There's a lot going on in this story about subsidies to U.S. pulp producers. I'm not sure exactly what all the trade implications are, but it's interesting enough that I'm going to talk about it anyway. As explained in the article, the basic story is as follows:
... it has been common practice in the pulp sector for 30 years to use a 100-per-cent biofuel called black liquor — a by-product of pulping wood chips — for heat and energy. Now American companies are blending in a percentage of diesel fuel in with the black liquor to qualify for the subsidy.
...
The tax credit was originally passed by Congress in 2005. It was dubbed the Highway Act, as it was designed to reduce the use of fossil fuels and promote the use of alternative fuels in the transportation sector.
But a recent interpretation of the U.S. tax code printed in a September 2008 Internal Revenue Service bulletin opened to door to the use of black liquor. It stated alternative fuels only need to contain 0.1 per cent of a taxable fuel to qualify.
By adding a small percentage of diesel to their black liquor, pulp mills were able to demonstrate they had switched to a blend of fossil and alternative fuels. It didn’t matter that they had switched in the wrong direction. The lawmakers hadn’t considered that alternative. They got the tax break.
Basically, U.S. pulp producers had been using a kind of biofuel on their own accord. Then along came legislation which offered a tax credit to companies who added alternative fuels to their fossil fuels. The pulp producers didn't qualify for the credit based on their use of the biofuel. However, by adding some diesel fuel to the mix, they qualified for the credit in reverse -- they added fossil fuels to their alternative fuels!
Here's the trade part. Foreign pulp producers are upset about the subsidy their U.S. counterparts are now getting:
The Canadian government is attempting to convince the U.S. administration to change the policy and several European governments are considering taking the issue to the World Trade Organization.
They have a point. However, it seems to me that it may be tough for them to achieve a good outcome here. They may be able to convince the U.S. government that the policy of rewarding companies when they use less alternative fuel makes no sense. On the other hand, if the subsidy is taken away from the pulp producers, you end up with a policy that rewards (with subsidies) companies who were polluting a lot but improved a bit, whereas companies who were polluting very little, on their own accord, get no subsidies. It's not clear that is a good approach either. The end result of all this may very well be that the law is changed so that pulp producers still get their subsidies, but they get them without having to add diesel. If that happens, then we may get to a more traditional trade and the environment question: Do subsidies to promote a cleaner environment violate trade rules?
