Sustainability Drivers of
Enterprise Transformations in the
Pulp & Paper Industry
Marilyn A. Brown, Professor of Energy Policy
Georgia Institute of Technology
TechnoBusiness Forum on Market
Dominance Through Enterprise
Transformation, Syracuse, New York
October 22, 2008
Strategic Energy Institute
Motivation
• New energy and climate change policies are
emerging at every scale of government
• Policy uncertainty can preempt innovation
• Unique opportunities await the pulp and
paper industry as one of the most energyintensive sectors
• Tracking policy “contingencies” can help to
optimize business models
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Strategic Energy Institute
Scope of Today’s Talk
• Reviewed five policies for possible
directional changes in biomass energy and
paper production
− Federal renewable electricity standard
− Carbon cap and trade system
− Stronger renewable fuels standards
− State incentives for biomass pilot projects
− Favorable taxation of forest property
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Strategic Energy Institute
Other Policies of Interest
− Production tax credits for renewable energy
− Import tax on ethanol
− Ethanol excise tax credit
− Renewable Energy Credits
− Terrestrial sequestration as “carbon offsets”
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Policy Scenarios: Multiple Technology
and Output Options Exist
Fuel Production
Facility
OUTPUT
Liquid Transportation
Fuels
and Chemicals
OUTPUT
INPUT
Pulp/Paper Mill
Forest-Based Biomass
Biomass Power
Plant
Paper Products
Electric Power
Liquid Transportation Fuels
OUTPUT
Electric Power
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Numerous Biorefinery “Pathways” are
Possible – How Do you Choose?
Source: B. A. Thorp, et al., 2007. “Compelling Case for Integrated Biorefineries”
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Federal renewable electricity
standard
• A renewable electricity standard (RES) is a
legislative mandate requiring electricity
suppliers to employ renewable resources
to produce a certain amount or percentage
of power by a fixed date
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Current Renewable
Electricity Standards
25 States and the District of Columbia have mandatory
renewable energy targets; others have goals
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Future Prospects for a
National RES
• Attempts to establish a federal RES have been numerous,
but unsuccessful so far.
• House Bill 3221 (HR 3221) adopted on August 4, 2007,
included an RES: 15% by 2020; up to 27% allowed from
energy efficiency.
• However, an RES was not in the Senate version and during
the effort to reconcile the two bills, the RES was dropped.
• Utilities in the Southeast were among the most ardent critics
of the RES, claiming that it would increase electricity rates
because of their limited renewable resources.
• The Energy Independence and Security Act of 2007 signed
by President Bush on December 19, does not include an
RES.
• It is likely that the policy will be proposed again.
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Senator Obama’s Platform
Ensure 10% of U.S.
electricity comes from
renewable sources by 2012,
and 25% by 2025, extend
the federal Production Tax
Credit for renewable energy
for 5 years.
Energy Issue
Senator McCain’s
Platform
Renewable Power
Rationalize the current
patchwork of temporary tax
credits for renewable
energy.
