A federal tax credit intended to boost the use of "alternative fuels" is instead encouraging American paper mills to add fossil fuels that previously were not needed in the production of pulp and paper products.
And now some industry analysts are wondering if Congress will stem the flow of millions in tax dollars paper mills are collecting from the obscure incentive before its scheduled expiration on Dec. 31, 2009.
While the tax credit is having some unintended effects, it is nonetheless helping the industry weather the global decline in demand for pulp and paper. It's unknown whether Port Townsend Paper Corp. has applied for the credit. Company officials declined a request for an interview for this story.
Here's how mills are using the alternative fuels tax credit.
In the "kraft" process of making paper, wood chips are cooked until the fibers can be separated from the sludge, which contains lignin, the glue that hold cellulose materials together. The byproduct is called "black liquor," and since the 1930s, most paper mills have burned it to generate steam for electricity and heat used in the manufacture of paper.
Prior to the tax credit, black liquor could be described as a "green" fuel because it contained no fossil fuels. Moreover, black liquor enabled paper mills to make use of a toxic product instead of discharging it into waterways, and burning it reduced operating costs.
Then, in a highway bill approved by Congress in 2005, an alternative fuel tax credit of 50 cents a gallon was funded. By adding just 0.1 percent of a taxable fuel (e.g., gasoline or diesel) to black liquor, a paper mill can get a credit for every gallon of the black liquor it consumes.
The cost to taxpayers could be $8 billion this year - just for the 10 largest paper companies - The Nation reported on April 2.
International Paper, which lost $452 million in the fourth quarter of 2008, has reported that it collected $71.6 million in tax credits for just one 30-day period during that quarter.
Wall Street investment bank J.P. Morgan estimates International Paper could collect $1 billion in tax credits in 2009. A J.P. Morgan report likened the tax credit to converting "black liquor into gold."
Unlike a tax deduction, a tax credit is a payment made by the U.S. Treasury whether or not a company owes taxes.
Benefit to PT Paper?
The Leader contacted Brian McClay, principal of TerraChoice Market Services of Montreal. He is a well-known analyst in the pulp and paper industry.
McClay estimated the Port Townsend mill has the capacity to produce about 200,000 tons of unbleached kraft paper a year. If running at that capacity, he said, the mill might qualify for a tax credit of about $15 million annually.
PTPC has facilities in Canada as well, but only U.S. plants qualify for the credit, McClay noted. Some Canadian paper mills have complained that the tax credit gives an unfair advantage to American mills.
"Everybody's in the same boat," McClay said of pulp and paper mills around the world. In China, he said, many mills are either closed or operating at reduced capacity.
"U.S. demand is way off and still falling," McClay added. But, he said, the pulp mills are "better off than they would be if they were making newsprint."
"Not everyone's going to make it" when the tax credit ends, McClay predicted. Like other observers, he suggested Congress might try to end the credit prior to its Dec. 31 expiration.
"There's so much irony here," McClay said. "You have to increase use of fossil fuels to do this." |
