The New York Times (pg. A1)  [Printer-friendly version]
May 29, 2007


By Edmund L. Andrews

WASHINGTON, May 28 -- Even as Congressional leaders draft legislation
to reduce greenhouse gases linked to global warming, a powerful roster
of Democrats and Republicans is pushing to subsidize coal as the king
of alternative fuels.

Prodded by intense lobbying from the coal industry, lawmakers from
coal states are proposing that taxpayers guarantee billions of dollars
in construction loans for coal-to-liquid production plants, guarantee
minimum prices for the new fuel, and guarantee big government
purchases for the next 25 years.

With both House and Senate Democrats hoping to pass "energy
independence" bills by mid-July, coal supporters argue that coal-
based fuels are more American than gasoline and potentially greener
than ethanol.

"For so many, filthy coal is a dirty four-letter word," said
Representative Nick V. Rahall, Democrat of West Virginia and chairman
of the House Natural Resources Committee. "These individuals, I tell
you, have their heads buried in the sand."

Environmental groups are adamantly opposed, warning that coal-based
diesel fuels would at best do little to slow global warming and at
worst would produce almost twice as much of the greenhouse gases tied
to global warming as petroleum.

Coal companies are hardly alone in asking taxpayers to underwrite
alternative fuels in the name of energy independence and reduced
global warming. But the scale of proposed subsidies for coal could
exceed those for any alternative fuel, including corn-based ethanol.

Among the proposed inducements winding through House and Senate
committees: loan guarantees for six to 10 major coal-to-liquid plants,
each likely to cost at least $3 billion; a tax credit of 51 cents for
every gallon of coal-based fuel sold through 2020; automatic subsidies
if oil prices drop below $40 a barrel; and permission for the Air
Force to sign 25-year contracts for almost a billion gallons a year of
coal-based jet fuel.

Coal companies have spent millions of dollars lobbying on the issue,
and have marshaled allies in organized labor, the Air Force and fuel-
burning industries like the airlines. Peabody Energy, the world's
biggest coal company, urged in a recent advertising campaign that
people "imagine a world where our country runs on energy from Middle
America instead of the Middle East."

Representative Rick Boucher, a Virginia Democrat whose district is
dominated by coal mining, is writing key sections of the House energy
bill. In the Senate, champions of coal-to-liquid fuels include Barack
Obama, the Illinois Democrat, Jim Bunning of Kentucky and Larry Craig
of Idaho, both Republicans.

President Bush has not weighed in on specific incentives, but he has
often stressed the importance of coal as an alternative to foreign
oil. In calling for a 20 percent cut in projected gasoline consumption
by 2017, he has carefully referred to the need for "alternative" fuels
rather than "renewable" fuels. Administration officials say that was
specifically to make room for coal.

The political momentum to subsidize coal fuels is in odd juxtaposition
to simultaneous efforts by Democrats to draft global-warming bills
that would place new restrictions on coal-fired electric power plants.

The move reflects a tension, which many lawmakers gloss over, between
slowing global warming and reducing dependence on foreign oil.

Many analysts say the huge coal reserves of the United States could
indeed provide a substitute for foreign oil.

The technology to convert coal into liquid fuel is well-established,
and the fuel can be used in conventional diesel cars and trucks, as
well as jet engines, boats and ships. Industry executives contend that
the fuels can compete against gasoline if oil prices are about $50 a
barrel or higher.

But coal-to-liquid fuels produce almost twice the volume of greenhouse
gases as ordinary diesel. In addition to the carbon dioxide emitted
while using the fuel, the production process creates almost a ton of
carbon dioxide for every barrel of liquid fuel.

Coal industry executives insist their fuel can actually be cleaner
than oil, because they would capture the gas produced as the liquid
fuel is being made and store it underground. Some could be injected
into oil fields to push oil to the surface.

Several aspiring coal-to-liquid companies say that they would reduce
greenhouse emissions even further by using renewable fuels for part of
the process. But none of that has been done at commercial volumes, and
many analysts say the economic issues are far from settled.

"There are many uncertainties," said James T. Bartis, a senior policy
researcher at the RAND Corporation, who testified last week before the
Senate Energy Committee. "We don't even know what the costs are yet."

The clash between "energy independence" and global warming will break
into the open next month. The Senate energy bill, being drafted by
Senator Jeff Bingaman, Democrat of New Mexico, would promote renewable
fuels -- but not coal-to-liquid fuels -- and would require electric
utilities to produce 15 percent of their power with renewable fuels by

But coal-state Republicans have vowed to resume their push for coal
incentives when the bill reaches the Senate floor, and many Democrats
are likely to support them. In the House, Democrats like Mr. Boucher
and Mr. Rahall will be pushing in the same direction.

But some energy experts, as well as some lawmakers, worry that the
scale of the coal-to-liquid incentives could lead to a repeat of a
disastrous effort 30 years ago to underwrite a synthetic fuels
industry from scratch.