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Expected Directional Changes from a National Renewable Electricity Standard
Factors
Biomass Power
Ethanol
↑↑
Higher input prices due to higher demand for biomass power
‐
No significant impact anticipated ↑
Accelerated investment in R&D and facility upgrades, especially to improve electric efficiencies
‐
No significant impact anticipated
↑
↑
Increased investment in new biomass power facilities
‐
Price
‐
Economies of scale and technology advances, but increased input prices
Quantity Produced
↑
↑
Increased production of biomass power due to legislated goals
Price
↑
↑
Higher input prices due to increased demand for biomass power
Quantity Available
↑
↑
Increased production of timber to meet higher demand for biomass power
Tech
Advance
System Change
INPUT
(Forest‐
(Forest‐
based)
TECHNOL
OGY
Paper
↑
↑
Higher input prices due to higher demand for biomass power
↓
Possible reduction in available biomass due to increased demand for biomass power
↑
Accelerated investment in facility upgrades, especially to improve electric efficiencies
No significant impact anticipated
↑
Increased investment in new facilities such as biorefinery and cogeneration units
‐
No significant impact anticipated
↑
Increased price of paper and paper products due to higher input prices
‐
No significant impact anticipated
↓
Decline in paper production due to higher input price
OUTPUT
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Carbon cap and trade system
• A market-based policy tool that limits
economy-wide carbon dioxide emissions
• Sources covered under the program
receive allowances that determine the
amount of emissions they can produce
• Sources can design their own emission
control strategy – adopting new
technology, purchasing offsets, or trading
in the emissions market
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Possible points of regulation
Source: National Commission on Energy Policy (2007)
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Impact of a Carbon Cap-and-Trade
System on Fossil Energy Prices
Carbon
Tax/
Penalty
($/MtC)
Natural
Gas
($/ccf)
Coal
($/short
ton)
Residual
Fuel Oil
(No. 6)
($/gal)
Kerosene
($/gal)
Liquid
Propane
Gas
($/gal)
Distillate
Fuel Oil
($/gal)
Motor
Gasolin
e
($/gal)
Electricity
($/MWh)
Average
CCGT
Coal
$25
$0.04
(0.49%)
$13.00
(52.20%)
$0.08
(5.83%)
$0.07
(2.45%)
$0.04
(1.82%)
$0.07
(3.13%)
$0.06
(2.77%)
$4.43
(4.17%)
$2.50
(2.36%)
$6.50
(6.13%)
$50
$0.07
(0.98%)
$26.00
(104.39%)
$0.16
(11.66%)
$0.13
(4.89%)
$0.08
(3.65%)
$0.14
(6.26%)
$0.12
(5.55%)
$8.85
(8.35%)
$5.00
(4.72%)
$13
(12.26%)
$75
$0.11
(1.47%)
$39.00
(156.59%)
$0.24
(17.48%)
$0.20
(7.34%)
$0.12
(5.47%)
$0.21
(9.39%)
$0.18
(8.32%)
$13.28
(12.52%)
$7.50
(7.08%)
$19.50
(18.40%)
$100
$0.15
(1.96%)
$53.00
(208.79%)
$0.32
(23.31%)
$0.27
(9.79%)
$0.16
(7.30%)
$0.28
(12.52%)
$0.24
(11.09%)
$17.70
(16.70%)
$10.00
(9.43%)
$26
(24.53%)
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Cap-and-Trade Proposals Debated by the 110th Congress
Bill
Lieberman‐
Lieberman‐Warner S.2191
Bingaman‐
Bingaman‐Specter S.1766
Scope
All 6 GHGs
Economy‐
Economy‐wide, “
wide, “hybrid”
hybrid” – upstream for transportation fuels; downstream for electric utilities and large sources
‐‐Regulates approximately 80% of economy
‐‐Regulates approximately 80% of economy
All 6 GHGs
Economy‐
Economy‐wide, “
wide, “hybrid”
hybrid” – upstream for natural gas and petroleum; downstream for electric utilities and large sources
‐‐Regulates approximately 85% of economy
‐‐Regulates approximately 85% of economy
Emission Targets
Beginning in 2012, GHG emissions are capped at 2005 levels, 10% below 2005 by 2020, 30% below 2005 by 2030.
Beginning in 2012, GHG emissions are capped and begin declining,
2006 emission levels by 2020, 1990 levels by 2030 (i.e., 20% below 2006 levels).
Offsets
‐‐15% limit on use of domestic offsets (e.g., for carbon ‐‐15% limit on use of domestic offsets (e.g., for carbon sequestration and other emission reductions from sources not covered under the cap‐
sources not covered under the cap‐and‐
and‐trade system)
‐‐15% limit on use of international offsets
‐‐15% limit on use of international offsets
‐‐10% limit on use of domestic offsets (e.g., for carbon ‐‐10% limit on use of domestic offsets (e.g., for carbon sequestration and other emission reductions from sources not covered under the cap‐
covered under the cap‐and‐
and‐trade system)
‐‐President may implement use of international offsets subject to ‐‐President may implement use of international offsets subject to 10% limit.
