Displaying items by tag: Black Liquor

County delegate says he won’t back bill to halt paper mill energy credits

Despite pressure from a local global-warming group, Del. Galen Clagett of Frederick said he has no intention of changing his vote on a bill to stop financial rewards for paper mills that burn a tar-like substance called “black liquor” to generate power.

The Chesapeake Climate Action Network is working feverishly to convince Clagett (D-Dist. 3A) to change his vote before the Maryland General Assembly adjourns its legislative session Monday night.

“There is still time for him to change his mind,” said James McGarry, the network’s policy analyst, at a news conference Wednesday afternoon in Frederick. “I hope he will change his mind.”

Network members, Frederick business owners and students conducted a news conference at Cafe Nola in hopes of convincing Clagett to change his vote. The group targeted him because they said early on he had indicated to them that he would support the bill.

But Clagett said in a phone message Wednesday night that he has no intention of changing his vote because he fears that the end of the subsidies could mean the loss of 870 jobs at the Luke Mill Coal Power Plant, the state’s only paper mill in Allegany County.

“I’m not sure this is the best way to go,” he said. “I have some problems, and I’ve chosen to go by the way of saving jobs. We’ve lost a lot of jobs in this state, especially in Western Maryland. And there is only one of these plants in the whole state.”

Currently, paper mills receive millions of dollars annually in electric ratepayer subsidies to burn black liquor — a tarry byproduct of the paper-making process.

Environmentalists argue that burning black liquor is a pollutant, and instead the subsidies should go to new wind and solar projects.

On March 28, the Maryland Senate agreed and passed SB684, that within five years would end the subsidies paper mills receive.

But when a version of the bill — HB1102 — came before the House Economic Matters Committee the next day, Clagett voted in opposition, which stopped the bill from moving out of committee and onto the House.

Seven business owners in Frederick also have sent a letter to Clagett saying they were “disappointed” with his vote.

“I’m disappointed by Delegate Clagett’s vote, but it’s not too late for him to do right by local businesses and our environment,” Matt Triche, general manager of Cafe Nola, a downtown restaurant that is powered by green energy, said in the letter. “I want the subsidy we pay on our electric bill each month to support new clean energy and jobs here in Maryland. That’s only fair for ratepayers and good for business.”

By redirecting the subsidies to wind power clean energy projects, up to 1,400 megawatts of new clean energy would be produced, and an estimated 1,800 new jobs would be created in Maryland, the letter states.

Under Maryland’s Renewable Energy Portfolio Standard laws is a requirement that renewable sources generate a specific percentage of the state’s electricity supply each year, increasing to 20 percent, including 2 percent for solar power, by 2022, according to the Maryland Department of Legislative Services.

Six months after questioning whether it would benefit from "Son of Black Liquor", International Paper announced Thursday it got $40 million of the bogus eco-fuel tax credits.

The giant papermaker received the Cellulosic Biofuel Producer Credits in the 4th Quarter of 2010 for burning black liquor, a pulp byproduct, to power its pulp mills in 2009. As with the original black liquor credits -- the Alternative Fuel Mixture Credits program that gave more than $2 billion in taxpayers' money to IP during 2009 -- CBPC (Son of Black Liquor) was intended to spur development of new bio-fuels but mostly rewarded pulp mills for doing what they would have done anyway.

The Son of Black Liquor credits IP claimed were "just the benefit on black liquor gallons that we ran in 2009 but did not mix" with diesel fuel, Timothy Nicholls, the company's CFO, said Thursday during a conference call with stock analysts. Black liquor had to be mixed with diesel to qualify for the original black liquor credits but not for Son of Black Liquor.

"IP cannot quantify the value of additional CBPC because it depends on future taxable earnings, but it could be significant," a company presentation said.

Less than a year ago, IP was apparently not bothering to seek CBPC money because it believed -- as did Dead Tree Edition -- that black liquor would not qualify. And even after an odd IRS ruling that opened the door, Nicholls told analysts this past summer "We don't see a huge benefit for the company."

Even now, Nicholls is unsure about the future benefits from Son of Black Liquor. IP would have to return some of the AFMC money to receive the more lucrative CBPC credits. Though it's been more than a year since pulp mills could earn credits under either program, the tax status of the AFM money is still unclear.

"There's some reason to believe that the proper conclusion maybe non-taxable," Nichols said. "If we come to that conclusion, then economically it just doesn't make sense to refund or payback the credit that we've already received and apply for the CB credit."

Rock-Tenn sees things differently. The packaging manufacturer's most recent annual report says AFMC "is not taxable for federal or state income tax purposes." But it estimates it will eventually net $112 million by paying back the original black liquor credits to get the more lucrative Son of Black Liquor money.

