Paper Makers Reaping Rewards of “Black Liquor” Tax Credit

Thanks to the Alternative Fuels Provision tax credit, North American pulp and paper makers are turning their “black liquor” wood-pulping byproduct into black gold. But with Congress expecting to pay out more than $6 billion a year in credits, the provision for paper companies is likely to be killed by Oct. 1.

The Alternative Fuels Provision began as part of a 2005 highway bill as a tax credit intended to promote alternative fuels for motor vehicles. An interpretation of the tax code by the Internal Revenue Service last September paved the way for several companies, such as paper manufacturers, to get in on the credits.

How? When wood is transformed into pulp to make paper, the process creates a thick, dark liquid known as black liquor. Paper companies have been using black liquor to run their mills since the 1930s; plants can generate about two-thirds of their energy by burning the fuel.

To qualify for the tax credit, which is 50 cents per gallon, paper mills must mix at least 0.1% of diesel fuel with black liquor. About 100 U.S. paper mills are eligible to take advantage of the incentive because they chemically produce their own pulp, according to Montreal-based pulp market data provider TerraChoice Market Services.

As you might imagine, the payouts to paper companies that have applied for the tax credit are considerable. In the fourth quarter of 2008, Verso Paper filed an application with the IRS for certification of its eligibility to receive incentive payments for its use of black liquor in alternate fuel mixtures at its Androscoggin Mill in Jay, ME, and a mill in Quinnesec, MI.

The company received a $29.7 million incentive payment in February for operations in the fourth quarter at the Androscoggin mill. A similar payment for fourth quarter operations in the Quinnesec mill was expected.

International Paper Co. reported its first-quarter net income jumped 93%, thanks to a large biofuel tax credit for powering its paper mills with black liquor. Other companies who have benefited from the tax credits are Montreal-based Domtar, as well as U.S. companies Weyerhaeuser, Mead Westvaco, and Temple-Inland.

It was estimated that the alternative fuel credits would cost the federal government $61 million a year in lost taxes–but that was before pulp and paper companies started applying. Now, the annual cost to the federal government ranges from $3.3 billion to $6.6 billion.

Because the payouts are more than expected, the Obama administration has rewritten the alternative fuels provision to exclude the paper industry for the fiscal year 2010 budget proposal. If approved by Congress, the provision will take effect Oct. 1, 2009, though if the law is changed and the tax credits expire at the end of this year, some members of Congress have said pulp and paper companies would receive some other form of relief.

Gary Evjen, senior vice president of sales at Wade Paper Corp., expects that the government will close the loophole and rescind the provision for paper makers in the near future. For one, “our industry is much less significant than in the past, and doesn’t hold a lot of lobbying leverage. Two, I am sure the lawmakers would rather get some press about closing loopholes, than being criticized for allowing companies to take advantage of the taxpayer.”

Verle Sutton, editor of Forestweb’s Reel Time Report, says the tax credit has reduced production costs at mills by about 40%. So are these tax windfalls what’s been pushing paper prices lower?

Not according to Dan Walsh, vice president of catalog/publication papers at distributor Bradner Smith & Co. “The black liquor tax credit has not affected prices either way,” he says.

While the tax credit has certainly helped to bolster the bottom line of many paper companies, paper prices are significantly lower than a year ago and mills continue to have to shut down their machines, temporarily or permanently, due to the lack of demand, Walsh says. “This unprecedented drop in demand is what has led to declining prices.”

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