Bad news for Biofuel producers

Black Liquor excluded from the Cellulosic Biofuel Production Credit

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The cellulosic biofuel production credit is a income tax credit granted for each gallon of qualified cellulosic fuel produced and sold during the taxable year. This biofuel production tax credit typically equals $1.01 per gallon.

In 2009, the IRS found that black liquor may qualify for both the cellulosic biofuel producer credit and the refundable alternative fuel mixture credit. Black liquor is a byproduct of the kraft process for making paper and is composed of water, lignin and the spent chemicals used to break down the wood. Since the 1930s, many kraft pulp mills have used black liquor as an energy source by employing boilers to capture and burn much of the black liquor they produce, which in turn generates steam and recovers the cooking chemicals. This process has helped paper mills to reduce problems with water emissions, to reduce their use of chemicals through re-cycling, and to produce, on average, 66% of their own energy needs on-site.

Effective January 1, 2010, the new Healthcare Act excludes from eligibility for this tax credit any fuel that contains significant water, sediment, or ash. Under the new law, the definition of cellulosic biofuel no longer includes fuel that: (1) is more than 4% water and sediment in any combination, or (2) have an ash content of more than 1%. See I.R.C. §40(b)(6)(E), as amended by the Healthcare Act §1408. Unfortunately for the South Carolina paper and biofuel industries, this change will exclude common black liquor.

The cellulosic biofuel producer credit does not apply to fuel produced from black liquor after Dec. 31, 2009


For further information or assistance with regard to renewable energy tax credits, please contact the following members of the Firm’s Climate Change Team: John P. Boyd (Columbia), Clay M. Grayson (Charleston), and Seph Wunder (Greenville).

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