Black Liquor – Green Fuel or Greenwash? 



August 13, 2009 - (Lang Michener Environment, Energy & Emissions Trading Brief Summer 2009 & Environmental LAW360)

Lang Michener Environment, Energy & Emissions Trading Brief Summer 2009 & Environmental LAW360

Black liquor is not the product of a pot still in rural Tennessee, but a toxic by-product of the kraft wood pulping process. On May 20, 2009 Canada, together with the European Union, Brazil and Chile, wrote to the United States Congress urging them to repeal a tax credit for the use of black liquor as a biofuel on the basis that the credit is acting as a subsidy on the production of kraft pulp contrary to World Trade Organization ("WTO") rules.

This is the latest example of a tax credit program presented as an environmental initiative which, on closer examination, proves to have little beneficial effect on the environment but does provide a significant subsidy to a particular sector of the economy. The practice of presenting an activity as environmentally friendly when its primary aim is to secure some economic advantage has come to be known as "greenwashing."

In the kraft pulp process, chemicals are used to digest the wood fibres into pulp, and extract a chemical called lignin, which is a complex natural polymer of phenylpropane. While efforts have been made to find some industrial use for lignin, for years kraft papermakers have found it most efficient to use the lignin containing black liquor as a fuel to fire a boiler for making process steam and hot water. In this way a toxic by-product was used as a "free" fuel, thus saving the pulp producer the cost of buying oil to fire the boiler. When Congress passed a statute to provide a tax credit for biofuels, it was quickly realized that black liquor was much more valuable as a biofuel. The credit was so generous (estimates of the amount that U.S. pulp producers will receive vary from $6 billion to as high as $10 billion) that pulp producers quickly stopped burning their black liquor, instead mixing it with some diesel oil and selling it as biofuel. Of course, the pulp producers still needed to fire their boilers, and have had to purchase fossil fuels to replace the subsidized black liquor that they were selling. The distortion caused by the tax credit has had the effect of making kraft pulp a by-product of the black liquor production process instead of the other way around. Between the extra production of cheap pulp and the general lack of demand due to the current economic turmoil, the impact on Canadian and other pulp producers has been devastating.

Under WTO rules, the tax credit is a prohibited subsidy contrary to the WTO Agreement on Subsidies and Countervailing Measures and it is distorting trade. The entitlement to claim tax credits provides U.S. pulp companies with an incentive to (1) over produce and (2) sell the pulp at lower prices because they may recover part of the money in the form of the tax credits. However, Canadian pulp producers cannot sue the U.S. at the WTO. Rather, the Canadian government would pursue the legal remedy with the assistance of Canadian pulp producers as advisors. In addition, Canadian producers of pulp or other by-products of the kraft pulping process, which are experiencing price depression, may be entitled to bring a countervailing duty trade remedy case under Canada's domestic laws. In order to be successful, the group filing a trade remedy case must (1) represent a proportion of Canada's domestic production, (2) demonstrate that the U.S. tax credit is a subsidy and (3) prove that the subsidization has caused, is causing or threatens to cause injury to the Canadian producers.

Whether this subsidy was intended as such, or was merely the unintended consequence of poorly conceived policy doesn't much matter. The adverse effect on the environment and the markets is the same. The problem is that if the public lose confidence in the good faith and competence of those devising and implementing policy and those taking advantage of massive incentive programs presented as eco-friendly, its support will evaporate. The public, particularly in the United States, have been asked to support governments as they provide vast amounts of public money to bail out private businesses who bet the farm and lost on the basis that the failure of such firms would harm the public more than the cost of such bailouts. The public mood is already becoming more hostile, as those who have taken bonuses for the loss of billions have seen.

A properly configured program to encourage truly advantageous environmental goals is worth pursuing. However, before any tax credit or the like is approved, the activity in question should be required to meet the following minimum criteria:

1. The new product or process uses less energy from the start of production (including any agricultural activities) to final consumption than the product or process it replaces. The amount of any credit would be proportional to the energy savings.

2. The new product or process produces fewer emissions from the start of production (including any agricultural activities) to final consumption than the product or process it replaces. The amount of any credit would be proportional to the emission savings. This will be more difficult to implement than credits proportional to energy savings. While energy has a common unit of measure, all emissions are not the same. While we can all agree that emissions of carbon dioxide (CO2) are undesirable, a process that reduced such emissions by converting the carbon dioxide to cyanide (CN) would be even less desirable.

As Canada and Ontario move to implement environmental programs, businesses will have to be alert to how such programs will change the rules of the game. For instance, Bill 185 to provide a system of greenhouse gas emissions trading introduced by the Ontario government on May 27, 2009 does not lay out the new rules – it simply provides a framework for making those new rules. While rule changes, such as greenhouse gas trading rules are unsettling, they also create opportunities. Businesses that first identify those opportunities will have a significant advantage over their competitors.