Talk About Unintended Consequences

MONTREAL _ Canadian forestry giants Domtar (TSX:UFS) and AbitibiBowater (TSX:ABH) are seeking millions of dollars in U.S. tax credits by transforming an alternative fuel called black liquor derived from pulpmaking into much needed cash.

Tax credits for technological innovation, eh? A good thing, eh? Except that isn't what's happening here. The forestry companies are moving to take advantage of a loop-hole in an alternative fuels tax credit from the 2005 U.S. highway bill.

You see, one by-product of the wood pulping process is this stuff called "black liquor":

Here's how it works. Wood chips are cooked in a chemical solution to separate the cellulose fibers, which are used to make paper, from the other organic material in wood. The remaining liquid, a sludge containing lignin (the structural glue that binds plant cells together), is called black liquor. Because it's so rich in carbon, black liquor is a good fuel; the kraft process uses the black liquor to produce the heat and energy necessary to transform pulp into paper. It's a neat, efficient process that's cost-effective without any government subsidy.

In other words, the paper industry produces much of the fuel it uses to make its products in the very process of making those products. It is, in that limited sense, a green industry. But the 2005 tax bill

...included a fifty-cent-a-gallon credit for the use of fuel mixtures that combined "alternative fuel" with a "taxable fuel" such as diesel or gasoline.

So clever heads within the paper industry figured: why not mix "black liquor" (an alternative fuel) with diesal (a "taxable fuel") and claim some of those government millions, even though the end result is to increase CO2 emissions (from burning the added diesel).

Domtar, though a Canadian company, is retrofitting its U.S. plants to get a piece of the action. But what about Canadian companies that only have plants in Canada? Suddenly, they are put at a competitive disadvantage, making the same pulp with higher production costs. So what do they do? Lobby for a similar tax credit on this side of the border. Pulp industry reps have already met with Stockwell Day over the issue.

(On the slightly more sane side, there is also an effort being made to convince the Obama administration that this was not what the original credit was intended for, and to have the wording changed to stop the fuel mixing practice.)

NDP Drinks The Black Liquor

A bizarre alternative fuel tax credit that actually subsidizes increased CO2 emissions at U.S. pulp mills could be "the final nail in the coffin for many struggling Canadian pulp mills."

This is a weird one, which I have written about here. Basically, pulp-and-paper mills can fuel many of their processes by making use of the by-products of these very processes, in particular a carbon rich sludge containing lignin (the structural glue that binds plant cells together) called black liquor. They've been doing things for years this way, and it keeps the production of pulp and paper relatively "green"(at least "greener" than it would otherwise be). However, in the 2005 U.S. highway bill law-makers introduced a provision that gave a 50 cent per gallon tax credit to industries using a taxable fuel/alternative fuel mix, and in 2007 this was extended to the pulp and paper industry. So clever heads thought "Hey, that money can be ours if we just add diesel to our black liquor!" even though this results in greater emissions and is entirely contrary to the purpose of the legislation.

Naturally, Canadian players in the industry are mad as hell, but the political response to has been most interesting, particularly from the NDP:

"The new U.S. administration is ensuring they are protecting American jobs," [NDP Trade critic Peter Julian] said. "Canada has to take similar tack and work with the U.S. administration to get a reciprocal arrangement that...[is] win-win for both countries."

...which sounds very much as though he is pushing for the tax credit to be extended to the Canadian side of the border, which means that, once again, the NDP is willing to sacrifice environmental interests for those of a dirty brown, heavily unionized industry. Ditching the green for the brown, as it were.

More sensibly, both the Liberals and the government are intent on having the credit killed in the U.S. rather than instituting something just as perverse up here.

The long, slow decline of the NDP as the party of the environment continues.

Black Liquor Takes Down Skookumchuck

Tembec said Thursday it is shutting down its Skookumchuck mill, citing the U.S. black liquor subsidy as a prime cause.

I've written about the U.S. "black liquor" subsidy on a number of occasions. It is apparently starting to bite (although, if you run a mill or any other kind of business, and there is an excuse to blame the shutdown of that business of some piece of regulation rather than poor business practices, you will inevitably use it, won't you?).

Black Liquor Tax Credit To Stay For Now

The American paper lobby gets to keep its alternative tax credit loophole for the time being. At least the federal government is trying to have to loophole closed South of the border, unlike the position of the federal NDP, which seems to want a matching rebate on this side.

