WASHINGTON (AP) — A law to make the earth a little greener is giving paper mills an unintended multibillion-dollar tax windfall with the help of a little diesel fuel.

The bonanza, however, could be short-lived.

The federal tax credit for producing alternative fuels is due to expire at the end of this year and a key member of Congress wants to make sure it is not renewed for paper companies, and maybe even rescinded for them.

The credits — an unintended consequence of a 2007 law — could add up to billions of dollars this year for an industry that has suffered big losses from the economic crisis. One company, Memphis-based International Paper, has already received $71.6 million in credits for a single month.

Sen. Max Baucus, chairman of the Senate Finance Committee, is working on a bill that could end the credits for paper companies “His objective to make sure that the credit is used in a way that is consistent with the spirit and intent of the law,” said Dan Virkstis, a spokesman for the Montana Democrat.

One issue is the loss of tax revenues at a time when the federal deficit is already expected to swell to $1.8 trillion this year.

The alternative fuel credits were projected to cost the federal government $61 million a year in lost taxes, but that was before paper companies started applying for them. A preliminary estimate being circulated among lawmakers by the nonpartisan Joint Committee on Taxation now puts the price tag at $3.3 billion.

Congress expanded the tax credit for developing alternative fuels in 2007, offering firms 50 cents a gallon to blend renewable fuels like ethanol with traditional fossil fuels like diesel.

Paper mills produce a liquid substance called “black liquor” as a byproduct of the process that turns wood into pulp. The pulp is dried to make paper and black liquor is then often used as fuel to power the mill.

The tax credit, however, is only available to firms that produce a blend of renewable fuels and traditional fossil fuels. Late last year some paper companies realized they could qualify for the credit by adding small amounts of diesel to the black liquor used for powering their mills.

At least two companies have already received the credits, which are available in payments from the Internal Revenue Service. Industry analysts predict many others will apply.

In addition to International Paper, Verso Paper Corp. received a $29.7 million credit for a single mill in Maine for the fourth quarter of 2008, according to a filing with the Securities and Exchange Commission.

A Goldman Sachs report estimates that International Paper could qualify for more than $1 billion in credits this year. Montreal-based Domtar Inc., which has mills in Arkansas, Wisconsin and Maine, could qualify for $515 million in credits, and MeadWestvaco, based in the Richmond suburb of Glen Allen, Va., could qualify for $254 million, the report said.

The Senate Finance Committee is scheduled to hold a hearing on energy tax credits Thursday, and the issue is sure to come up. A bill from Baucus could come as early as this week.

Some environmental groups complain that the credit actually provides an incentive for paper companies to burn more fossil fuels because they must add diesel to their fuel mix to qualify for the credit.

Industry representatives, however, note that the blend has to contain only 0.1 percent fossil fuel to qualify.

The credits could mean up to $10 million a year for Lincoln Paper and Tissue, a small paper company in Lincoln, Maine, said president and CEO Keith Van Scotter.

“In the last six months it has been a huge lifeline,” Van Scotter said in an interview.

Montreal-based AbitibiBowater, which filed for bankruptcy protection last week, is in the process of filing for credits for its mills in Alabama, Tennessee and South Carolina, said Seth Kursman, the company’s vice president of communications and government affairs.

Kursman said the credits should not be cut off simply because paper companies were already using renewable energy. “That should be rewarded, not penalized,” he said.

The United Steel Workers union is backing the paper companies. In a letter to lawmakers, union president Leo W. Gerard said a decline in demand for paper goods has led to 25 mills closing in the past two years.

“It is not an overstatement to say that this credit, in a number of cases, is the most compelling factor in decisions related to the continuing operation of a number of pulp and paper mills,” Gerard wrote.


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