Sunday, April 12, 2009

Pulp Fiction: Eco-Credits for Black Liquor

A federal program intended to promote the use of renewable fuels is instead encouraging U.S. paper companies to pursue some rather "un-green" practices, such as substituting virgin pulp for recycled pulp.

If the "black liquor" tax loophole persists, it could turn the market for publication papers topsy-turvy and lead to public backlash against paper companies -- and perhaps their customers.

At least two U.S. containerboard mills recently switched from recycled corrugated to wood chips as their fiber source because of the loophole, and others are probably doing the same, Pulp & Paper Week reports in its April 10 edition. (As I wrote in "Hey, Big Boy, Can I Recycle Your Cardboard?" four months ago, the market for recycled corrugated was already so weak that perhaps it's a good thing that the "Corrugated Recycles" phone number was taken over by a phone-sex outfit.)

Most, perhaps all, U.S. kraft-pulp mills are receiving or have applied for alternative-fuel credits for using a mixture of black liquor and a bit of diesel to power the mills, according to Kevin Mason of Equity Research Associates. The credit is worth roughly $200 per ton of pulp, he estimates, which means the federal government could theoretically end up paying out $10 billion for these credits. The current market price for kraft pulp is about $600 per ton.

The credits come from 2005 transportation legislation intended to encourage the use of non-fossil fuels, but the effect for paper companies is just the opposite: For decades, kraft-pulp mills have been using black liquor, a pulp byproduct, for power, but they can only receive the fuel credits if they mix some fossil fuel into the black liquor.

The credits also give paper companies a perverse incentive to use kraft pulp instead of mechanical (groundwood) pulp. Mechanical pulp is usually considered environmentally preferable to kraft because it uses fewer trees and causes less pollution.

Kraft pulp is generally more expensive to make than mechanical pulp, which is one reason that freesheet papers command a price premium over papers containing mechanical pulp. But the fuel credits might actually make kraft pulp cheaper for many mills.

So why should such mills make 50# #4 coated groundwood when it would be more profitable to sell 50# #3 freesheet at #4 prices? And why should a company sell a groundwood-substitute at a discount to uncoated freesheet when it would be cheaper just to make the uncoated freesheet?

I don't blame U.S. paper companies, many of which have undergone massive downsizing, for taking advantage of a perfectly legal loophole that could bolster their anemic bottom lines.

But others will. And in an era when the general public mistakenly views digital content as being greener than paper-based content, that could end up being a huge public-relations nightmare for those of us who toil in the dead-tree world.


A.M. Mallett said...

There is a lot of buzz on this issue that is not substantiated. I do not know of any firm that is removing recycled fiber in order to add virgin furnish. I do not see pulp and kraft inventories increasing in order to get this credit. Where are the pundits getting their information? The Canadians are accusing US firms of depressing kraft and pulp prices but there does not seem to be anything to substantiate this.

Anonymous said...

I work at a mill that has a virgin and recycled fiber and we are using more recycled because the fiber is almost free and is cheaper than the virgin fiber with the credit. I don't know what mill would do the opposite with today's recovered fiber prices.

Anonymous said...

I work for a company in Canada that has already felt the sting of this "American ingenuity". It is disheartening and frusrating when just a few years ago the Americans were accusing us Canadians of being subsidized by the government. If this isn't the same thing, tell me how it differs?
Substantiated or not this is one of the items that will hurt all the good that we have been doing for the last 10 years cleaning up our act.
Thaks alot IP!!

Postcard Printing said...

This whole black liquor loophole is dangerous to let loose for long. Its damages to the ecological balance and all the previous efforts to limit virgin pulp usage will be wasted. Thanks for the update. We should all try to pass the word and to make it a real topic for government to act upon.

A.M. Mallett said...

It is not at all accurate to state that our Canadian neighbors have been hurt by this energy credit. To date, these credits are not affecting pricing, inventory levels or reclaimed fiber. I do not believe there is a single Canadian firm that can demonstrate they lost business on price due to these credits. If anything at all, the credits relieve pressure on price given inventory levels continue to remain level. What the credits accomplish is significant in that it infuses badly needed cash into an industry hard hit and in need of capital investment. Obviously, this is a short term stimulus but if it carries the well managed companies through this recession, then something good has come from it.
We are pouring billions if not trillions of dollars into intangible financial instruments. Perhaps the infusion of cash into hard, tangible assets that employ people is of greater worth.

Anonymous said...

This subsidy, as every subsidy, is very likely to imbalance the market. Something it really doesn't need now! Considering the level of the tax credit, it is very dubious that US companies will not sell at uncompetitive prices their pulp and paper products. Or at least constitute reserves of cash and wait for their Canadian and European counterparts to go for bankruptcy.
For the record, as announced by some major newspapers, the tax credit may represent as much as 50% of the current (and depressed) price per tonne for virgin pulp.
If that's not protectionism and unfair competition, what is it ??

Unknown said...

AM Mallet says "Canadian companies are not hurt by this credit" Are you for real? Do you appreciate that we all compete in the same world market, and a $200 credit per ton of $600 pulp SEVERLY distorts the market? How can it not? If GM suddenly gets a credit (not a loan) of $10,000 for every $30,000 vehicle they sell, do you think Ford would sit by and say, "Well, if they manage it well I guess it's OK". I doubt it! This is clearly a subsidy, and is illegal under WTO guidelines.