NCPA - National Center for Policy Analysis

Turning Coal Into Tax Credits

July 12, 2001

The original purpose of granting companies tax credits for research and development of synthetic fuels was to encourage development of methods to turn coal into a substitute for oil -- either as a gas, a liquid or an environmentally clean solid. That was 20 years ago, when the U.S. faced a shortage of imported oil -- but had coal aplenty.

Today, the synthetic-fuels tax credit is still on the books and some companies are reaping millions of dollars in subsidies just for altering coal a little bit to make it qualify as a synthetic fuel.

  • One process -- grinding coal up and then soaking it with an oily emulsion -- produces a product which has the same energy content as regular coal and burns similarly.
  • Other processes involve soaking, spraying or coating coal with substances ranging from asphalt to waste oil to starch and even diesel fuel -- processes that don't increase energy output.
  • The only difference, experts say, is that it's the taxpayer who gets burned -- to the tune of about $26 a ton.
  • Tax subsidies under the program this year will run between $650 million and $850 million.

President Ronald Reagan killed off President Jimmy Carter's U.S. Synthetic Fuels Corp. because it had become a symbol of government failure and waste -- but not before it had made about $1.5 billion in grants and guarantees.

But Congress failed to eliminate the tax credit -- thanks to some skilled lobbyists -- and it continues to prop up bogus processes.

Source: John D. McKinnon, "Washington Alchemy Turns Coal Products into Big Tax Credits," Wall Street Journal, July 12, 2001.

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