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Green, Greener, Greenest: Washington and Business Battle Over Policy Choices

The U.S. forest industry is learning it's no longer easy being green—and that might not be a bad thing when it comes to government support during tough economic times.

The industry is in danger of losing a lucrative tax credit as Congress looks for budget savings to pay for an expensive jobs creation bill.

The question over the so-called black liquor credit is the latest skirmish in the the ongoing battle of how—and how quickly—to “green” American industry in tough economic times, and whether taxpayers and consumers should be satisfied with “cleaner,” rather than truly clean energy in the short term.

For more than 70 years, black liquor—the leftover waste liquid from the chemical “soup” used in the kraft papermaking process—has been used as a fuel to power the plants throughout the industry.

As a result, you might say the forestry industry is as concerned as it is confused about a proposal by Senators Max Bauchus (D-Mont.) and Charles Grassley (R-Iowa) to cut the $24-billion tax credit to help pay for a job creation bill they cobbled together after weeks of negotiation.

Biomass wood pellets
Biomass wood pellets

Cutting the tax credit “does not encourage the additional energy efficiency benefits of renewable energy produced and used on-site,” says Donna Harman, CEO of the American Forest & Paper Association, AFPA, a trade group of over 150 member firms.

Black liquor certainly has its carbon virtues. The liquid waste product contains about hall of the energy content of the original wood and its use is considered carbon neutral because it is generated in a closed production loop, meaning the waste is re-circulated to burn as fuel.

That could be a key consideration if the industry were ever to be regulated under a carbon cap-and-trade program.

Last week, Sen. Max Baucus (D-Mont.) and Sen. Charles Grassley (R-Iowa) suggested not renewing the multi-year, $24 billion tax credit to pay for their $85 billion Hiring Incentives to Restore Employment (HIRE) Act, a bill designed to spur job creation, which at this point now seems to be out of favor with Majority Leader Harry Reid (D-Nev.)

“Three-quarters of our operations’ energy needs come from biomass,” says Anthony Chavez, spokesman for forestry firm Weyerhaeuser , who says the company considers black liquor a biomass fuel worthy of incentives.

Biomass fuels are generally defined as those derived from living or recently living organic material—as opposed to fossil fuels—and black liquor would seem to qualify, but groups promoting a clean energy economy argue that granting any industry tax credits for a process that has an economic incentive, like recovering chemicals, is a waste of economic resources better used in spurring other forms of green energy.

“Again and again the pulp and paper industry will find any loophole to keep claiming subsidies,” says Nathanael Greene, director of renewable energy policy at environmental non-profit Natural Resources Defense Council, NRDC. “The central thing about black liquor is that it’s already being used for energy. It’s burned to recover the chemicals. The energy off that is captured to run mills.”

The black liquor tax credit is certainly not small change for the industry and has probably helped some forest products companies survive a rough recession. The credits, for instance, helped turn a $7 million loss into a $38 million profit for papermaker Temple-Inland in the fourth quarter of 2009.

But other firms in the sector, like International Paper and Weyerhaeuser, have said publicly that since the 50-cents-a-gallon tax credit had expired at the end of 2009, there would little impact on their operational expenses going forward.

Nevertheless, industry participants are emphatic about the use of by-products like black liquor as being a part of how the sector can help provide a bridge to greener energy production in the country.

The Carbon Challenge: A CNBC Special Report
The Carbon Challenge: A CNBC Special Report

Chavez says Weyerhaeuser is partnering with equipment-maker Mitsubishi to create commercial-scale “biopellet” production facility by 2011, turning the woody waste from their forestry operations into a biomass fuel for use in power plants that use coal.

These plants would use the biopellets along with coal, what's called co-fire, reducing their overall carbon emissions and possibly extending the plant’s lifespan. The biopellets would also be usable in current and future biomass-only plants.

This wrings more value from existing timberland management activities and adds new revenue streams for his industry, Chavez says. “We’re not changing our forest management practices,” he says. He argues the forest products industry should be allowed access to the same incentives that any new entrant in the renewable energy sector would get.

And any new facilities that come out of the venture with Mitsubishi would also create more jobs like other renewable energy project, Chavez says, the purpose of the job-creation proposal in the first place.

“We support initiatives that encourage the development of additional renewable energy,” says AFPA’s Harman, but adds that any efforts must avoid “the unintended consequences of displacing existing renewable energy production in industries like forest products that provide high-paying manufacturing jobs in rural communities.”

Whether or not the biomass strategy of the forestry industry qualifies it for inclusion in the portfolio of green fuels of the future, organizations like NRDC want to ensure that policymakers, industry and activists alike focus on what the country’s green energy goal really is.

“I want a performance standard that pays for carbon reduction and ecosystem benefits,” says NRDC’s Greene. “Rather than pick your point in the system, pick your outcome.”