Allocation
Increasing auction
5% set‐
5% set‐aside of allowances for agricultural and forests
Increasing auction
Some sector allocations are specified
5% set‐
5% set‐aside of allowances for agricultural
Cost Controls
‐‐Creates a Carbon Market Efficiency Board to monitor ‐‐Creates a Carbon Market Efficiency Board to monitor the carbon trading market and manage price volatility
‐‐Allows banking
‐‐Allows banking
‐‐Sets a predetermined price at which the government will sell ‐‐Sets a predetermined price at which the government will sell additional allowances, thereby effectively capping compliance costs. ‐‐$12/ton CO2 (safety valve) and increasing 5%/yr above inflation
‐‐$12/ton CO2 (safety valve) and increasing 5%/yr above inflation
‐‐Allows banking
‐‐Allows banking
Early Action
5% of allowances for early action in 2012, phasing to zero in 2017
From 2012‐
From 2012‐2020, 1% of allowances allocated to those registering GHG reductions prior to enactment
Technology
‐‐Bonus allocation for carbon capture and storage
‐‐Bonus allocation for carbon capture and storage
‐‐Funds and incentives for technology, adaptation, and ‐‐Funds and incentives for technology, adaptation, and mitigating effects on poor
‐‐Subject to 3
‐‐Subject to 3‐‐year review
‐‐Bonus allocation for carbon capture and storage
‐‐Bonus allocation for carbon capture and storage
‐‐Funds and incentives for technology R&D
‐‐Funds and incentives for technology R&D
‐‐Target subject to 5
‐‐Target subject to 5‐‐yr review of new science and actions by other nations
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Senator Obama’s Platform
Implement a cap and trade
system to reduce GHG by
80% from today’s levels by
2050, auction all pollution
credits and use revenues to
invest in a clean energy
future.
Energy Issue
Senator McCain’s
Platform
Greenhouse Gas (GHG)
Cap and Trade System
Return GHG emissions to
2005 levels by 2012,
implement a GHG cap and
trade system with
mandatory reductions of
GHG emissions to 66%
below 2005 levels by 2050.
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Expected Directional Changes from a Carbon Cap and Trade Program
Factors
INPUT
(Forest‐
(Forest‐
Based)
Biomass Power
Ethanol
Paper
Price
↑
↑
Higher forest‐
Higher forest‐based input prices due to increased demand for biomass power
↑
↑
Higher forest‐
Higher forest‐based input prices due to increased demand for biomass power
↑
↑
Higher forest‐
Higher forest‐based input prices due to increased demand for biomass power
Quantity Available
↑
↑
Increased production of timber to meet higher demand for biomass power ↓
Possible reduction in available biomass due to increased demand for biopower ↓
Possible reduction in available biomass due to increased demand for biopower
Tech
Advance
↑
Increased investment in R&D and facility upgrades to support increased biopower production
‐‐
Decline in major facility upgrades except energy efficiency improvements
‐‐
Decline in major facility upgrades except energy efficiency improvements
System Change
↑
↑
Accelerated investment in new facilities such as biorefineries and cogeneration units
↑
Accelerated conversion to biorefinery facilities
↑
Some investment in new facilities such as biorefinery and cogeneration units
Price
‐
Higher demand for biomass power will produce economies of scale and reductions in biopower production costs and prices, but high input prices will create a counter‐
create a counter‐effect
‐
Slightly lower production costs and price for ethanol due to economies of scale from increased demand, but high input prices will create a counter‐
counter‐effect
↑
↑
Higher price of paper due to higher input prices Quantity Produced
↑
↑
Greater production of electricity from biomass resources
↑
Slight increase in production of ethanol from forest‐
ethanol from forest‐based resources
↓
↓
Decline in production due to higher prices for paper products and shift to biomass power generation TECHNO
LOGY
OUTPUT
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Strategic Energy Institute
Stronger renewable fuels
standards
• A policy instrument used to expand the
displacement of gasoline and diesel with
renewable fuels
• The Energy Independence and Security Act
(EISA) sets a mandatory renewable fuels
standard requiring the production of 36 billion
of renewable fuels by 2022
• EISA also requires that by 2020 the United
States produce 21 billion gallons of advanced
biofuels, such as cellulosic ethanol.
