The US, in its misguided attempt to encourage more use of bio-mass for fuel, has provided a (probably unintended) subsidy for the pulp and paper mills that use their "black liquor" (what is left after the pulp is extracted) for fuel. Here is just one article on the subject (h/t to Emirates Economist).
The issue centres on black liquor, a biofuel byproduct of the papermaking process. At kraft pulp mills, wood is boiled in caustic chemicals, causing the pulp to separate from the various combustible chemicals in the wood. What is left after the pulp is removed is black liquor, which is refined and burned as a biofuel energy source in most kraft pulp mills.
While pulp mills have been burning black liquor for decades, American paper companies have begun receiving large tax rebates from the U.S. government, which Canadian papermakers complain puts them at a distinct disadvantage.
Here are some of the bizarre and not-so-bizarre effects of the policy:
- In order to qualify for the subsidy, firms in the US must burn a blend of petroleum-based fuels and bio-mass based fuels. So while the pulp mills had been merrily using purely bio-mass based fuel for decades, they now blend it with diesel fuel to qualify for the subsidy, thus increasing the demand for diesel fuel.
- The subsidy amounts to a cost reduction of nearly 25% of average costs for US firms. Understandably, this subsidy has Canadian pulp mills hurting and upset.
We tend to teach our students that if another country wants to subsidize production of something, then we should let them, gladly. It's as if they're giving us stuff cheaper than we can produce it ourselves AND they allow us to free up our scarce resources to produce something else.
It's a nice theory, assuming that capital, resources, and labour are all completely fungible and freely mobile. Then, sure, the capital and labour being used in Canadian pulp mills can just find alternative uses in Canada, and we'll all be better off in Canada if the US wants to subsidize pulp production, right?
How likely is it that the capital of a pulp mill will find an alternative use? How long will it take labour, located where the pulp mills are, to find new jobs? And what kind of jobs will these be?
We cannot teach trade theory and policy using two-by-two-by-two models (two inputs, two outputs, two countries) and expect them to make sense to real people in the real world who understand that adjustment is painful and has costs.
These adjustment costs are dealt with, to some minor extent, in Canada with various transitional adjustment programmes as well as our higher social safety net than exists in the US. But at the same time, this type of subsidy in the US (which I suspect policy makers did not anticipate) must be fought via NAFTA and the WTO. I don't know that much progress can be made in these fights, but at the same time, it makes little sense for Canada to offer countervailing subsidies.
Man, this bio-mass energy kick sure created some weird and awful distortions.