Monday, August 16, 2010

Open Forum on Taxpayer Subsidies for Burning Black Liquor

This Sunday there was article in the Mobile (Alabama) Press-Register that continued to illuminate the real world implications of the confusing and troubling story of the paper industry's second big windfall in the past year from taxpayers for continuing to burning its black liquor waste. (Article from Mobile also has a good summary of how we got here, in addition to the interest new case studies)

The conservation community, acting in defense of taxpayers, recycled pulp and paper manufacturers plus their mill employees, and common sense, strongly disagrees with the IRS's recent overruling of the US Environmental Protection Agency's (EPA) determination that black liquor does NOT qualify for this second tax incentive, the Cellulosic Biofuel Producer Tax Credit. As the Clear Air Act authorizes EPA to handle registration of biofuel producers and to determine if different fuels should qualify, 27 leading conservation groups sent a letter to the EPA late in 2009, and received correspondence in return clarifying the issue. From the EPA's correspondence.....
"The $1.01 cellulosic biofuel producer credit is a tax credit put in place by the 2008 Farm Bill and administered by the Internal Revenue Service. The act's language requires that among other things, in order to qualify as cellulosic biofuel, the fuel must meet "the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act (42 U.S.C 7545)." These registration requirements are applicable only to motor vehicle gasoline, motor vehicle diesel fuel, and additives for these fuels. Our understanding of black liquor is that it is a byproduct of the paper milling process with the consistency of molasses."
Its clear from the people who know, black liquor doesn't meet registration requirement for a "cellulosic biofuel producer" under the Code.

The article from Mobile helps us start to get more real world information on how each pulp producer will handle the surprise ruling by the IRS, and the new opportunity to cash in on burning their black liquor.

If you are familiar with this issue, you know that some companies will have plenty to keep their accountants busy, because they claimed .50/gallon for all of 2009 already. Some got started adding diesel fuel to the mix late, so they have early 2009 black liquor burning they can claim the 1.01/gallon tax credit outright for that volume. Without the diesel mix, they couldn't fit through the tax loophole. As the article shows, some of the companies, like International Paper, whose consultants had the impressive imagination to find and negotiate their way through this loophole, got a head start and got a cool $2 billion, won't be returning the cash to take advantage of this tax

The Joint Committee on Taxation is currently studying how much this new twist will cost taxpayers, and to be accurate, they would have to take each company's considerations into account. For example, they can not say this will cost taxpayers $2 billion dollars additional for IP, since it is valued at twice as much a gallon for 2009

However, the leadership of the US Senate Finance Committee, Senator Max Baucus and Senator Charles Grassley, would be acting irrationally and irresponsibly not to close this loophole, and to repeat the mistake they made in 2009 by sitting on their hands as the US Treasury bled $8 billion dollars.

What do you think? Post your comments below in this open forum on the black liquor issue.


Anonymous said...

First of all, it is important to remember what black liquor is - it is a biofuel that is derived from the lignin in a tree, basically the glue that holds the fibers of a tree together. When making pulp and paper, the lignin must be removed; therefore, using the parts of a tree that cannot be made into a finished product as a fuel makes great sense. It is a clean, renewable fuel that would otherwise be waste. Why shouldn't the paper industry be incentivized for using this renewable fuel, just like other biomass burners?
Second, remember that this is not a second tax break - the code says that a taxpayer cannot take both the original tax break for black liquor and the cellulosic biofuel credit - they must choose one or the other. Finally, the industry never asked to be eligible for this second credit; in fact, the industry believed just as the conservation community did, that this credit was for vehicle fuel.

Papyrus said...

Thanks Anonymous for your comments.

You are correct, companies can not take both. Perhaps that should have been explicitly stated. IRS was clear on this point. It also said that companies did have the option to return the money from the one benefit, in order to refile and claim the more lucrative one.

It is my perspective that the purpose of incentives using taxpayer dollars is to stimulate innovative activity that wouldn't happen otherwise if left to the free market. Otherwise it is corporate welfare. In this case, the mills would, and have been for many decades, burning black liquor anyways. The taxpayer injection of funds did not stimulate any positive new behavior whatsoever.

The original Congressional intent of each of these pieces of legislation was to help develop new markets for biofuels in vehicles, where there was a perceived need for a modest government boost, and an expected net benefit of a reduction in fossil fuel consumption. It wasn't intended to pay anyone for continuing the status quo.

ScienceBased said...

@Anonymous: The reasons that paper industry shouldn't be incentivized to use black liquor are many but one of the reasons you implied yourself: black liquor is an unavoidable byproduct of the virgin paper making process. Therefore it is a free source of fuel, which is why paper companies have been using it as a fuel for over 75 years. In other words, there is not need for an additional incentive at the expense of taxpayers! The purpose of government incentives are to incentivize behavior that would otherwise be too costly for individuals or companies to pursue even though it is in the public interest. It is NOT to reward them for existing practices that already make inherent economic sense; tax dollars are too limited to be paying companies billions (collectively) to do something that they already do.