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Stronger renewable fuels
standards – State Initiatives
State
California
Hawaii
Iowa
Louisiana
Minnesota
Renewable Fuels Standard
All gasoline produced at California refineries to contain 10% ethanol by December 31, 2009.
All gasoline produced at California refineries to contain 10% ethanol by December 31, 2009. Enacted June 2007
85% of gasoline to contain 10% ethanol by April 2006. Enacted Sept. 2004
85% of gasoline to contain 10% ethanol by April 2006. Enacted Sept. 2004
25% of motor fuel to come from renewable sources (E10, E85, biodiesel by 2020). Enacted May 2006
25% of motor fuel to come from renewable sources (E10, E85, biodiesel by 2020). Enacted May 2006
All gasoline to contain 2% ethanol; 2% of all diesel to be biodiesel.
All gasoline to contain 2% ethanol; 2% of all diesel to be biodiesel. To go into effect six months after there are 50 million gallons of ethanol in annual production or 10 million gallons of biodiesel in the state.
million gallons of ethanol in annual production or 10 million gallons of biodiesel in the state. Enacted June 2006
All gasoline to contain 20% ethanol by 2013. Enacted May 2005
All gasoline to contain 20% ethanol by 2013. Enacted May 2005
Missouri
All gasoline except premium grade gasoline to contain 10%
ethanol by 2008. Enacted July 2006
ethanol by 2008. Enacted July 2006
Montana
All gasoline (except 91‐
All gasoline (except 91‐octane) to contain 10% ethanol. Enacted May 2005
octane) to contain 10% ethanol. Enacted May 2005
Oregon
Washington
All gasoline to contain 10% ethanol after Oregon ethanol production reaches 40 million gallons per year; All diesel All gasoline to contain 10% ethanol after Oregon ethanol production reaches 40 million gallons per year; All diesel fuel to contain 2% biodiesel after the production of biodiesel from sources in Oregon, Washington, Idaho and after the production of biodiesel from sources in Oregon, Washington, Idaho and Montana reaches 5 million gallons per year. To be increased to 5% when production reaches 15 million gallons per year. Enacted July 2007
year. Enacted July 2007
All gasoline to contain 2% ethanol by 2008. To be increased up to 10% if no adverse ozone pollution levels result and All gasoline to contain 2% ethanol by 2008. To be increased up to 10% if no adverse ozone pollution levels result and sufficient raw materials are available within the state; 2% of all diesel sold to be biodiesel by 2008. To be increased sufficient raw materials are available within the state; 2% of all diesel sold to be biodiesel by 2008. To be increased to 5% if there is sufficient in‐
to 5% if there is sufficient in‐state biodiesel production. Enacted July 2006
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Senator Obama’s Platform
Require at least 60 billion
gallons of advanced
biofuels by 2030; mandate
all new vehicles are flex fuel
by 2012; establish a
national low carbon fuel
standard to reduce the
carbon of fuels by 10%
within 10 years.
Energy Issue
Ethanol
Senator McCain’s
Platform
Eliminate mandates,
subsidies, tariffs and price
supports that focus
exclusively on corn-based
ethanol.
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Expected Directional Changes from Stronger Renewable Fuels Standards
Biomass Power
Factors
Price
Tech
Advance
↑
↑
↑
Small increase in forest‐
Small increase in forest‐based input prices due to higher ethanol demand
↑
Possible long‐
Possible long‐term rise in prices for forest‐
term rise in prices for forest‐
based inputs for paper production
‐
No significant impact anticipated
↑
Small increase in production of timber to meet higher demand for ethanol and biodiesel
↓
Possible reduction in available biomass due to increased demand for ethanol and biodiesel
‐
No significant impact anticipated
↑
Facility upgrades and expansions as demand for ethanol increases ‐
No significant impact anticipated
‐
No significant impact anticipated
↑
Possible conversion of pulp and paper mills to biorefineries and accelerated investment in new ethanol plants
↑
Possible conversion of pulp and paper mills to biorefineries
‐
No significant impact anticipated
↑
Ethanol prices may increase in the short‐
Ethanol prices may increase in the short‐run as RFS goals cause rapid expansion of production
↑
Possible small increase in paper prices due to higher input prices
‐
No significant impact anticipated
↑
↑
Greater ethanol production; uncertain how much will come from forest‐
come from forest‐based biomass
↓
Possible small reduction in paper production due to higher input prices
TECHNOL
OGY
System Change
Price
OUTPUT
Quantity Produced
Paper
No significant impact anticipated
INPUT
(Forest‐
(Forest‐
based)
Quantity Available
Ethanol
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State incentives for biomass
pilot projects
• These incentives vary depending on the
specific needs and potential of the individual
states.
