are wildly popular with the members of Congress who just can't find much room "in the budget" for tax cuts for ordinary people.

However, I did use the occasion to outline some of the results from research I've been doing on tax breaks and subsidies for wind energy and explain that these measures shift tax burden and cost from "wind farm" developers to remaining taxpayers and to electric customers.

July 12, 2003

Mr. Tim MacDonald
Senior Vice President
Meridian Clean Fuels, LLC
1266 Furnace Brook Parkway
Quincy, MA 02169

Dear Mr. MacDonald:

Thank you for your July 2, 2003, letter:

· Indicating that Meridian is in the business of brokering Section 29 and 45 tax credits, with plans to focus on the extensive tax credits available for wind energy, and

· Asking that I help you understand the reasons why wind energy does not really have all the advantages that its supporters claim.

In summary, I do not propose to help you because I believe:

· Your letter is evidence that you have not done the objective research that would, if undertaken, reveal the answers you are asking me to provide.

· Federal tax credits available under Sections 29 and 45 of the Internal Revenue Code often:

· Encourage investments in projects that are undertaken for tax avoidance purposes rather than sound business reasons.

· Distort private sector capital investments by directing capital to projects with little intrinsic merit.

· Shift tax burden from highly profitable organizations to ordinary individuals.

· Encourage investments in projects that help push up consumers' electricity prices.

· Result in damage to environmental, ecological, scenic and property values that has not been taken into account by lawmakers and regulators.

· Are not in the national and public interest, despite the fact that they may be legal.
Based on your letter, it appears that Meridian plans to serve as a "money changer" by using faulty federal and state tax law and tax policies for wind energy to aid in transferring wealth (hundreds of $ millions) from ordinary taxpayers and consumers to organizations with high profits that wish to avoid taxes.

Such a role probably is quite legal. Whether helping to load more tax burden and high (regressive) electricity costs on ordinary citizens is morally acceptable is a separate consideration. My sympathies in this matter lie with the taxpayers, electric customers and citizens who would bear the economic burden as well as the cost of impaired environmental, ecological, scenic and property values resulting from "wind farms."

The magnitude and merits of energy tax breaks and subsidies

Normally, I would be quite willing to help keep tax dollars from flowing to Washington where they are wasted with such abandon -- as illustrated by the hundreds of millions of tax dollars that flow through the US Department of Energy(DOE) each year. As you probably know, DOE and its predecessors have spent over $100 billion on "energy R&D" that has produced little that is technologically sound, economically competitive, and environmentally acceptable.

For example, DOE has spent hundreds of millions on wind energy R&D, often using the argument that this was an "investment" in technology that would give the US an advantage in world markets. However, some 90% of the wind turbine market is supplied by foreign companies. The dollars being spent for wind turbines imported for "wind farms" in the US are, like dollars for imported oil, a part of the US balance of payments deficit.

My normal desire to keep tax dollars out of Washington does not extend to either:

1. Unwarranted Section 29 and 45 tax credits, which, demonstrably, are among the more wasteful and outrageous measures pushed through the Congress by various special-interest groups. For example, you may be aware that Section 29 tax credits for coal-bed methane at times exceeded the wellhead market price for natural gas. Also, the abusive use of "synfuels" tax credits is nearly legendary. The recent Wall Street Journal story indicating that the US Treasury Department is finally preparing to clamp down on this abusive tax credits is a welcome sign.

2. "Windfall" tax breaks and subsidies, now being captured by the wind-energy industry at the expense of the nation's electric customers and taxpayers. Contrary to the claims by wind energy advocates, wind energy may now be THE most heavily subsidized energy source WHEN CONSIDERED IN LIGHT OF EITHER ITS CURRENT OR PROSPECTIVE CONTRIBUTION TOWARD SUPPLYING THE NATION'S ENERGY REQUIREMENTS.

Many federal, state and local tax breaks and subsidies (some from regulators) are now available for commercial-scale windmills even though the huge machines produce very little electricity. The list includes:

1. Unwarranted Section 29 and 45 tax credits, which, demonstrably, are among the more wasteful and outrageous measures pushed through the Congress by various special-interest groups. For example, you may be aware that Section 29 tax credits for coal-bed methane at times exceeded the wellhead market price for natural gas. Also, the abusive use of "synfuels" tax credits is nearly legendary. The recent Wall Street Journal story indicating that the US Treasury Department is finally preparing to clamp down on this abusive tax credits is a welcome sign.

2. "Windfall" tax breaks and subsidies, now being captured by the wind-energy industry at the expense of the nation's electric customers and taxpayers. Contrary to the claims by wind energy advocates, wind energy may now be THE most heavily subsidized energy source WHEN CONSIDERED IN LIGHT OF EITHER ITS CURRENT OR PROSPECTIVE CONTRIBUTION TOWARD SUPPLYING THE NATION'S ENERGY REQUIREMENTS.

