Unintended Consequence of an Energy Policy: Black Liquor, the Paper Industry’s Profitable Cocktail

"Black liquor"—waste, green biofuel, or cash crop? (image: chemrec.se)

The alternative fuel mixture credit was intended to spur development of new, cleaner, and greener energy sources by providing a tax credit for alternative fuels, including ones incorporating traditional fossil fuels into their mix. It was not intended to subsidize an activity the paper and forest products industry were doing anyway—but that’s become one of its main effects, to the tune of $6 billion dollars a year of tax credits. As National Public Radio reported, paper companies mix one-tenth of one percent of diesel into the “black liquor” left over from paper making and burn it to produce power for their plants. In the process, they receive a $0.50 per gallon tax credit.

What makes it especially jarring to many is that it has not reduced the paper industry’s use of fossil fuels or increased its use of renewable biofuel. The forest products industry has always burned their leftover sludge for power. And as the American Forest and Paper Association (AFPA) notes in a press release defending the credit, mills have typically mixed in fossil fuels, such as diesel, natural gas, or fuel oil, to light the boilers and regulate combustion. So while the tax credit has not increased use of fossil fuels or the industry’s carbon footprint, it hasn’t decreased them either. Instead, the industry has found a way to receive $6 billion dollars of taxpayer money for business as usual.

Just how big is usage of black liquor, anyway? Besides the $6 billion size of the tax credit—which certainly indicates we’re talking “big” here—according to the AFPA, using black liquor, the forest products industry generates 28.5 million megawatts of energy per year, or enough for 2.7 million homes. That’s enough energy to meet two-thirds of the industry’s total energy demands, and is more power than is currently produced from all U.S. solar, wind, and geothermal sources combined. And even though you probably never heard of it before, it’s also one of the nation’s largest energy sources—the fifth largest, by some estimates.

An industriual boiler powered by black liquor. (image: resurgent.in)

Energy from black liquor is also renewable energy, since it’s produced mostly from wood pulp and paper, and it’s more-or-less carbon neutral in the same way that other biofuels are—the carbon released from burning should be approximately offset by the carbon captured by the new trees that the industry plants to sustain their resource base.

There’s another factor to consider in the scope of black liquor usage and the stakes involved in this tax credit: jobs. Like pretty much every other industry, papermaking has suffered in the recession, sometimes in unexpected ways—a Maine company that makes paper for napkins and paper towels has seen their revenues decline as less people travel and eat out. Overall, the demand for paper is down 20 to 30 percent according to industry sources, with 1,000 papermakers being laid off in Maine alone in 2008. As Maine Senator Olympia Snow noted, the forest products industry employs over 1 million Americans. As she puts it, if a $6 billion tax credit can save jobs in that industry, isn’t that a bargain compared to a $787 billion stimulus intended to save or create 3.5 million jobs?

The tax credit will expire this year. Senators and Representatives from paper making states want to renew it, citing jobs and the economic impact—which may be good arguments, but which are a far cry from the credit’s purpose. If you trace out the evolution of the issue, you’ll see that what was intended to spur green and/or clean fuels has been redefined as job-creating stimulus or bailout for a major industry—a stimulus or bailout that has in no way altered the industry’s fuel usage or carbon footprint.

There’s nothing at all illegal about the forest product industry’s use of this credit: they are in all ways complying with the law. In that important sense, what the industry is doing is as appropriate as a homeowner deducting her mortgage interest payments, or a business owner taking a deduction for equipment depreciation. It’s also just as predictable as those examples, or as any other case of a person, company, or industry taking advantage of government largess, be it an agribusiness accepting farm subsidies or, as was recently the case, auto manufacturers selling gas-guzzling SUVs because of the way fleet fuel economy regulations were written.

People act in their own self-interest—that’s the whole intellectual and philosophical basis of the free market. It should be taken as a given that people will look for how they can legally benefit from policy or tax changes, even if they were not the intended beneficiary. This in turn should give our elected representatives pause when seeking to influence behavior with taxes and incentives, including energy taxes and incentives. They need to proceed cautiously, especially when large amounts of money are at stake, because the only consequence you can always count on is the unintended one.