NCPA - National Center for Policy Analysis

Synfuel Producers Hit Paydirt!

August 30, 2001

During the energy crisis of the late 1970s, Congress approved tax credits to stimulate private development of new energy sources. The coal industry was largely unable to take advantage of the tax credits until 1996, when the Internal Revenue Service ruled that the so-called Section 29 credits could be sold off, allowing companies without large tax liabilities to "profit" from the credits. But to qualify, synfuel plants had to be up and running by June 30, 1998.

  • Some 55 coal-based synfuel plants sprang up to take advantage of the tax credits, worth as much as $1 billion a year.
  • The tax credits are worth about $26 a ton, more than the so-called synfuels on which they are based (about $22 a ton).
  • Many plants simply blend coal dust with binders and additives to alter the product's chemical composition, then bake the mixture into briquettes for sale to utilities.
  • Conventional coal operators complain the taxpayer-subsidized synfuel has depressed prices for conventional coal.

In May 2001 the IRS issued new rules designed to end various abuses and excesses. But the credits are currently scheduled to keep flowing until December 31, 2007, when the Section 29 program is set to expire.

But owners of synfuel plants are supporting the Energy Security for American Consumers Act, which would keep the credits flowing through 2010, and have formed the Coalition for Energy Independence to push the bill.

Source: Bill Hogan, "The Wages of Synfuels," Mother Jones, September-October 2001.


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