Packaging Corporation of America, which has about one-eighth of IP's pulp capacity, recorded $135.5 million in Son of Black Liquor credits last year.

That's news to Congress' Joint Committee on Taxation, which in December estimated that the government's cost for all "credits for alcohol fuels", including CBPC, for fiscal years 2010-2014 would only be $100 million.

The cost of "green" energy subsidies involving the pulp and paper industry shot well past $30 billion today -- with not a cent of it doing anything to help the environment.

President Obama today signed the Small Business Jobs Act of 2010, a package of goodies that is supposedly deficit neutral partly because of nearly $1.9 billion in "savings" from closing the non-existent "Grandson of Black Liquor" loophole. The alleged savings come from making crude tall oil, a highly corrosive pulp byproduct, ineligible for Cellulosic Biofuel Producer credits, which are intended for alternative motor fuels.

Because crude tall oil has never qualified for such credits and by all rights never could have, the law's provision is just a Congressional ruse to add to the federal deficit while pretending not to do so.

The idea of using pulp byproducts to fleece taxpayers first came to light early last year when some paper companies revealed they had hijacked another biofuel program. Alternative Fuel Mixture Credits were supposed to encourage greater use of biofuels, but the paper companies snagged billions in such credits for burning black liquor as a fuel source, which they had been doing for decades anyway.

Despite howls of protest from Congressional leaders, Congress did nothing to plug this loophole and simply let the law expire at the end of 2009. Aided by friendly rulings from the IRS, publicly traded pulp manufacturers received well over $6 billion in black liquor tax credits, and privately held companies probably received a couple of billion more.

A good whipping boy
But Congress didn't completely ignore the black liquor tax credits. Smart politicians know a good whipping boy when they see one, especially when they can whip up money for pet programs.

Riding public disgust with the original black liquor tax credits, Congressional Democrats proposed closing the "Son of Black Liquor" loophole. That is, they made black liquor ineligible for CBP credits starting this year. Never mind that even pulp makers didn't think black liquor would qualify for the credits.

A compliant Joint Committee on Taxation said that closing the non-existent loophole would save a bit more than $23 billion, and Congress then applied the "savings" toward "paying for" ObamaCare this past spring. The watchdogs of the press mostly chewed on and regurgitated Congressional press releases touting the resulting savings that supposedly helped make ObamaCare deficit-neutral.

The IRS got back into the act this summer with an odd ruling that made black liquor burned prior to this year eligible for CBP credits. It has already approved two pulp manufacturers for the credits, while others that have lined up at the trough are awaiting word on their applications. Preliminary indications are that the net value of the credits to paper companies will be "only" in the hundreds of millions -- unless Congressional bill writers decide to close this latest loophole and use the savings for another new project.

So let's recap the tab -- probably $8 billion-plus for the original black liquor credits (the only money in this story that actually went to the paper industry), $23.6 billion for Son of Black Liquor in ObamaCare, untold millions for pre-2010 Son of Black Liquor, and nearly $1.9 billion for Grandson of Black Liquor.

So when your daughter or granddaughter asks you in a few years why the U.S. didn't do more to wean itself from dirty energy sources and foreign oil imports, just tell her we were too busy adding to the federal deficit while pretending to be fiscally responsible.

The United Steelworkers, which vociferously supported black liquor tax credits for U.S. pulp mills, suddenly seems to have decided that renewable-energy subsidies are not such a good idea.

In a case of One Person's (or Country's) Jobs and Energy Program Is Another's Unfair Subsidy, the union filed a complaint this week accusing China of "protectionist and predatory practices . . . to develop their green sector at the expense of production and job creation here in the U.S."

It was only last year that Canada and other countries accused the U.S. of violating free-trade rules by allowing pulp mills to hijack a renewable-energy program and get government subsidies for using black liquor, a pulp byproduct, as fuel. And it was only last year that the Steelworkers, the major union for U.S. pulp and paper industry workers, defended those black liquor tax credits for "saving thousands of Steelworker and other jobs.”

"The tax credit has turned out to be good for both jobs and for America's energy future," one Steelworkers leader said at the time.

Despite some politicians' criticism of the tax credits during the spring of 2009, Congress' failure to close the loophole enabled publicly traded pulp manufacturers to reap about $6.6 billion in federal money last year. A Steelworkers publication says privately held Georgia Pacific received an additional $5 billion in black liquor credits.

The “Son of Black Liquor” tax credits will probably cost American taxpayers hundreds of millions, if not billions, of additional dollars, but Congress might grab the money without paper manufacturers getting a dime.

