The Alternative-Fuel Tax Credit Controversy

A controversy over pulp and paper companies taking advantage of the alternative fuel credit has been widely reported in local and national newspapers. By mixing black liquor generated during the kraft paper process with fossil fuels, the companies became eligible for a $0.50 per gallon (of alternative fuel) tax credit. Criticisms of this have come from lawmakers, environmental groups and other pulp producing countries:

• Lawmakers argued that the tax credit was or estimated to cost the federal government $61 million. Originally, once the pulp and paper companies began applying for the credit, however, the cost skyrocketed to anywhere from $2 to $3.3 billion. With the growing U.S. deficit, these lawmakers argue, the tax credit is a loophole we just can’t afford.
• Environmental groups argue that giving the tax credit to pulp and paper companies violates the intention of the law. In order to qualify for the credit, companies must burn a mix of alternative and fossil fuels. As a result, some mills have added diesel to black liquor in order to qualify for the credits. The intention of the law was to encourage companies to reduce their use of fossil fuels and adopt alternative fuel sources. For pulp and paper companies, they argue, it’s done the exact opposite.
• Other environmental groups recognize that black liquor is a clean and renewable fuel, but point out that pulp and paper companies have used it to fuel their plants for decades, in order to reduce their fossil fuel costs. This savings is incentive enough to continue the practice, opponents believe.
• According to Gordon Hamilton of the Vancouver Sun, “Canadian industry leaders say the sheer size of the subsidy threatens to disrupt the already over-supplied global pulp and paper economy, pushing pulp producing countries like Canada out of the market.”

We think there are several good reasons supporting the pulp and paper companies’ strategy.

• The tax credits being requested by the companies are legal. In 2005, Congress passed a highway bill that provided a tax credit for those mixing transportation fuels with alternative fuel sources. In 2007, the credit was extended to non-transportation fuels. This made it possible for companies powering their industrial operations with alternative fuel sources to apply for the credit as well. The only remaining question was whether the legislation considered black liquor an alternative fuel. A September 2008 Internal Revenue Service bulletin clarified this point; it included in its definition of eligible fuels any “liquid fuel derived from biomass.”< /font>
• Public companies have a fiduciary responsibility to their stockholders to take advantage of the credit, as they struggle to remain profitable in the teeth of the recession.
• Leo W. Gerard, President of the United Steel Workers, believes that the tax credit is the “most compelling factor in decisions related to the continuing operation of a number of pulp and paper mills.” In essence, the tax credit is keeping mills running when they might otherwise have closed, which will save jobs.
• Some companies applying for the credits were already adding a fossil fuel to black liquor. To get the credit, they switched to diesel. In these cases, there is no net gain in fossil fuel use.
• Large amounts of fossil fuel are not being added to black liquor. For those who have begun adding fossil fuel to their mix since changes in the law took effect, the net gain is negligible: the mixture is approximately 99.9 percent black liquor and 0.1 percent diesel.
• There are preliminary signs that the incentives are prompting pulp and paper companies to look for additional ways to use alternative fuels. According to John Richardson of the Portland Press Herald, Lincoln Paper & Tissue in Maine reduced oil consumption in other parts of the mill by switching to recycled vegetable oil after they found out about the credit.

Despite these realities, there is serious concern in the industry that the tax will not last until it is set to expire at the end of 2009. At a Senate Finance Committee meeting about the issue on April 23, the pulp and paper industry had at least one formidable ally. One of three Republicans to support the stimulus bill, Senator Susan Collins (Maine) is not afraid to stand in the crossfire. After the meeting, she released a statement in support of letting the tax credit remain in effect. “Given the gravity of our economic circumstances, do we really want to punish an industry that employs 1.3 million Americans...that is a top ten manufacturing employer in 42 states...an industry that was ahead of the curve with respect to alternative energy when many other industries were behind the curve...an industry that’s hanging on right now by a thread through no fault of their own?”

Sources:

Dizikes, Cynthia. “Paper firms to reap billions from tax credit—but should they?” MinnPost.com. April 24, 2009. www.minnpost.com/

Hamilton, Gordon. “U.S. black liquor law threatens to kill Canadian pulp sector.” Vancouver Sun. April 15, 2009. www.vancouversun.com/

Richardson, John. “Senators defend paper-mill windfall.” Portland Press Herald. April 24, 2009. pressherald.mainetoday.com/

“Snowe fights to preserve tax credit for pulp and paper industry.” Press Release. April 24, 2009.