The grand vin of Canada-U.S. free trade is hard to swallow these days because it has been mixed up with a shooter that is priced in half gallons and appropriately named “black liquor.”
The black liquor raising U.S. spirits and leaving us with a hangover is a concentrated residue of wood lignin that is a byproduct of making kraft pulp. The “liquor” is separated out in a recovery boiler and then used as fuel to keep the boiler going.
Now, some enterprising American pulp and paper producers have implemented a spectacularly fraudulent scheme to generate billions dollars in tax credits from their black liquor use. It is a massive subsidy which directly imperils Canadian pulp and paper mills and thousands of jobs.
Aggressive Canadian response?
Trade Minister Stockwell Day and his legion of free trade advocates at Canada’s Department of Foreign Affairs and International Trade have no idea what to do. They have launched “an aggressive diplomatic offensive” in Washington to convince Americans that they should cancel the billions of dollars in tax credits that is being paid to the U.S. pulp and paper industry. However the Conservatives have so far apparently convinced themselves that there is little or nothing they can do in this country to provide Canadian producers similar advantages.
The tax credits are part of U.S. incentives to encourage the use of alternative fuels. One of the incentives is a tax credit to provide $.50 per gallon tax credit for an alternative fuel when it is mixed with gasoline, diesel or kerosene. The idea was to promote liquid natural gas, hydrogen or ethanol and reduce the use of the taxable fossil fuels.
But last year, the American pulp and paper industry began to inject diesel fuel into their boilers mixed with black liquor and then applied for tax credits for using black liquor with the claim that it is an alternative fuel. It doesn’t matter that the recovery boilers don’t typically use fossil fuels and that this mixture actually increases their use; just hook up a hose with diesel, mix it one part diesel with 9 parts black liquor and send the U.S. government a bill for $.50 per gallon of the black liquor.
Subsidies in the billions
In March, the largest U.S. forest company, International Paper, received a cheque for $71 million from the U.S. government. It is a down payment on the $1 billion that financial analysts Goldman Sachs projects that this company alone will collect in 2009. The potential total subsidy has been estimated at about $6 billion in 2009.
The fraudulent character of the tax scam is matched only by the colossally bad policy and economic distortion that it brings to the pulp and paper industry. Only a portion of the industry has “kraft mills” and recovery boilers. Most newsprint mills and many other paper mills either buy kraft pulp or use a different process to make pulp that does not produce black liquor. In other words, part of the industry gets a massive subsidy while the rest gets nothing.
The Canadian industry became aware of the tax credit in early March when they learned that the American Forest and Paper Association was assisting every U.S. kraft pulp producer to register with the tax department and be eligible for the payments. Over the past three weeks the Canadian industry quickly formed a committee, put together fact sheets and letters and has contacted Canadian federal government officials to express their concern and ask for help.
Tons of U.S. profits could mean Canadian job losses
The current price for a metric ton of softwood kraft pulp is currently around US $570 while hardwood kraft sells for about US $485. At these prices, Canadian producers are only barely breaking even, and many are losing money. It is estimated that the U.S. black liquor subsidy is worth up to $300 per ton, meaning the U.S. producers will be making lots of money.
There are reports that International Paper is selling kraft pulp at US$255 per ton. With that kind of advantage for US producers, Canadian pulp producers are screwed. A similar story, slightly less dramatic, will apply to the rest of the paper industry. Industry sources say the impacts are already being felt in export markets. It won’t take long before it results in closures of Canadian mills and job losses in the thousands.
Meanwhile, Day has told the industry that his people are “in hot diplomatic pursuit” of the issue in Washington but have not come up with any ideas of how to level the playing field with a Canadian program that would “level the playing field.”
This brings us back to the DFAIT drinking club which has already been advising industry leaders and politicians that any measures that assist our integrated forest producers would violate the Softwood Lumber Agreement (SLA).
The SLA has a section which says that a grant or program that assists an exporter is considered to reduce or offset the provisions in the deal that limit our exports, and are therefore prohibited. This provision was happily entered into by our neo-Liberal trade negotiators and ever since, especially through the last two years of deep economic crisis in the forest industry and the loss of about 40,000 jobs, it has been the standard federal government excuse for doing nothing. Of course, you don’t have to be a neo-liberal trade negotiator to figure out that pulp is not lumber and that the U.S. will have difficulty taking action against Canada for doing the same as it does.
When pressed on the matter, the Conservatives fall back to the real issue — the cost of a similar Canadian program would be in the billions. In fact, first estimates are that if the same tax credits applied in Canada it would be worth $2 billion per year for our pulp and paper producers.
All signs so far indicate that the Conservatives have no intention of ordering up that kind of a Canadian program. What then will they do, when the leaders of the free (trade) world are subsidizing their industries by the billions and the survival of Canadian industries are threatened? At Stockwell Day’s DFAIT, it’s time for another drink.
Fred Wilson is the Assistant to the President of the Communications, Energy and Paperworkers Union.