Seven publicly traded paper companies have estimated that they will net about $570 million from the IRS’ recent ruling that made black liquor eligible for Cellulosic Biofuel Producer credits (CBPC), reports the Press-Register of Mobile, Alabama. Leading the way are Weyerhaeuser with $240 million (pre-tax) and Domtar with $200 million.

The other 14 publicly traded producers of black liquor, including the largest (International Paper), have not released such projections, partly because of uncertainty about exactly what the June 28 ruling means. (See Pulp Manufacturers Scratching Their Heads Over Son of Black Liquor Ruling for more information about these uncertainties.)

Meanwhile, the IRS’ “generosity” toward companies that produce, and burn, black liquor as part of their pulp-making operations has caught the eye of Congress, writes Jeremiah Coder for Tax Analysts. “The agency’s administrative largesse appears to be prompting members of Congress to consider legislation to retroactively disallow biofuel credits for black liquor claims.”

Sen. Charles Grassley of Iowa, the ranking Republican of Iowa, has asked the Joint Committee on Taxation for a “revenue estimate” on such a move, Coder reports. That is significant in at least three ways:

1) JCT’s estimate of revenue (actually, avoided costs) from overturning the IRS ruling is “likely to immediately become an attractive add-on to any legislation in need of pay-fors,” Coder writes. In other words, Congress could use the savings to pay for a new program and claim that it is not increasing the federal deficit (though it would be, because no money has been budgeted to subsidize the use of black liquor).

2) The JCT blew a previous estimate regarding Son of Black Liquor, saying that disallowing CBPC credits for black liquor from 2010 forward would save only about $25 billion when it could have set the number at $50 billion or more. (See How Google Could Help the Democrats By Buying a Pulp Mill and Black Liquor Bonanza: Earnings Exceeding Projections of Experts and Congress for details.) Congress certainly won’t be happy if the JCT low-balls this opportunity to create some funny money, this time by blocking the issuance of CBPC credits for black liquor used in 2009.

3) To back up its calculation, the JCT may reveal how much was paid out to paper companies from the original black liquor tax credit program. The 21 publicly traded companies reported receiving $6.5 billion from that program, but some big pulp makers like Georgia Pacific are privately held and therefore do not have to real what they received.

The JCT will also need to take a stab at some questions that are bedeviling the pulp makers about how to interpret the IRS ruling. Here’s a look at recent statements from some of the companies about those questions and how Son of Black Liquor might affect them:

• Weyerhaeuser (CFO Patricia Bedient): “During the first part of 2009, we produced approximately 238 million gallons of black liquor, which did not qualify for the alternative fuel mixture credit. This equals $240 million of potential cellulosic biofuel credit at $1.01 per gallon, or $149 million net of tax. Since this credit offsets income tax liability, we could only carry the credit forward. It is still unclear whether the credit can be claimed in the same year as the alternative fuel mixture credit [the original black liquor tax credit]. For the last three quarters of 2009, we claimed $344 million of fuel mixture credit. There's a great deal of uncertainty as to the process for claiming these credits and we are evaluating both credits to determine which credit or mix of credits, if allowed, would add the most value to the company.”
• Domtar: "From January 1, 2009 until we started to claim the Alternative Fuel Tax Credits, we have approximately 200 million gallons of black liquor that may qualify for this CBPC that would represent approximately $200 million of CBPC or approximately $120 million of after tax benefit to the Corporation. In July 2010, we submitted an application with the IRS to be registered for the CBPC. There is, however, a degree of uncertainty related to this credit as we have not received our registration for the credit and we believe there is some lack of clarity with the application of the IRS rules. As such, during the period ended June 30, 2010, we have not recorded any impact related to the CBPC."
• Graphic Packaging Corp. (CFO Dan Blount): “It appears that some in the industry are considering the cellulosic biofuel credit path. We have evaluated this approach. And given our large NOL [net operating loss] position and the fact that the cellulosic biofuel credit can only be used to offset federal income taxes payable, we will not be pursuing this option.”
• Smurfit-Stone (which recently emerged from bankruptcy protection): “Cellulosic biofuel producer credits unlikely to be utilized/relevant.”
• Kapstone Paper & Packaging: "In December 2009, the Company filed its registration as a cellulosic biofuel producer for the year 2009 and is awaiting approval. ..The IRS is expected to provide guidance for converting AFTC’s to cellulosic credits for qualifying producers. … At this time, the Company estimates a $22 million potential future after-tax credit for CBTC relating to black liquor burned in 2009 prior to the Company’s AFTC registrations being approved. If the Company were to receive any tax credits related to cellulosic biofuel it would be realized by reducing income tax payable beginning in late 2010."
• Packaging Corp. of America: "As a result of the IRS guidance, PCA has filed an application to receive the required registration code to claim the cellulosic biofuel producer credit. We expect this registration to be received during the third quarter. PCA has not yet filed a claim for any black liquor credits earned in 2009, since our tax -- 2009 tax return is not due until September 15, 2010. Once the cellulosic biofuel registration is received, PCA can claim the cellulosic biofuel producer credit of $1.01 per gallon instead of the alternative fuel mixture credit of $0.50 per gallon. This would increase our total 2008 and 2009 tax credits to about $370 million or $230 million after-tax, compared to alternative fuel mixture credits of $195 million or a $45 million increase."

