Tuesday, March 8, 2011

Cost of New Black Liquor Boondoggle Reaches $1.1 Billion

The cost of the "Son of Black Liquor" giveaway to U.S. pulp and paper companies officially passed $1 billion last week and could eventually grow much larger.

A dozen publicly traded pulp manufacturers recently reported actual or expected federal Cellulosic Biofuel Producer Credits (CBPC) totaling $1.1 billion in their annual and quarterly reports.

That number includes only $65 million, so far, for #1 pulp manufacturer International Paper and nothing from #2 Georgia Pacific, which is privately held. Both giants seem likely to join or surpass Packaging Corp. of America, Weyerhaeuser, and Domtar, each of which recorded or expects to record more than $200 million (pretax) in CBPCs.

CBPC is supposed to subsidize the production of environmentally friendly biofuels, but in the case of pulp manufacturers it’s a pure giveaway of taxpayer money. The credits are being shelled out to the manufacturers for burning black liquor as a power source, a standard industry practice, in 2009, but the manufacturers didn’t even know they would qualify for the credits until 2010.

IP recorded 2010 tax credits on less than 2% of the black liquor it burned in 2009. That was the portion that it did not mix with diesel fuel to take advantage of the original black liquor tax credits, which exploited a loophole in the federal Alternative Fuel Mixture (AFM) program.

IP has not decided whether to repay any of its $2.1 billion in AFM credits to get the more lucrative, but taxable, CBPC funds. But its 2010 annual report says it might end up switching some or all of its AFM credits for CBPC. That would be worth up to another $2.1 billion pretax and probably at least $400 million after taxes.

PCA leads in Son of Black Liquor credits so far, partly from paying back AFM credits to get $146 million ($33 million net gain) in CBPC, plus another $107 million for the “proprietary biofuel process” at its Filer City, Michigan mill. It estimates it has another $200 million in CBPC available to offset future income taxes until the credits expire in 2015.

Rock-Tenn plans to trade its AFM credits for CBPC over the course of several years, resulting in an estimated pre-tax gain of $112 million. Pulp makers that have claimed or estimated less than $100 million from Son of Black Liquor are Temple-Inland, Clearwater Paper, Wausau, Rayonier, Buckeye Technologies, Kapstone Paper and Packaging, and Mead Westvaco.

Nine companies that benefited from the original (AFM) black liquor credits have not claimed or estimated Son of Black Liquor handouts – AbitibiBowater, Appleton, Boise, Graphic Packaging, Glatfelter, NewPage, SAPPI, Smurfit-Stone Container, and Verso. Several of these companies are unlikely to benefit because of their history of unprofitability; CBPC can only be used to offset income taxes.

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