As I've written previously, the loophole gives pulp and paper companies a subsidy for adding diesal to a clean/green fuel alternative fuel mixture, thereby actually increasing CO2 emissions. They're being paid to pollute.

And our once green NDP. Well, those were the old days, man.

Update: NDP forestry critic John Rafferty will be introducing a private member's motion "to negotiate an end to the unfair ‘Black Liquor’ subsidy in the US before June, or otherwise implement a similar regime in Canada." Negotiating an end to the subsidy is fine. Giving pulp and paper companies money to make their own processes less environmentally efficient is crazy.

Member Motion On Black Liquor

From NDP MP John Rafferty:

April 21, 2009 — Mr. Rafferty (Thunder Bay—Rainy River) — That, in the opinion of the House, the government should move immediately to support the struggling forestry sector by: (a) extending and securing loan guarantees to companies in need; (b) countering the United States ‘‘Black Liquor’’ subsidy for the pulp and paper industry through negotiation prior to June 1, 2009 or by introducing similar supports in Canada as soon as possible; and (c) convening a national stakeholder summit to address the severe and ongoing crisis in the sector.

Since "introducing similar supports" means paying the P&P industry to increase their carbon footprint in the name of alternative fuels, that's not on (is crazy, in fact).

Nevertheless, the U.S. government has in effect introduced a protectionist measure worth $100,000,000s under the guise of green tech. It would be nice to see a more significant response from the Canadian government and the other opposition parties (or from Canadian environmentalists, or from U.S. ones, for that matter).

Scrapping Over The Black Liqour

America's weirdest "green" initiative threatens to trigger a trade war:

Canada has threatened trade action against the United States over a massive "black liquor" tax credit to its pulp and paper industry that has distorted global pulp markets.

In a statement Thursday, International Trade Minister Stockwell Day said Canada has joined the European Union, Brazil and Chile in demanding that the credit, estimated to be worth between $4 billion and $8 billion, be withdrawn.

If you remember, this is the "alternative tax credit" buried in the 2005 highway bill that subsidizes American pulp & paper companies for dirtying up their production processes by adding diesel to the lignin sludge their mills produce as a by-product and then recycle as a clean-burning fuel.

Rather disappointing is the fact that yankee enviros have written very little about this issue (other than a few short pieces I remember seeing at Grist). Don't know if its because it has gone under the radar in all the struggles over Waxman-Markey, or whether there's a little bit of protectionism in their mental makeup.

Libs Talk Black Liquor

OTTAWA – The Conservative government must act immediately to ensure the Canadian pulp and paper industry is protected in light of a new $8-billion U.S. tax credit that is putting the competitiveness of the Canadian industry in jeopardy, said Jean-Claude D’Amours, Member of Parliament for Madawaska-Restigouche.

Iggy and co. are complaining about an alternative tax fuel credit contained in the 2005 U.S. highway bill that allows U.S. paper mills to cut production costs by $1,000,000,000s, thus undercutting operations in this country. The release is quite correct in noting that the subsidy could jeopardize Canada's pulp and paper industry.

Now, there are a couple of ways to proceed. One, which the Tory government has been pursuing, is to lobby the Obama administration/U.S. Congress to have the credit rescinded. There is support for this move South of the border, where the credit is seen as a bit of an embarrassment, although the U.S. paper lobby has killed action for the time being.

Another path forward is to replicate the subsidy here, which is an alternative proposed by NDP John Rafferty. Such a move would be lunacy, for the tax credit, though it is touted as a "green measure", actually pays companies to increase their carbon footprint by adding diesel to the cleaner fuels they already use to run their mills. (Although I should say that mirroring the tax credit here is only one of the measures Mr. Rafferty has taken into consideration with his private member's motion.)

So good on the party for bringing this one up. The pulp and paper industry doesn't have a whole lot of friends, and I don't usually count myself among them, but they are in this case getting screwed over in a most perverse manner.

A reader notes that the LPoC began agitating on this issue several weeks ago.

If You're Hanging Around Jim Flaherty's Office Today

...that ain't Jim Flaherty. Its an unhappy lumberjack. He's angry over a "lack of leadership in handling the forestry crisis."

His demands can be found here.

PS. One of them is that Canada "match U.S. tax credits to the industry for the use of alternative fuel". That's the whole "black liquor" thing I've been writing about.