In the past few months, black liquor subsidies to U.S. pulp mills have become a particularly contentious issue. Canadian pulp mills say their U.S. counterparts are receiving a tax credit that equates to an unfair competitive advantage.

The tax credit is actually intended to support development and use of alternative fuels. Because of the phrasing used in the legislation, U.S. mills that produce virgin pulp can qualify for USD 0.50 per gallon refundable tax credit if they mix a miniscule amount of diesel oil in with the black liquor they burn as fuel.

For some U.S. mills, the tax credit has provided a welcome economic stimulus during hard times. By one estimate, International Paper could receive nearly USD 1.3 billion during 2009, thanks to the tax credit. It has, however, allowed some U.S. newsprint producers to lower prices more than competing mills in other countries can afford to match. It also means that some U.S. mill employees are back on the job, while their counterparts in Canada are either idled or out of work. Domtar, for example, which has mills in Canada and the United States, has used the tax credit to reopen its pulp mill in Baileyville, Maine, while its pulp mill in Dryden, Ontario remains closed.

In the later part of May, the ambassadors from Brazil, Canada, Chile, and the European Commission sent a letter urging Congress “to take immediate action to end this unintended and distortive application of the tax credit.” They note that the tax credit is an actionable subsidy and that adverse effects caused by it “are subject to remedies in the [World Trade Organization] or through domestic countervailing duty investigations.”

The tax credit is scheduled to expire at the end of 2009. The Senate Finance Committee and House Ways and Means Committee have been discussing a proposal to more quickly exclude black liquor from being eligible for the tax credit. On 11 June, the Senate committee released a draft proposal that would close the loophole.

In the United States, the American Forest & Paper Association has been working with Congress to highlight how the industry produces renewable energy and supports America’s goal to achieve energy security and promote the use of clean burning fuels. According to AF&PA, “Revoking the forest products industry’s eligibility for the alternative fuel mixture tax credit before it expires later this year, despite the industry’s efforts to comply with the rules, could have serious consequences for our companies and our nearly one million employees at a time of unprecedented economic challenges.”

In Canada, forest industry executives and the Forest Products Association of Canada have been meeting with government ministers to promote an aid package for Canadian mills to help restore the competitive balance. In their view, however, the damage has been done, even with an early end to the loophole.