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Son of Black Liquor: A $50 Billion Loophole for the U.S. Pulp and Paper Industry

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Timber Procurement


For the second time in a year, the U.S. pulp and paper industry has hijacked a multi-billion dollar federal program that was supposed to promote new biofuels.

What's being called Son of Black Liquor dwarfs the original black-liquor loophole that created such a stir in Congress and among Canadian officials earlier this year.

Son of Black Liquor, officially known as cellulosic biofuel producer credits, could generate $50 billion in tax credits for U.S. kraft pulp mills before it expires at the end of 2012, Dead Tree Edition estimates. Tax expert Martin A. Sullivan, writing at Tax.com, more conservatively forecasts that "this credit will provide the paper industry with $25 billion of additional tax benefits that Congress never intended."

The program, part of the 2008 farm bill, was supposed to benefit "companies that use expensive, cutting-edge technologies to distill ethanol from plant materials instead of corn," Sullivan writes. "But these new technologies developed by fledgling companies will get peanuts compared to the windfall pulp manufacturers will get from the new credit."

IRS Ruling
Despite Congress' intent, the Internal Revenue Service released a memorandum in the past few days ruling that black liquor qualifies for cellulosic biofuel producer credits because the fuel is produced and used in the U.S. and is "derived from lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis." Black liquor is an energy-rich byproduct of the kraft pulping process and the main power source for pulp mills worldwide.

The memorandum says black liquor cannot be used for both the original black-liquor loophole -- the 50-cent-per-gallon alternative fuel mixture credit -- and the $1.01-per-gallon Son of Black Liquor credits. Though it is twice as generous, Son of Black Liquor is also harder to use because it is not refundable, notes Sullivan.

As an example of how easy it is to collect the original black-liquor credits from the IRS, International Paper is on track to earn nearly $2 billion in alternative fuel mixture credits this year from its kraft pulp mills. The company paid less than $200 million in U.S. income taxes last year and had less than $400 million in earnings during the first half of this year.

U.S. pulp producers, therefore, may continue milking the original black-liquor program until it expires at the end of this year and then switch to Son of Black Liquor next year.

Doing the Math: $25 Billion or $50 Billion
Here is Sullivan's math: A Congressional committee reported that the pulp industry received more than $2.5 billion in alternative fuel mixture credits during the first half of this year. With Son of Black Liquor being twice as generous and essentially lasting three years, that indicates it has a potential for $30 billion. But because the credits are not refundable, Sullivan figures companies will only be able to claim $25 billion in benefits.

Here is Dead Tree Edition's math: As explained in Black Liquor Credits Top $3 Billion So Far, U.S. companies probably earned more than $3 billion in black-liquor credits during the first half of this year (though some were not received until later). Because some companies were late to the black-liquor party, the credits in the second half seem likely to approach $4 billion.

As companies learn to take advantage of these credits, they are no doubt tweaking their operations to maximize their output of black liquor. A paper-industry insider tells me, for example, that a mill can create more black liquor and less (though brighter) pulp by "cooking" the wood fibers longer. So it seems likely that, with a payout double that of the original black-liquor loophole, Son of Black Liquor will be worth more than $8 billion in a six-month period, which equates to $50 billion over three years.

Although $50 billion may be greater than the taxable income of U.S. pulp-mill owners during the next three years, I have enough faith in the American accounting profession and consulting industry to believe that somehow the available credits will not be wasted.

For more information on black-liquor credits, please see:



Issued by:  Dead Tree Edition



Issue date: October 17, 2009

Link to Article: Origin of text


Canadian forest sector fears massive U.S. green energy subsidy

A new U.S. biofuel subsidy is sounding alarm bells in the Canadian forest industry over fears it could be used by American forest companies to give them a final and overwhelming advantage in the battle for continental supremacy.

The Canadian industry is saying it is no longer competing against American forest companies but is in an unwinnable battle with the U.S. Treasury which is doling out billions in a bid to develop new green energy resources.

The cause of this latest panic is a tax credit on fuels made from cellulose that the Internal Revenue Service said in a memo last week could apply to black liquor, a fuel produced as a byproduct of the pulping process. It's the third U.S. biofuel subsidy to face Canadian producers this year.

But an American tax policy analyst said the IRS memo doesn't clear the way for forest companies to cash in.

"I'm telling my clients not to bet on it," said Tim Vandenberg, of Washington Analysis Corp.

Vandenberg said it's "not impossible but it strikes me as improbable," that American forest companies could benefit. There's no taste in Congress, he said, for more subsidies to the forest industry like the black liquor rebate that is scheduled to end Dec. 31.

The cellulosic fuel tax credit is massive — a break of $1.01 a gallon — that could add up to a $50 billion subsidy over the next three years if Vandenberg is wrong. Its purpose is to compensate producers of biofuel from cellulose — as opposed to corn — for the higher cost of their product.

Black liquor, used to fuel boilers at pulp and paper mills, is a byproduct of the wood chips used to make pulp. Pulp mills already have received an estimated $6-$8 billion on the first black liquor subsidy.

If U.S. pulp and paper companies can use this new tax credit, it essentially means they wouldn't have to pay any income taxes, said Kevin Mason, an analyst at Equity Research Associates.

Details of how the ruling can be applied remain foggy. It must meet U.S. Environmental Protection Agency registration requirements under the Clean Air Act and the EPA only registers highway fuels, which is leading to the confusion.

Vandenberg said the original black liquor subsidy to pulp producers was not intended by Congress and he does not think a second unintended loophole will open up.

"I don't think lightning is striking twice," he said.

American industry leaders are down-playing the significance of the biofuel tax break.

"This is something that came onto our radar screen only last week," said Scott Millburn of the American Paper and Forest Products Association. "We are taking a look at it to see whether it has any impact on the industry."

The cool attitude towards it from the Americans is setting off alarms for Avrim Lazar, president of the Forest Products Association of Canada. He has heard that before.

Lazar said he believes the U.S. has entered the subsidy game in a big way and that Canada is going to have to respond or the pulp and paper industry here will die.

"If it's not this, it's going to be something," Lazar said in an interview from Buenos Aires, where he is attending a global conference. "We see it coming from the left and the right."

Six months ago, forest companies were sounding the same alarm over the first black liquor subsidy. The Canadian government responded with a $1 billion green energy program this is now in place. Then the U.S. announced a new biomass crop assistance program that has the potential to provide up to $4 billion in subsidies to the industry.

Lazar said it is clear that the U.S. is raising the stakes.

Mason said the subsidies to the American forest industry appear to be intended not so much to create new biofuels but to keep them from being harmed by still other subsidies and policies aimed at the emerging green energy sector. Both industries use the same raw material — biomass — to make their products.

Regardless of the intent in the U.S., Canada must respond, said David Gandossi, vice-president of B.C. pulp producer Mercer International.

"The world of subsidies is a minefield of unintended consequences," he said "But not responding is not an option."


Issued by:  The Vancouver Sun

Author: Gordon Hamilton

e-Mail: ghamilton@vancouversun.com

Issue date: October 20, 2009

Link to Article: Origin of text


Extpub | by Dr. Radut