When US lawmakers unveiled the new Highway Act of 2005, they likely weren’t aiming to ignite a global trade dispute in the forest products sector. The Act was allegedly designed to increase the alternative and renewable fuel mixtures powering the transportation of America. The legislation, however, was fatally flawed in its vague eligibility criteria. The rollout of the tax credits translated to a massive subsidy for the American pulp industry.
Pulp mills claim the tax credit for burning black liquor, awaste by-product of the kraft pulping process, as a renewable fuel. Black liquor is defined as renewable because it comes from trees. Burning black liquor has been standard practice for decades in pulp mills. Because the legislation specifies a fossil fuel/renewable blend in order to qualify, the mills add new diesel, to their traditional fuel – completely perverting the goal of the subsidy. Further, since black liquor is only produced in virgin fibre pulping, it has given virgin pulp a huge competitive advantage over recycled fibre. The subsidy can discount the price of pulp up to 60%.
International Trade Response
The US black liquor tax credit was met with alarm around the world. Opponents argue that the subsidies distort the market beyond recognition and could make kraft pulp a by-product of the black liquor production and burning process in the US, instead of the other way around, flooding markets with low-cost pulp. Canada, along with Brazil, Chile and EU countries threatened the US with action through the World Trade Organization (WTO) and demanded that the loophole be closed immediately.
Canadian Response Breaks WTO Rules
The Canadian pulp industry began lobbying heavily, not for the government to take action through the WTO, but to match the subsidy. Although Canadian finance minister Flaherty was on record in June of 2009 as labelling a matching Canadian subsidy a “recipe for downward spiral to depression,” by the end of that month the Pulp and Paper Green Transformation Program was introduced. In October, a billion dollars was allotted to be divided between 24 companies, ranging from $2.6 million for Meadow Lake mill in Saskatchewan, to $143 million for Domtar.
The US pulp industry association wasted no time in pointing to the Canadian subsidy as being in contravention of the WTO rules. The US subsidy, they argued, violates no trade obligations since it is not aimed to benefit a specific industry, and does not target an export market. The Canadian black liquor subsidy however, they submit, is indisputably guilty on both counts.
It was only a matter of days after the Canadian handout that the next round was fired, when a United States IRS memo was released with a new interpretation of the farm bill of 2008. The bill was designed to reduce the focus on corn-ethanol as an alternative fuel, due to its well-documented impacts on food production and distribution. It introduced a tax credit for ethanol made from cellulose, to start just as the previous Highway Act black liquor subsidy was scheduled to end, and endure through to the end of 2012. The farm bill subsidy for black liquor, if the interpretation sticks, is twice the amount of the current one, and could amount to an American pulp industry windfall worth up to $50 billion. The Canadian government is already under pressure from industry to beef up the matching subsidy. If Canada responds true to form, it will not only be the latest chapter in an environmental policy framework gone horribly wrong, it can only serve to exacerbate a simmering trade war in which Canada has abdicated any advantage.
Canada’s Green Transformation
The Canadian response to the misguided American tax credit was a one billion dollar subsidy awarded to 24 companies responsible for the operation of 38 pulp mills producing kraft pulp. Credits are based on 16 cents per litre of black liquor burned in 2009 for any mill, but are awarded to the controlling company rather than the mill. The largest portion of the subsidy for one producer was $147 million for Domtar based on credits generated by three mills. Domtar can direct the funds to projects anywhere in its operations, and is not restricted to the mills generating the credits.The ‘Green Transformation’ segment of the name comes by virtue of the project eligibility.The subsidy funds must be directed to capital projects in Canada that result in ‘demonstrable improvements in environmental performance.’ Expenditures must also be made before the end of March 2012.
Rewards for Tax Revolt in BC
Meanwhile Catalyst Paper has been leading a corporate tax revolt in BC, refusing thus far to pay in full their assessed municipal taxes, which they maintain are unfair. They have come up with their own ‘Consumptive Tax Model’ whereby they assess their own taxes on the basis of the services that they consume. They continue to withhold $17 million in the four communities where they operate pulp mills, despite a BC Supreme Court ruling that the tax assessments were legal. They have been awarded $18 million under the Green Transformation subsidy program. The Catalyst tax revolt was soon followed by Mercer International, owner of Castlegar’s Celgar mill who owe $3.6 million in unpaid taxes, about 45% of the municipal budget, leaving the town cash-strapped. They have received $57.7 million under the federal program. The municipalities have no claim on the federal subsidy money since it is for new capital projectswith a discernible improvement in environmental performance.
Ten Years of Forgiving Kamloops Emissions
In October, the Ministry of Environment announced that they were giving Domtar another three-year extension on their extension of a deadline to reduce emissions at their Kamloops pulp mill. Domtar had applied for the second extension to postpone improvements that were originally scheduled for the end of 2007. As a result of an earlier five year extension, pollution control was slated to be complete by 2012, but Domtar has pleaded economic hardship as justification for further extending the deadline to the end of 2015.
In addition to the deadline extension, the ministry granted a reconfiguration of the emission stacks that will share the discharges between the current high level stack and two mill-level stacks. The change has been challenged by local environmentalists that charge that the lower level stacks will increase particulate matter and nitrous oxide emissions at valley level by several times. The ministry has employed dispersion modeling, done with computer software that emulates the conditions of the emissions coming out of the stacks, taking into account winds, temperatures, topography and other natural variables. The model, they say, predicts an overall improvement in air quality with the proposed technology.
A group led by environmentalists Bronwen Scott and Ruth Madsen in Kamloops say that the predicted levels have only a theoretical relationship to actual air quality. They question the reliability of Domtar’s data which is based, they say, on data generated from older problematic software. They also point to issues with haze and the fact that the modeling exercise did not include all the pollutants emitted by the mill.
Grounds for appeal are being prepared by the Shuswap-Thompson Organic Producers Association, said Madsen. Information from Natural Resources Canada research and other authorities are clear that dispersion models should not be relied upon alone, she said. Dispersion modeling, the groups contend, was developed for long range emissions studies.