The Wood and Fiber Supply Chain Experts
Black Liquor Tax Credits
From the November 2009 Forest2Mill newsletter.
One of the biggest controversies of the year has been the black
liquor tax credit. This tax provision—a $0.50 per gallon tax credit—began as part of the 2005
highway bill; later it was expanded by the 2007 energy bill. Originally intended to reduce the
amount of fossil fuels being used, the bill provided the tax credit to any company mixing
alternative fuels with traditional fossil fuels. Pulp and paper companies, which were already
burning black liquor to create energy, began mixing their black liquor with a small amount of
traditional fossil fuel in order to qualify for the tax credits.
The addition of fossil fuels is not the only change that pulp and paper companies have made
because of the tax credit. Many assumed these companies would begin pumping out huge volumes of
inventory in order to maximize the size of their tax credits. Inventories have
been mostly lower in 2009, however, and prices for paper either remained stable or increased.
If these companies had increased production in the middle of a global recession, prices would have
decreased.
Instead of increasing production, however, these companies shifted production to virgin
fiber mills and away from recycled fiber mills. The lignon in virgin fiber produces black liquor,
and recycled material contains no lignon. Because paper companies shifted as much
production as possible to virgin fiber mills, demand for pulpwood has actually increased. And
prices have held their own, even in the midst of the economic downturn.
What will happen when the current black liquor tax credit expires at the end of 2009? If the
tax credit goes away, paper companies will revert to their normal balance between virgin and
recycled materials. This will lead to decreased demand for pulpwood and a softening in pulpwood
prices.
A couple of things to keep an eye on as the transition occurs:
- First, we’ve heard rumors that an extension to the tax credit is still a possibility. (We think this is a long shot).
- The 2008 Farm Bill includes a $1.01 per gallon tax credit for biofuels from cellulose. The IRS reportedly released a legal memorandum that indicates black liquor will be eligible for the credit. If this is true, the tax credit would go into effect 1/1/2010 and last through 2012. We would expect to see even more paper production shift to virgin fiber mills if this happens. (When this story hit the internet, stock prices for pulp and paper companies improved. A day or two later, after analysts had a chance to investigate, stock prices lost the gains. We have been unable to find a copy of the IRS memo that first broached this possibility in order to form an opinion of our own, but we’ll continue to explore the issue and keep you posted.)