• They include streamlining the application
process, offering fiscal subsidies for facility
construction, and providing production tax
credits.
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State incentives for biomass
pilot projects
• Streamlining the application process
− GA: established the GA Bioenergy Partnership to develop a bioenergy
market in GA.
− The state has improved its administrative procedures in order to
facilitate the permitting process. GA Environmental Protection Division
has started to expedite the permitting process for biofuels facilities (90
days or less).
− The state has also developed a “one-stop shop” concept, which
facilitates communication among the representatives of local, state and
federal government and companies.
• Fiscal subsidies for facility construction
− Savannah-based Herty Advanced Materials Development Center
approved a $1 million investment of state funds to expand biofuel
development facilities in Georgia.
− Legislation passed to reduce sales taxes on ethanol and biodiesel
companies.
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Expected Directional Changes from Biomass Pilot Projects Factors
Biomass Power
Price
INPUT
(Forest‐
(Forest‐
based)
Increase in forest‐
Increase in forest‐based input prices due to higher ↑
biopower and ethanol demand
Ethanol
Paper
↑
Increase in forest‐
Increase in forest‐based input prices due to higher biopower and ethanol demand
↑
Increased production of forest‐
Increased production of forest‐based bioresources to meet growing demand for biopower and ethanol
↓
Possible reduction in available biomass due to shift to biomass power and ethanol production ↑
Increase in forest‐
Increase in forest‐based input prices due to higher biopower and ethanol demand
Quantity Available
↑
Increased production of forest‐
forest‐based bioresources to meet growing demand for biopower and ethanol
Tech
Advance
↑
Accelerated investment in R&D and facility upgrades
↑
Accelerated investment in R&D and facility upgrades
‐
No significant impact anticipated
System Change
↑
↑
Accelerated investment in new facilities such as biorefinery and cogeneration units
↑
↑
Accelerated investment in new facilities such as biorefinery and cogeneration units
↑
Accelerated investment in new facilities such as biorefinery and cogeneration units
Price
‐
Technology advances; higher input prices
‐
Technology advances; higher input prices
↑
Small increase in price of paper products due to higher priced inputs
↑
More power plants and more biopower production
↑
More ethanol facilities and more ethanol production; uncertain how much will be from forest‐
much will be from forest‐based inputs
↓
Decline in production due to lower demand resulting from higher output prices
TECHNOLOGY
OUTPUT
Quantity Produced
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Favorable taxation of forest property
• Property tax -- a tax on property measured by the
property's value.
− Ad valorem property tax is collected based the value of
the land and the trees and is the most common type.
− Flat property tax is based on a uniform rate per acre
regardless of the value of the timber.
− Exemption programs excuse the landowner from
taxation.
− Severance tax is a flat tax on a specific unit of volume
harvested (i.e., board feet, cubic feet, cords, tonnage
etc.).
− Yield tax is based on the value of the harvested timber.