Many federal, state and local tax breaks and subsidies (some from regulators) are now available for commercial-scale windmills even though the huge machines produce very little electricity. The list includes:

a. Federal five-year double-declining balance accelerated depreciation (MACRS) which, with the recently enacted depreciation "bonus," permits "wind farm" owners to deduct 60% of the capital cost of a "wind farm" from otherwise taxable income in the 1st tax year, another 16% in the 2nd tax year, and the remainder over the next 36 - 48 months..

b. A ten-year, $0.018-per-kilowatt-hour (kWh) Production Tax Credit which permits the owners of "wind farms" or their parent companies to deduct additional millions of dollars each year from their tax liability.

c. Depreciation deductions from income that would otherwise be subject to state corporate income tax in states that conform their corporate taxes to the federal income-tax system.

d. Dozens of state and local-government tax breaks, enacted in response to wind-industry lobbyists, including (depending on the state) state production-tax credits, reductions in or exemptions from business and occupation taxes, sales-and use-taxes, and state and local property-taxes. Some reductions are in the 85% to 95% range.

e. Direct DOE subsidies (via contracts, grants and subcontracts) for wind-energy R&D and for wind-promotional activities carried out by DOE national laboratories, trade associations and numerous non-government organizations that have been created to promote expensive "renewable" energy.

f. Similar state subsidies (e.g., in New York), which are provided to "wind-farm" developers from funds collected from electric customers via so-called "public benefit funds."

g. "Renewable Portfolio Standards," (RPS), enacted in several states (and proposed as a federal measure), which shift additional costs to electric customers. This insidious subsidy forces electric distribution companies to purchase high-cost electricity from "renewable" energy companies and pass energy and administrative costs not recovered through "green" programs on to all electric customers.

h. "Green" energy programs that are forced on electric distribution companies to provide a market for high-cost renewable energy.

i. Mandated or voluntary "green" energy purchases by federal, state and local government agencies and schools, with the higher cost of renewable energy borne by taxpayers.

j. Costs of building electric transmission capacity to serve "wind farms," with costs shifted by regulators from the "wind farm" owners to electric customers. Examples include a $148 million Xcel project in Minnesota and capacity additions in Texas.

k. Arbitrarily awarded "capacity" credits for "wind farms" that exceed the true contribution that this intermittent, variable, and largely unpredictable source can provide.

My preliminary estimates indicated that tax breaks and subsidies for wind energy from the first few items in the above list will easily exceed $300 million in 2002 and will be higher in the years ahead.
My preliminary estimates indicated that tax breaks and subsidies for wind energy from the first few items in the above list will easily exceed $300 million in 2002 and will be higher in the years ahead.

The wind industry's claims that it does not get its fair share of government subsidies should be considered in light of the small contribution that wind is expected to contribute in supplying US energy requirements. This small contribution (despite the enormous growth in subsidies) can be seen in the following table that is based on the Energy Information Administration's (EIA) Annual Energy Outlook 2003.

U.S. Energy Consumption by Energy Source: 2000 Actual and EIA Forecast for 2025
Energy Source Actual 2000 EIA Forecast for 2025
Quadrillion Btu % of Total Quadrillion Btu % of Total
Traditional Sources        
Petroleum products 38.39 38.60% 56.22 40.40%
Natural Gas 24.07 24.20% 35.81 25.73%
Coal 22.64 22.76% 29.42 21.14%
Nuclear Power 7.87 7.91% 8.43 6.06%
Conventional Hydropower 2.84 2.86% 3.12 2.24%
Other 0.31 0.31% 0.07 0.05%
Sub-Total - Traditional 96.12 96.64% 133.07 35.62%
Non-Hydro Renewables        
Geothermal 0.30 0.30% 1.02 0.73%
Wood 0.41 0.41% 0.40 0.29%
Other Biomass 2.07 2.08% 3.42 2.46%
Municipal Solid Waste 0.31 0.31% 0.44 0.32%
Solar Thermal, electric & hot water 0.36 0.36% 0.09 0.06%
Solar Photovoltaic 0.00 0.00% 0.01 0.01%
Ethanol 0.14 0.14% 0.34 0.24%
Wind 0.05 0.05% 0.37 0.27%
Sub Total - Non-Hydro renew 3.34 3.36% 6.09 4.38%
Total 99.46 100% 139.16 100%

As the table shows, fossil energy sources (petroleum, natural gas and coal, combined) are expected to supply 87.27% of US energy requirements in 2025 - or 323 times the 27/100 of 1% expected from wind. If wind subsidies totaled $300,000,000 in 2002, the industry's "fair share" argument would suggest that subsidies for fossil energy sources should be at least $96,900,000,000! Clearly, the wind industry's claim is without merit.

The implications of your activities

Please consider seriously the fact that subsidies for wind energy are shifting hundreds of millions of dollars in cost from "wind farm" owners and placing it on the backs of ordinary taxpayers and electric customers - with this extra burden then hidden in tax bills and monthly electric bills. Does Meridian really want to participate in, encourage and profit from this activity?

