I have recently heard someone say that recycled paper produces just as much environmental issues as virgin paper products. I'm sure that this isn't a surprise but I haven't found much to support that. I did find a relatively decent summary of the environmental impact of recycled paper vs virgin paper. While its clear that recycled paper is still not environmentally neutral it leaves less impact that cutting down more trees. It is however still more expensive. So if more paper is recycled by consumers this brings down the material cost even more for recycled paper making it more competitive.
I did find a wikipedia entry on recycling criticism but the arguments seem pretty weak and not as well referenced.