RPT-Black Liquor: The paper industry's new best friend

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* Paper makers get tax credits due to a loophole

* Credits to expire at year end

* May not be renewed in current form

By Hezron Selvi

NEW YORK, April 24 (Reuters) - Paper manufacturers looking for a break from the global recession finally have one -- a tax break.

A loophole in a federal law, intended to encourage the use of biofuels along with fossil fuels, has helped the industry fill its coffers with large tax rebates.

Under the law, companies that blend biofuels with fossil fuels and reduce their dependence on fossil fuels are eligible for what could be hundreds of millions of dollars in tax credits.

Paper manufacturers generally burn a biofuel called "black liquor" to power mills. Black Liquor is a by-product obtained while processing wood to get pulp for making paper.

The paper manufacturers have recently been adding small quantities of diesel to the black liquor, qualifying for the tax credits.

The credit is worth more than $3 billion a year to the industry, according to an analysis by Congress' Joint Committee on Taxation, and could serve as a lifeline as the industry fights to survive the recession.

Global demand for paper and packaging products has collapsed and led to the closure of many paper mills, as the recession sapped demand from many industries the paper and packaging makers serve.

The tax credits are a bright spot in an otherwise difficult year.

But the credits may be soon be taken away because of heavy opposition from some U.S. politicians.

"The application of the alternative fuel credit to the paper industry is controversial as the industry for decades has produced and burned black liquor for energy," analyst Joshua Zaret of Longbow Research wrote in a research note.

Senate Finance Committee Chairman Max Baucus, a strong opponent to the industry receiving these credits, said in a statement recently: "We are working to undo that unintended consequence. Unless we plug this loophole, the Federal Government is liable for billions in credits for black liquor in 2009 alone, even though the credit was never intended for this fuel."