Canada has been joined by the European Union, Brazil and Chile in protesting to the United States about a tax credit that, it is argued, has been distorting the international pulp market.
According to Stockwell Day, Canadian Minister for International Trade, the ‘black liquor’ tax credit is providing a large cash infusion to US kraft chemical producers (paper produced by the kraft process from wood pulp) and creating a “significant incentive” to over-produce pulp at a time when producers in Canada and elsewhere are already operating at significantly reduced levels because of the economic downturn.
“This is causing market distortions and we are asking the US to immediately end the tax credit for black liquor,” he asserted in a statement issued May 21.
Canadian Ambassador Michael Wilson, Brazilian Ambassador Antonio de Aguiar Patriota, Chilean Ambassador Jose Goni and the head of the European Commission Delegation John Bruton are signatories to a letter sent May 20 to the US Congress, calling on the US to end the tax credit.
The tax break in question allows companies to claim a credit at the rate of USD0.50 per gallon for converting fossil fuel into a mixture of fossil fuel and biofuel. However, it has emerged that a number of paper mills in the US are claiming the credit – illegitimately it is suggested – by mixing diesel fuel with ‘black liquor’, a byproduct of paper and pulp, to make a carbon rich but less-than-environmentally friendly ‘biofuel.’
Day raised the black liquor issue with US Trade Representative Ron Kirk and US Congressman Charles Rangel in his visit to Washington, D.C. on April 27.
The tax break was approved by Congress in 2005, but is due to expire at the end of this year. President Obama has proposed to make black liquor ineligible for the alternative fuel mixture tax credit in his 2010 budget blueprint, suggesting that Congress may not renew the credit. However, this may not be enough to avert a compensation claim from the affected nations, possibly via the World Trade Organization.
It is estimated that the credit has been worth as much as USD7bn to the US paper industry, allowing them to cut costs by as much as 60%.
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