NCPA - National Center for Policy Analysis

Synfuels Tax Credit

July 14, 2003

During the Carter era of fuel shortages and rising prices, Congress turned to synthetic fuels as a potential solution to the energy crisis. "Synfuels," it was thought, would be competitive with coal and oil-based fuels when crude oil hit the expected $100 a barrel -- of course, adjusted for inflation, oil would have to rise much higher today.

  • First enacted in 1980, the tax credits were designed to subsidize huge coal gasification plants, but when those proved to be impractical, less-ambitious efforts to process coal for use in power plants sprang up because of the tax break.
  • And 20 years later, a synthetic-fuels tax credit remains on the books, generating a tax credit of about $26 per ton of coal.
  • Instead of turning coal into oil, however, businesses qualified for the credit by doing such things as spraying crushed coal with fuel oil or similar substances, a tactic that has become known as "spray and pray."
  • In 2001, for example, the tax credit was worth between $650 million and $850 million.

In June 2003, the Internal Revenue Service announced that it now has "reason to question the scientific validity of test procedures and results that have been presented as evidence" in support of the tax credits. To qualify, the coal is supposed to be significantly altered, but the processed coal has the same energy content as regular coal.

Source: David Rogers, "IRS Bid to Revoke Fuel Credits Clears a Hurdle in Budget Vote," Politics & Policy, Wall Street Journal, July 14, 2003.

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