Will the EPA Stop 'Son of Black Liquor'?

Though the Canadian forest-products industry has gone apoplectic and stock traders have gone ape about "Son of Black Liquor" tax credits, there are growing doubts about the new tax loophole's prospects.

The doubts center around whether the Environmental Protection Agency will classify black liquor, a byproduct of the kraft-pulping process, as a fuel.

An Internal Revenue Service ruling that was released last week seemed to clear the way for U.S. producers of black liquor to claim cellulosic biofuel producer credits. As discussed in Son of Black Liquor: A $50 Billion Loophole for the U.S. Pulp and Paper Industry, the resulting loophole potentially dwarfs the controversial black-liquor credits that are enriching U.S. pulp and paper companies this year.

But the law that created the cellulosic biofuel producer credits also says that a qualifying biofuel must meet "the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act." Black liquor is not an EPA-approved fuel, and the EPA has no process for registering non-transportation fuels like black liquor, CongressDaily.com reported today.

Still, nothing in the Clean Air Act seems to prohibit the registration of non-transportation fuels. The act gives the EPA Administrator control over whether a fuel is registered, mostly on the basis of whether its emissions are harmful to public health.

EPA's process for deciding whether a fuel can be registered includes testing in a motor vehicle, a report from Morningstar stated yesterday. "Given the tarlike consistency of black liquor, it's doubtful any engine would survive such an ordeal," it said.

But Canadian pulp producers aren't ready to breathe a sigh of relief that Son of Black Liquor is dead, the Vancouver Sun reported today. They say the U.S. is raising the stakes in the subsidy game and that Canada must either respond or watch its pulp and paper industry die.

For more on the original black-liquor subsidy, please see:

• Boozing It Up on Black Liquor: One Company's High Is Another's Hangover 
• Paper Companies Getting Liquored Up  
• Black Liquor Credits Top $3 Billion So Far