The Black Liquor War

The U.S. and Canada duke it out over an alternative-fuel boondoggle.

Congress's unrelenting efforts to rid the world of fossil fuel have now produced a North American trade war over an obscure substance called "black liquor." Let us explain.
This story begins with Congress's 2005 highway bill. It included a subsidy to encourage businesses to power their motor vehicles with "alternative fuels" such as ethanol, rather than fossil fuels such as diesel. Congress said businesses could receive a 50-cent tax credit for every gallon of gasoline if they used a blend of a traditional fossil fuel and an alternative fuel.
Then in 2007, Congress extended this largesse beyond highway vehicles to a wider range of alternative fuel users. Enter "black liquor," a carbon-rich substance the paper industry has used for decades to power its mills. It also qualifies as an alternative fuel. All the paper industry had to do was blend some fossil fuel in with their alternative fuel and -- voila! -- billions of dollars in federal subsidies were within reach. So they did.
Adding diesel to the paper production process might not be in the anti-fossil fuel spirit of Congress's tax credit, but it was legal, and lucrative. The American paper industry is on pace to pocket some $6 billion in tax credits this year, enough to cut production costs by 60% and reduce the price of some U.S. paper goods by 25%.
Not surprisingly, Canadian paper companies are miffed at this subsidized windfall to their competition. Now they've gotten their Parliament to do something about it. Following the two-wrongs-make-a-right logic of trade wars, Canadian lawmakers recently passed a subsidy worth $882 million for their domestic paper industry.
Canadian paper producers defend the counter-subsidy in the classic language of trade warriors. "This will save tens of thousands of jobs," says Avrim Lazar of the Forest Products Association of Canada. "When the U.S. government is stepping in," Mr. Lazar adds, "creating a massive advantage for American jobs, it's the [Canadian] government's job to step up to the plate."
Senators Max Baucus and Chuck Grassley are trying to end the American black-liquor subsidy ahead of its scheduled expiration on December 31. Don't expect this to satisfy Canadian paper producers. Cue Mr. Lazar: "Even when they stop the tax credit, we'll be way behind the starting line when the new race starts." Translation: We like subsidies, too.
So a sloppily written green provision in a federal highway bill has triggered an enduring cross-border subsidy war. No word yet on whether ethanol is being written into the health-care bill.