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Taxation of forest property is highly
variable
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Strategic Energy Institute
Expected Directional Changes from Favorable Taxation of Forest Property
Factors
INPUT
(Forest‐
(Forest‐
Based)
Biomass Power
Ethanol
Paper
Price
↓
Lower forest‐
Lower forest‐based input prices due to higher input supply
↓
Lower forest‐
Lower forest‐based input prices due to higher input supply
↓
Lower forest‐
Lower forest‐based input prices due to higher input supply
Quantity Available
↑
Higher input supply due to forestland availability
↑
Higher input supply due to forestland availability
↑
Higher input supply due to forestland availability
Tech
Advance
‐
No significant impact
anticipated
‐
No significant impact anticipated ‐
No significant impact anticipated
System Change
↑
Possible investment in new biomass power facilities
‐
No significant impact anticipated
↑
Possible investment in cogeneration units
Price
‐
No significant impact anticipated
‐
No significant impact anticipated ↓
Lower price for paper products due to lower input prices
Quantity Produced
↑
Increased production of biomass power due to lower input prices
‐
No significant impact anticipated due to technical barriers to ethanol production from forest‐
barriers to ethanol production from forest‐based biomass
↑
Increase in paper production due to lower input prices
TECHNOLOGY
OUTPUT
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Strategic Energy Institute
Summary of Energy and
Climate Policy Impacts
Factors
Federal Renewable Electricity Standard
Carbon Cap and Trade
Stronger Renewable Fuels Standards
Biomass Pilot Plants
Favorable Taxation of Forest Property
Point of Impact
Electricity suppliers
Mostly “upstream
” sources of GHGs
Refiners and other fuel producers
Biomass energy producers
Forestland owners
Status
Federal –
Federal – Pending;
States –
States – in place in 33 states
Federal –
Federal –
Pending;
Regional –
Regional –
Pending
Federal –
Federal – just enacted; States –
States – in place in 9 states
In place in numerous states
Variable; four states exempt forest owners from property taxes
Short‐term Impact on Inputs
Price of Forest‐
Price of Forest‐Based Inputs
↑↑
↑↑
↑
↑
↓
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Strategic Energy Institute
Summary of Energy and Climate
Policy Impacts (ctd.)
Factors
Federal Renewable Electricity Standard
Carbon Cap and Trade
Stronger Renewable Fuels Standards
Biomass Pilot Plants
Favorable Taxation of Forest Property
Short‐term Impact on Outputs
Price of Paper Products
↑
↑↑
↑
↑
↓
Production of Paper Products ↓
↓↓
↓
↓
↑
Price of Biomass Power
‐
‐
‐
‐
‐
Production of Biomass Power
↑↑
↑↑
‐
↑
↑
Price of Ethanol
‐
‐
↑
‐
‐
Production of Ethanol ‐
↑
↑↑
↑
‐
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Strategic Energy Institute
Sustainability Concerns Are Likely
to Transform the Pulp and Paper
Industry
• Reinforces
product
diversification
and integration in
biorefineries
• Encourages
large-scale
energy efficiency
and the recycling
of waste heat
Strategic Energy Institute
30
For more information
• “Potential Impacts of Energy and Climate Policies on the U. S. Pulp and Paper
Industry,” Marilyn A. Brown and Nilgun Atamturk, Georgia Institute of
Technology School of Public Policy Working Paper #40, June, 2008.
(http://www.spp.gatech.edu/faculty/workingpapers.php)
• “The Lexington Project: An All of the Above Energy Solution”
http://www.johnmccain.com/Informing/Issues/17671aa4-2fe8-4008-859f0ef1468e96f4.htm
• “New Energy for America”
http://my.barackobama.com/page/content/newenergy
• “Energy Buzz” at Georgia Tech
http://www.gatech.edu/energybuzz/
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Acknowledgements
Assistance with this research was provided by Nilgun Atamturk, PhD
Student, School of Public Policy, Georgia Institute of Technology
Detailed reviewer comments were provided by the following
individuals and are gratefully appreciated:
• Dr. Andrew Jones, Energy and Chemical Recovery Solutions, International
Paper
• Jerry Schwartz, Senior Director, AF&PA
• Doug Seekins, Vice President, Cellulose Biorefining, Georgia Pacific
Cellulose
Support for this analysis was provided by the Center for Paper
Business & Industry Studies, a Sloan Foundation Industry Studies
Center at Georgia Tech. Its Board of Directors provided valuable
comments on an earlier presentation of this study’s findings.
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