U.S. pulp makers are still trying to figure out exactly what the IRS’ recent “Son of Black Liquor” ruling means, but the largest one said yesterday it sees little if any gain.

“We don’t see a huge benefit for the company,” said Timothy Nicholls, CFO of International Paper, during the company’s quarterly earnings call. “When you layer in the consideration that we would have to return the credits that we filed for last year under the alternative fuel mixture tax credits [the original black liquor tax credits] and then accrue those benefits over some period of time, we don't see the rationale for making any kind of change from what we've previously done at this point.”

Others were a bit more optimistic but still uncertain about exactly how to interpret the ruling that became public earlier this month.

Here’s the explanation presented this week by Temple-Inland’s CFO, Randy Levy, during that company’s earnings call:

“We expect to be registered as a cellulosic biofuel producer during the third quarter. We have received $228 million in cash from alternative fuel mixture tax credits for the period from late March 2009 to year-end 2009.

“We may have the potential to ultimately receive up to an additional $130 million to $140 million of after-tax credits by selecting the cellulosic biofuel producer [Son of Black Liquor] credit, about $80 million to $85 million of which is attributable to the January 1 through late March period when we were not yet mixing and about $50 million to $55 million for the incremental credit between the alternative fuel mixture credit and the cellulosic biofuel credit for the balance of the year.

“However, in order to convert from the alternative fuel mixture tax credit to the cellulosic biofuel credits the cash we previously received would have to be returned plus interest. A key piece of information for us that is currently not available is whether both credits may be claimed in the same year on different volumes. Our objective is to maximize the present value of these credits. There is still a lot of uncertainty surrounding this issue.”

The biggest uncertainty is the process for obtaining the Son of Black Liquor credits, writes Robert Tita of Dow Jones Newswires. “The IRS says companies that received 50-cent credits can't collect a second, higher credit on the same black liquor. Companies, however, could return the money from the 50-cent credit and apply for the $1.01 credit instead.” However, he notes, “the $1.01 credit would be applied as a noncash offset to companies' cash expenses for federal income taxes. The 50-cent credits were distributed as cash subsidies.”

“Given the complexities of acquiring the larger credit, companies could conclude that the reward isn't worth the effort," Tita adds. "Pursuing the higher credit also could expose paper companies to further outrage from members of Congress who remain angry over the paper industry's use of a regulatory loophole to obtain the 50-cent credit.”

Congressional outrage didn’t carry much weight or have much impact on the paper industry last year. Various members of Congress expressed outrage in the spring of 2009 when they learned that U.S. paper companies makers were receiving tax credits for doing what manufacturers of kraft pulp around the world had been doing for decades – burning black liquor to power their mills. But Congress did nothing to close the loophole before the law expired on Dec. 31, enabling pulp and paper companies to rack up more than $8 billion in direct federal subsidies.

In fact, the IRS’ logic-defying June 28 ruling looks like a gift to Congress. The relevant law requires that a qualifying cellulosic biofuel “meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency”. Normal people, and many pulp manufacturers, interpreted that to mean that a biofuel must be registered by the EPA to receive the credits and that black liquor is therefore excluded because it can’t be used as a motor fuel.

But the IRS ruling exempts black liquor from the EPA requirement specifically because it is not a motor fuel or fuel additive. (That makes me wonder what would happen if someone, perhaps a Canadian pulp manufacturer, tried to register black liquor as a motor fuel. Would the EPA’s rejection close the Son of Black Liquor loophole?)

Congress’ “pay-for” rules (that is, new programs must be paid for with offsetting cost savings or revenue gains) have led to some odd accounting methods – “odd” as in “If you, private citizen, used this kind of accounting, you’d end up in the slammer.” The ObamaCare health law includes $23 billion in “savings” from declaring black liquor ineligible for cellulosic biofuel credits starting on Jan. 1, 2010, even though no money had ever been budgeted for that alleged expense in the first place.

So how long will it take some enterprising Congressman to propose "paying for" a new multibillion-dollar program by changing that date to Jan. 1, 2009?