This of course is just one reason. Other reasons include the fact that this incentive was clearly intended for vehicle fuels, that it was intended to reduce GHG emissions by inducing a switch to a lower carbon fuel (which maintaining the status quo of burning black liquor doesn't do), and it results in an unfair market advantage for virgin paper producers over recycled paper producers who don't generate black liquor as result of their papermaking process.

This last consequence is particular detrimental from a sustainability perspective given that recycled paper requires less wood fiber (i.e. trees), less energy, less water and generates fewer carbon emissions than virgin paper.

PulpMillGuy said...

The rationalization by Paper Industry folks about the legitimacy of taking either of these credits is just disgusting. From a group that coined the term "tree huggers", they are first at the trough for some environmental pork. Let's have some facts on this "clean, renewable fuel" that Black Liquor has become:

Wood is an excellent fuel, and has been used as nature produced it for centuries as solid fuel. Most kraft mills have wood waste boilers on site that burn solid fuel (bark, chips, etc) very efficiently. The goal of these credits is to incentivize the creation and production of material to specifically displace LIQUID fossil fuel. The cellulosic biofuel credit even went so far as to explicitly state the requirement of "approval for use in a motor vehicle". The incentive is to create something with greater utility than the biomass it is derived from. Black Liquor is the opposite of this. Recovery Boilers are more dangerous, more complex, more polluting, more expensive, less efficient, and more difficult to operate than a biomass (or plain wood fired) boiler. It produces steam no different from a biomass boiler, it just does so less efficiently with more pollution. If a mill could make suitable long fiber from chips without having to operate a Recovery Boiler, they would. It is a by-product that they wish they didn't have.

More ironic is that the credit is ostensibly to reduce "greenhouse gas" emissions, but in the case of Black Liquor, neglecting to consider a laundry list of other pollutants. A tree is roughly 50% "fuel" in the form of cellulose and lignin and 50% water. Black liquor is only 35% "fuel" in the form of dissolved lignin/cellulose, 30% Inorganic chemicals with no fuel value, and 35% water. It requires massive amounts of chemicals (Caustic and sodium sulfide, look it up) and energy to extract from the tree. Black Liquor Recovery boilers are a necessary evil in the production of Pulp. The entire process is expensive, dangerous, and full of noxious chemicals. The industry does an excellent job minimizing the impact on the environment while producing the pulp and paper products that are necessary to modern civilization. But you would have a hard time developing a less efficient way to generate steam from burning wood, with the added "benefit" of turning a 0% sulfur solid fuel and turning it into a 10+% sulfur liquid fuel - in some cases fed into grandfathered boilers from the 1960's spewing tons and tons of SO2 and mercaptans into the atmosphere. A credit for simply burning wood would be more logical and effective; but would likely spark a bit more outrage from the public, since they know a bit more about wood than black liquor.

Anyone with even a cursory background in Chemistry with just a little research knows this; and the government is populated almost exclusively by academics, so it can't be by accident. The only conclusion I can draw from Treasury overriding this against the EPA opinion is that the economy is in worse shape than we know, and Treasury is pulling out all the stops to "drop money from helicopters" to stem a potential deflationary depression. By using (abusing) obscure credits already on the books, they avoid political fallout. Anyone think the IRS is going to hurt their reputation by giving money away? Politics are a huge part of it as well. Like GM and Chrysler, this is just another bailout of a heavily unionized industry with high wages and benefits. Unfortunately the lion's share of it is going into the pockets of executives that would otherwise be run out on a rail for bankrupting their company with poor business practices - All with money that is likely more than the tax burden to be paid by everyone reading this, their children, and grandchildren.

Anonymous said...

I feel as a tax payer this is one of the biggest scams I have ever seen. Last year, the paper industry reaped approximately $6.7 billion in tax payer subsidies for a practice they have been doing for the past 40 years.

If they can land this windfall, why then do they need to go after Asian paper manufactures to launch a law suite for dumping paper when they already have found a way to screw the American public.

If NewPage, Appleton Coated and SAPPI are successful in securing tarriffs for printing paper manufactured in China and Indonesia, they will not be doing the printing industry a service.

Prices will increase at an alarming rate and send a message to end users to find alternative ways to market their products. This will accelerate the use of electronic marketing and will certainly drive significant amounts of printing outside the U.S. printing market to Canada, Mexico and Indonesia.

If successful, the domestic mills will be signing their own death sentence.

Protectionism has never worked in the past. So then, why do you think protectionism will work suddenly today?

This is a ploy to increase pricing on domestic coated printing papers.