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The Liquid Coal Tax Credit: An Environmental and Financial Time Bomb

Brian Siu

Posted December 16, 2010

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A few days ago, a colleague wrote that Congress planned to extend the liquid coal excise tax credit.  Since then, the Senate passed that extension despite opposition in the House.  Extending the credit is shortsighted policy on several levels.  As I've described earlier, liquid coal has enormous environmental drawbacks.  But there are also substantial financial risks associated with this decision.  A closer look at the tax credit’s structure demonstrates how this poorly designed subsidy can rack up significant taxpayer costs if Congress continues to extend it.

Sections 6426(d), 6426(e), and 6427 of the Internal Revenue Code provide a refundable fifty cent tax credit for each gallon of liquid coal sold or mixed into motor vehicle, motorboat, or aviation fuel. The present cost of this subsidy is fairly low because there are no commercial scale liquid coal facilities to take advantage of it.  But a read of the tax code suggests that there is nothing to prevent future costs from spiraling out of control. There are no apparent limitations on how much any individual company can benefit in one year, how many consecutive years that company can qualify, how much aggregate subsidy the company can accrue, or how much the program can cost overall. It is virtually a blank check limited only by Congress’s willingness to discontinue the incentive.  There are not even safeguards to suspend the payments if oil prices creep back to historic highs.

This favorable treatment for a very dirty fossil fuel sharply contrasts with restrictions that are routinely applied to environmentally superior options. The hybrid vehicle tax credit, for instance, phases out once a manufacturer produces 60,000 units. The solar Investment Tax Credit is limited to 30% of qualified expenditures. A 30% cap also applies to federal grants to help automakers retool their manufacturing facilities to produce advanced technology vehicles.  It seems not only unfair, but shortsighted to apply hard limits on clean technologies while giving liquid coal and its profound environmental impacts open ended access to public funds.

Moreover, the large centralized nature of liquid coal technology maximizes taxpayer exposure to this credit.  A commercial scale facility might produce roughly 50,000 barrels of fuel per day.  At 42 gallons per standard barrel and fifty cents per gallon, the annual subsidy costs pencils out to well over $300 million per year for a single facility.  And that figure would increase in large step increments as more large plants come on line. Granted, escalation assumes continuous extension of the credit and that is not guaranteed.  But it does underscore the importance of quickly discontinuing this provision before it becomes a financial and political problem.  We should not let vague assumptions of eventual discontinuation prevent us from taking real steps to protect taxpayers and the environment. If we wait too long, an emerging liquid coal industry could become financially reliant on this generous subsidy, making removal that much more difficult.

Yet these concerns should not obscure the larger point that the credit attempts to commercialize harmful technology.  As we have stated earlier, producing and burning liquid coal emits roughly double the global warming pollution as producing and burning conventional gasoline, diesel, or jet fuel. And because it requires half a ton of coal to produce one barrel of product, a commercialized liquid coal industry would significantly increase coal mining and its environmental consequences

It’s clear that the liquid coal tax credit is an environmental and financial mistake in progress. And while 32 wise members of the House of Representatives voiced opposition to this subsidy, it is unclear if and when the rest of Congress will follow their advice.

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louieDec 17 2010 09:23 AM

You'd have to ask yourself before publishing this article is it a cheaper option in the long run to pay these subsidies, keeping in mind the royalties and company tax the ctl plant operators will pay the country and provide thousands of jobs or to keep importing crude oil with absolutely no benefit to the country.

Brian SiuDec 17 2010 12:37 PM

Thanks for your remarks, Louie.

NRDC fully agrees that we need to develop technologies that enhance energy security and create jobs. However, we disagree that we should subsidize technologies that are an environmental dead end. With widespread concern of the spending and debt, we must demand the most for our limited dollars. That means directing our taxpayer resources to measures like advanced technology vehicles that provide employment, environmental and energy security benefits. Conversely, we should avoid using limited dollars to invest heavily in technologies that ultimately lose public support as the environmental consequences mature.

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