Please note also the point that subsidies distort investments by directing capital toward endeavors that often have little long-term value. The federal and state governments are repeating a mistake made during the 1980s when tax credits were the motivation for building thousands of windmills in California which produce little electricity. Many were abandoned once tax benefits were exploited - resulting in California's "windmill junkyards."

Finally, please note that the high front-end tax benefits for wind energy provide an incentive for (a) similar abandonment of today's "wind farms" once tax benefits have been captured, and/or (b) "churning" of "wind farm" ownership to permit successive owners to take advantage of lucrative accelerated depreciation benefits.

Adequacy of your research.

I have some doubt whether your research has been as thorough as you suggest. Your questions suggest that you have focused primarily on promotional information from the wind industry, DOE, the National Renewable Energy Laboratory (NREL), and various wind-energy advocacy groups - none of which can be relied on for objectivity. You should have found answers to most of your questions if your research had extended to such sources as the following:
· The growing number of articles in the general press on opposition to proposed "wind farms."
· Open literature and web sites that include analyses and commentary from individuals and organizations that are not biased in favor of wind energy.
· Web sites sponsored by organizations that actively oppose wind energy because of its adverse impacts on environmental, ecological, scenic and/or property values, and sites that encourage discussion of the issues that are involved. Such sites exist in the US, UK, Denmark, Germany, Spain, Italy, Australia and probably other nations.
· Numerous papers that I have written and distributed.

True cost of electricity from wind energy

While not important to your plan to capitalize on faulty government tax policies, you may want to note that most claims about the per kWh cost of electricity from wind turbines are without a solid foundation and are often understated. For example:

· Often, those calculations are based on assumed turbine (and related windmill components) lifetimes of 20 years and assumptions about O&M, repair and replacement costs. In fact, no one has experience with today's generation of wind turbines over a long enough period to demonstrate the validity of those assumptions.
· The claimed per kWh costs often ignore the fact that the generous subsidies for wind energy described above shift large portions of the true cost from "wind farm" owners and hide them in bills paid by ordinary taxpayers and electric customers.
· The claimed per kWh costs generally do not include the true cost of backup generation, integration of electricity from intermittent wind generation into electric grids, or transmitting electricity from "wind farms" to areas where the electricity can be used.

I hope that the above information will explain adequately why I do not wish to provide the help for Meridian's venture that you requested in your letter. In summary, like the tax benefits you wish to exploit, I do not believe that your venture would make a positive contribution to the national or public interest.


Glenn R. Schleede
PO Box 3875
Reston, VA 20195-1875
Phone: 703 709-2213


5. Air pollution and asthma: Is there a connection?

Australia, Ireland, New Zealand, UK, and USA, all countries with low levels of air pollution have populations with a high percentage of asthma symptoms (25% and higher). Countries with high levels of pollution like China, India, Indonesia, and Mexico have low levels of asthma (around 5%). These data from an International Study of Asthma and Allergies in Childhood are quoted in The American Enterprise of July 2003.

Meanwhile , the WSJ reports that EPA agreed to review and possibly tighten its standards for minimizing soot and smog , part of a lawsuit brought by the American Lung Association and other environmental groups. The ALA quotes medical research showing the danger of soot and smog for aggravating - yes - asthma in children.

A search of the web of the ALA was rvealing< > Nearly 20% of its budget comes from the government. In the past 25 years while the air has been getting cleaner and tobacco use has diminished, the mortality from chronic bronchitis and emphysema has nearly doubled (from 24 to 42 per 100,000 age-adjusted population). The incidence of asthma has also increased and is highest in states with cold winters. Might global warming help? Interesting!


6. Cato Institute Report Blows Whistle on Regulatory Sprawl: $860 Billion, 8% of GDP

In 2002 the Federal Register totaled over 75,000 pages, compared to 10,000 pages 50 years ago. Regulatory cost adds an additional 40% to the federal tax burden. EPA leads the list of agencies, followed by Transportation, Treasury (IRS), Agriculture, and Interior.

What to do? Cato recommends: A sunsetting review, a bipartisan Regulatory Reduction Commission, and support for the proposed Congressional Responsibility Act that would make elected representatives, not unelected bureaucrats, answerable for costly regulations.


7. Microbe That Eats Toxic Waste:

The Associated Press reports that a newly discovered microbe, known as BAV1, "eats" vinyl chloride in material packed below the surface of the earth. Researchers found that injecting soil with concentrated amounts of BAV1 destroyed and rendered harmless the vinyl chloride at a contaminated site in Michigan. After use, the microbes remain in the soil, yet, even when used in large concentrations, have not been shown to harm humans. In addition, the organisms can only grow when the contaminants are present. When the toxic material is gone, the numbers of microbes decline because they lack food. Vinyl chloride, present at up to a third of Superfund sites, is most often produced by the breakdown of such common chemicals as dry cleaning fluid and metal cleaners. The research is published in the current issue of Nature. The full AP story is available at



















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