What's being called Son of Black Liquor dwarfs the original black-liquor loophole that created such a stir in Congress and among Canadian officials earlier this year.
Son of Black Liquor, officially known as cellulosic biofuel producer credits, could generate $50 billion in tax credits for U.S. kraft pulp mills before it expires at the end of 2012, Dead Tree Edition estimates. Tax expert Martin A. Sullivan, writing at Tax.com, more conservatively forecasts that "this credit will provide the paper industry with $25 billion of additional tax benefits that Congress never intended."
The program, part of the 2008 farm bill, was supposed to benefit "companies that use expensive, cutting-edge technologies to distill ethanol from plant materials instead of corn," Sullivan writes. "But these new technologies developed by fledgling companies will get peanuts compared to the windfall pulp manufacturers will get from the new credit."
Despite Congress' intent, the Internal Revenue Service released a memorandum in the past few days ruling that black liquor qualifies for cellulosic biofuel producer credits because the fuel is produced and used in the U.S. and is "derived from lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis." Black liquor is an energy-rich byproduct of the kraft pulping process and the main power source for pulp mills worldwide.
The memorandum says black liquor cannot be used for both the original black-liquor loophole -- the 50-cent-per-gallon alternative fuel mixture credit -- and the $1.01-per-gallon Son of Black Liquor credits. Though it is twice as generous, Son of Black Liquor is also harder to use because it is not refundable, notes Sullivan.
As an example of how easy it is to collect the original black-liquor credits from the IRS, International Paper is on track to earn nearly $2 billion in alternative fuel mixture credits this year from its kraft pulp mills. The company paid less than $200 million in U.S. income taxes last year and had less than $400 million in earnings during the first half of this year.
U.S. pulp producers, therefore, may continue milking the original black-liquor program until it expires at the end of this year and then switch to Son of Black Liquor next year.
Doing the Math: $25 Billion or $50 Billion
Here is Sullivan's math: A Congressional committee reported that the pulp industry received more than $2.5 billion in alternative fuel mixture credits during the first half of this year. With Son of Black Liquor being twice as generous and essentially lasting three years, that indicates it has a potential for $30 billion. But because the credits are not refundable, Sullivan figures companies will only be able to claim $25 billion in benefits.
Here is Dead Tree Edition's math: As explained in Black Liquor Credits Top $3 Billion So Far, U.S. companies probably earned more than $3 billion in black-liquor credits during the first half of this year (though some were not received until later). Because some companies were late to the black-liquor party, the credits in the second half seem likely to approach $4 billion.
As companies learn to take advantage of these credits, they are no doubt tweaking their operations to maximize their output of black liquor. A paper-industry insider tells me, for example, that a mill can create more black liquor and less (though brighter) pulp by "cooking" the wood fibers longer. So it seems likely that, with a payout double that of the original black-liquor loophole, Son of Black Liquor will be worth more than $8 billion in a six-month period, which equates to $50 billion over three years.
Although $50 billion may be greater than the taxable income of U.S. pulp-mill owners during the next three years, I have enough faith in the American accounting profession and consulting industry to believe that somehow the available credits will not be wasted.
For more information on black-liquor credits, please see:
- "Black Liquor" Credits Are Helping Paper Buyers
- Pulp Fiction: Eco-Credits for Black Liquor, which discusses how the supposedly "green" alternative fuel mixture program is discouraging the use of recycled pulp.
- 'Son of Black Liquor' subsidy poses new threat to Canadian forest sector, an excellent Vancouver Sun article about Canada's reaction to the new U.S. program.