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The Problems With Coal Liquids Subsidies

The energy legislation passed last week by the U.S. Senate could not have been more different than what it passed two years ago. The core of the 2005 bill was mostly subsidies for the oil and energy industries. This bill is about energy efficiency. It includes both CAFE standards for autos and light trucks, and strengthened energy efficiency provisions for buildings and appliances.

One of the most significant features of the bill is what it did not include: new subsidies for plants to make liquid fuels from coal. Coal to Liquids (CTL) technology dates back to the 1920s as a possible substitute for petroleum-based liquid fuels.

The appeal of coal-to-liquids (CTL) for coal-rich countries (the US, China, Australia, India, South Africa) is that it would seem to allow them to reduce their exposure to oil market uncertainties. The question is how much they are willing to pay, and the costs look pretty steep for the process itself, as well as its climate, water, and land destruction impacts.

The climate consequences are pretty simple. It takes energy to make coal into a liquid. There are GHG emissions when you make the fuel and then GHG emissions when you burn the fuel. Without carbon capture and sequestration (CCS) CTL has about twice the GHG emissions as traditional petroleum.

With CCS, the best estimates are that one would be lucky to produce fuel with about 10% greater GHG impact than petroleum. Someday, of course, there may be more novel processes to convert coal to liquid fuel (or even better, into hydrogen) and to capture all of the CO2, but that doesn't seem likely anytime soon.

For the environment, there are significant concerns about water availability, especially given that not all coal-rich regions of the world have lots of water (north central China, the U.S., India, and Australia). It takes about 8 gallons of water to make a gallon of CTL. Using water at that scale would clearly introduce new tensions and insecurities. MIT estimates that U.S. coal production would have to increase by 25% to supply 10% of the current demand for liquid fuel. That would mean significantly greater impacts of mining and exploiting less desirable, higher cost coal.

The current political debate is not about regulation; it is about subsidies and economics, and here it gets interesting. CTL seems to fit into the "receding horizon" category: it has always claimed to be commercially ready when oil prices hit a level that was just over the horizon (roughly $15/barrel back in the 70s; $30 in the 80s, $60 in the 90s, and now, $80?). Of course CCS will increase the price for CTL. No one is building CTL facilities today, although there are no regulations preventing it, because it doesn't make economic sense. And that's without CCS. Why would we subsidize a technology that no private investor believes to be viable?

Of course the argument for CTL is security and protection of the coal industry. It seems unlikely that energy security in the 21st Century can be achieved with carbon intensive technology or by attempting to use expensive technology to insulate energy supply from the global economy. That will make us less competitive.

And there are far better options to diversify our energy supply, reduce costs, and control emissions. With help from effective government policy, efficiency is a triple win proposition. Companies like DuPont, Alcoa, and GE are reducing GHG emissions, costs, and energy use through efficiency. Vehicle efficiency improvements allowed us to cut oil demand by over 3 million barrels per day between the late 1970s and mid 1980: we have opportunities again today to lower global oil market tension and emissions through stronger CAFE regulations. Investors are also betting on renewables as a near term option. Policy signals and political leadership are needed to advance these technologies.

For the coal industry, for the US, and for the world, the key to the future is CCS. The future of the coal industry lies with advanced electric power generation technology (IGCC, ultra-supercritical plants) used with CCS, not with producing liquid fuels for the transport sector.That is where the investment should go.

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