U.S. blunder left Canada with no choice

By Les Leyne, Times Colonist
Published: June 18, 2009

Maybe it looks good on paper, no pun intended. But the big, splashy bailout of the Canadian pulp and paper industry is a nightmare from hell when it comes to sound public policy.

The federal Conservatives -- in the midst of their monthly parliamentary crisis -- felt forced to put the billion dollars on the table because of an absurd loophole someone discovered in the United States.

That's a pretty remarkable basis on which to throw a billion dollars around. A competing jurisdiction makes a bone-headed mistake that allows an entire industry to get welfare cheques every month. So Canada is forced to follow suit, with a slightly more sensible but still questionable move.

Any other time this idea would have been dead on arrival. But there is so much federal money being thrown around these days to rescue different parts of the economy that this goes down as just another day at the office.

Once you've put $7 billion into Chrysler, what's another billion for the pulp and paper industry? The feds were a bit shy in acknowledging it yesterday, but the origins of the new Pulp and Paper Green Transformation Fund lie in an obscure section of U.S. tax law.

They set out last year to encourage alternative fuels. So they created a one-year tax credit for alternative fuel when it's mixed with regular fuel.

Some genius in the U.S. pulp industry took careful note. The "black liquor" byproduct of kraft pulp mills is commonly refined and used for energy.

The industry's been doing it for years, with no particular government involvement. But by splashing some diesel in that mix earlier this year, they made themselves eligible for the credit. Even though the upshot means burning more diesel, not less.The industry has likely been doubled over laughing ever since.

International Trade Minister Stockwell Day confirmed yesterday that senior U.S. officials were caught off-guard when the industry started applying for the credits.

U.S. pulp and paper companies could make billions of dollars from the tax credit before it expires at the end of 2009. The cheques are mailed out to the companies every month and they've been cutting prices and gobbling up market share ever since.

Canada has been begging the U.S. to fix this botch for months. But the situation is so dire the federal Conservatives have decided to more or less match the subsidy.

Canadian kraft pulp mills will get 16 cents for every litre of black liquor they use. They will have to invest the money in capital projects for energy efficiency or environmental performance.

There are two places where this is good news: Port Alice's Neucel mill will be eligible, as will Nanaimo's employee-owned Harmac mill.

Harmac president Levi Sampson said it's eligible and produces enough black liquor that the grant will be worthwhile. "It will definitely be helpful," he said. There are a number of projects that would reduce chemical use or emissions. If Harmac commits to one or more of them, the cost would be covered by the government. But even the beneficiary acknowledges the oddness of it all. "You never like to see the industry subsidized. You'd like to see it stand on its own two feet," he said. "But they (the feds) were forced into it."

Other industry and union officials feel the Conservatives are making the best of a bad hand. They've recognized the forest industry's travails, which is good. But the transformation program -- even if it's more sensible than the inept U.S. tax credit -- won't have a dramatic impact.

And if the U.S. government comes to its senses and closes the loophole in October, rather than December, the transformation program will likely vanish soon after.

Just So You Know: Left almost completely out of the picture is the biggest pulp and paper maker on the coast, Catalyst Paper. Three of its four mills are thermo-mechanical, not kraft, so they don't use black liquor to the same degree.

And the one kraft mill at Crofton has been down since late February. The calculations will be based on current year production, so it only has two months worth of black liquor for which to claim credits.

lleyne@tc.canwest.com
(c) Copyright (c) The Victoria Times Colonist