When oil prices plunged in the 1980s, the government-owned Synthetic
Fuels Corporation became a giant government albatross that lost
billions and remains a symbol of misguided industrial policy more than
25 years later.

"This is the snake oil of energy alternatives," said Peter Altman, a
policy analyst at the National Environmental Trust, an environmental
advocacy group. "The promises are just as lofty and the substance is
just as absent as the first snake oil salesmen who plied their trade
in the 1800s."

Coal executives contend that the technology for converting coal to
"ultraclean" diesel fuel for use in cars and trucks has been around
for decades. Known as the Fischer-Tropsch process, the technology
dates to the 1920s. It was used by Germany during World War II and by
South Africa during the apartheid era, in both cases because the
countries were blocked by international embargoes from buying oil.

SASOL, a South African chemical conglomerate, is the world's largest
producer of coal-based liquids and operates a plant that produces
150,000 barrels a day.

"Greener and cleaner -- we can do it, and we will do it," said John
Baardson, president of Baard Energy, a firm in Vancouver, Wash., that
is trying to build a $4 billion coal-to-liquid plant in Ohio.

But no company has built a commercial-scale plant that also captures
carbon, and experts caution that many obstacles lie ahead.

"At best, you're going to tread water on the carbon issue, and you're
probably going to do worse," said Howard Herzog, a principal research
engineer at the Massachusetts Institute of Technology and a co-author
of "The Future of Coal," a voluminous study published in March by
M.I.T. "It goes against the whole grain of reducing carbon."

The M.I.T. team expressed even more skepticism about the economic
risks. It estimated that it would cost $70 billion to build enough
plants to replace 10 percent of American gasoline consumption.

The study estimates that the construction costs for coal-to-liquid
plants are almost four times higher than the costs for comparable
petroleum refineries, and it argues that cost estimates for synthetic
fuel plants in the past turned out to be "wildly optimistic."

In a new report last week, the Energy Department estimated that a
plant capable of making 50,000 barrels of liquefied coal a day -- a
tiny fraction of the nearly 9 million barrels in gasoline burned daily
in the United States -- would cost $4.5 billion.

But the Energy Department also estimated that such a plant could
produce a 20 percent annual return if oil prices remain about $60 a

Coal executives say that they need government help primarily because
oil prices are so volatile and the upfront construction costs are so
high. "We're not asking for everything. All we're asking for is
something," said Hunt Ramsbottom, chief executive of Rentech Inc.,
which is trying to build two plants at mines owned by Peabody Energy.

But coal executives anticipate potentially huge profits. Gregory H.
Boyce, chief executive of Peabody Energy, based in St. Louis, which
has $5.3 billion in sales, told an industry conference nearly two
years ago that the value of Peabody's coal reserves would skyrocket
almost tenfold, to $3.6 trillion, if it sold all its coal in the form
of liquid fuels.

Coal industry lobbying has reached a fever pitch. The industry spent
$6 million on federal lobbying in 2005 and 2006, three times what it
spent each year from 2000 through 2004, according to calculations by

Peabody, which has quadrupled its annual lobbying budget to about $2
million since 2004, recently hired Richard A. Gephardt, the Missouri
Democrat who was House majority leader from 1989 to 1995 and a
candidate for the Democratic presidential nomination in 1988 and 2004,
to help make its case in Congress.

One of the most vociferous champions of coal-to-liquid fuels is the
Southern States Energy Board, a group organized by governors from 16
states. Last year, the group published a study, which cost $500,000,
that concluded that coal-to-liquid fuel could and should replace
almost one-third of imported oil by 2030.

As it happens, the coal industry supplied much of the financing for
the study and subsequent marketing. Peabody Energy contributed about
$150,000 and the National Mining Association added $50,000, officials
at the Southern States Energy Board said.

The inducements under discussion would not only subsidize up to 10
coal-to-liquid plants, but also guarantee a minimum market through
long-term contracts with the Air Force and minimum prices for at least
some producers.

"There is financial uncertainty, which is inhibiting the flow of
private capital into the construction of coal-to-liquid facilities,"
said Mr. Boucher, who supports most of the proposals and is drafting
portions of the energy bill.

In addition to construction loan guarantees, Mr. Boucher would protect
the first six liquid plants from drops in energy prices. If oil prices
fell below about $40 a barrel, the government would automatically
grant loans to the first six plants that make coal-based fuels. If oil
prices climbed to $80 a barrel, companies would have to pay a
surcharge to the government.

But the most important guarantee, many coal producers said, is the
prospect of signing 25-year purchase contracts with the Air Force.

The Air Force consumes about 2.6 billion gallons a year of jet fuel,
and Air Force officials would like to switch as much as 780 million
gallons a year to coal-based fuels. Air Force officials strongly
support the idea of extremely long contracts, but others at the
Defense Department worry that the military could be left holding the
bag for years if oil prices dropped significantly.

For Mr. Boyce, chief executive of Peabody Energy, there is no reason
to be timid.

"If America has the will to be one of the great energy centers of the
world," he told an industry conference last year, "we have the
resources right under our feet."