US cellulosic biofuel tax credit may open up to paper industry

By James McLaren, Senior Editor, PPI Pulp & Paper Week, RISI

SAN FRANCISCO, Oct. 20, 2009 (RISI) - In addition to potential federal incentives to pulp and paper mills for use of biomass for energy next year, a greater windfall could be available to the industry for continued black liquor combustion tax benefits under a federal cellulosic biofuel producer credit.

The new credit would basically double this year's alternative fuel mixture credit of $0.50/gal of black liquor and extend it through 2012.

Details of both new programs are yet to be finalized and it is unclear if pulp mills will fully qualify for funding, sources said.

A potential $4 billion could be available to the paper industry under the US Farm Service Agency's (FSA) Biomass Crop Assistance Program (BCAP), intended for biomass material suppliers such as timberland owners. Eighteen pulp mills have been approved under BCAP so far, and applications were pouring into the FSA to join the program.

The larger black liquor tax credit was floated in a June memo by the Internal Revenue Service, released last week, that said mills that qualified for using black liquor as an alternative fuel this year could become eligible for the cellulosic biofuel producer credit in 2010-2012. The $1.01/gal credit is non-refundable, so a producer must have a tax liability to benefit, something one source noted is a challenge in the current economic downturn. The current black liquor credit is refundable.

Early estimates valued the new black liquor credit at $25 billion, assuming many producers would not qualify for the full payout.

As the current $7 billion alternative fuel credit to kraft pulp producers expires this year, mills could shift into the biofuel producer program, if approved by the Environmental Protection Agency, which currently lacks guidelines on the matter, a knowledgeable source told PPI Pulp & Paper Week.

Given political opposition to this year's credit, sources believe there will be greater efforts to derail the new program, although perhaps not until later in 2010 if not 2011. Most analysts seemed to not factor in the benefit to companies until more information is known.

Critics point out again that the benefit was not intended for kraft pulp mills and disadvantages recycled paper mills. The larger US subsidy could also make a bigger impact on global trade and especially hurt the Canadian industry, which ramped up its own C$1 billion black liquor funding program to compete with the US program this year. There are continued concerns the new program would prevent needed mill closures and cause overproduction.

"This is all too early," said an industry contact about the rampant speculation over the new energy tax credit. "EPA has yet to approve this."