Role of Federal Subsidies

The possibly dramatic rise in the cost of coal seems inevitable in the foreseeable future, but the question of who should pay for these changes is far from settled. Some research and demonstration projects focused on advanced coal technologies are currently subsidized by the federal government. One such project is the Clean Coal Power Initiative, described by the Department of Energy as “a 10-year, $2 billion program designed to support the Clean Coal Technology Roadmap milestones with the government providing up to 50 percent of the cost of demonstrating a range of promising technologies.”⁴⁷ In 2003, two of the eight funded projects were located in Kentucky; however, both of these were eventually withdrawn.⁴⁸ In 2008, the program funded a portion of a research and development project at the University of Kentucky’s Center for Applied Energy Research (CAER).⁴⁹ Most recently, the American Recovery and Reinvestment Act of 2009 allocated $3.4 billion for fossil fuel research and development.⁵⁰ The majority of this money is expected to be invested in carbon sequestration and related technologies.

In August of 2008, the Department of Energy announced that the University of Kentucky CAER would receive $1.425 million to support ongoing research on coal-to-liquid for transportation fuel. In addition, the DOE and the Appalachian Regional Commission provided $850,000 for a year-long study in 2007 that led to plans for a coal-to-liquid plant in Pike County, Kentucky. Though they have not received the funding to build the plant, officials say they have support from key legislators and are planning to use state and federal funds to build the $4 billion plant. Whitley and McCracken counties have also discussed the possibility of coal-to-liquid facilities.⁵¹ Most recently, Governor Beshear released his energy plan which includes a proposed $7.5 billion coal-to-liquid plant in Paducah.⁵² Many concerned groups protest funding and support for coal-to-liquid facilities because they believe the plants will violate the Clean Air Act and accelerate the rate of mountaintop removal mining.⁵³

While the future of these specific plants and proposals is unknown at this time, it is clear that the future of coal will be expensive. Coal is already heavily subsidized in the United States, and investments in new technologies will require additional subsidies. Research and Development (R&D) funding has remained fairly constant in the last five years, while tax expenditures on the industry have risen sharply. According to a 2007 report from the United States Government Accountability Office, the fossil fuel industry received $3.1 billion in federal money for electricity-related R&D between 2002 and 2007. During this same time period, the industry received $13.7 billion in tax expenditures — a 43% increase over the five-year span.⁵⁴ In 2007, the coal industry received 68% of electricity-related tax expenditures (see Figure 17 and Figure 18).

Figure 17: Tax Expenditures by Fuel Type⁵⁵

 

Figure 18: Tax Expenditures by Fuel Type

The majority of tax expenditures for coal in recent years can be attributed to the synfuel tax credit—a federal subsidy enacted in Section 29 of the Crude Oil Windfall Profit Tax Act of 1980. This tax credit, originally intended to reduce dependence on foreign oil by building infrastructure for a competitive synthetic fuels sector, was resurrected in the 1990s as a way for enterprising coal operations to increase profitability.⁵⁶ Synfuel is made by spraying small pieces of coal with a petroleum-based product, creating a more consistent fuel product. Because the tax credit rewards high heat content, synfuel producers migrated to areas with high-Btu coal. This increased the competitiveness of Kentucky coal.⁵⁷ In 2007, however, the synfuel tax credit expired. A recent report from the Energy Information Administration states: “Without the credit, coal synfuel production is unprofitable and it is expected that all coal synfuel plants will shut down after 2007.”⁵⁸ This is expected to significantly reduce coal’s share of electricity-related tax expenditures.

Figure 19: Research and Development Expenditures by Fuel Type⁵⁹

 

Figure 20: R&D Expenditures by Fuel Type

In 2007, coal received 34% of R&D expenditures (see Figure 19). If the American Recovery and Reinvestment Act of 2009 is any indication of future policy, R&D expenditures will rise significantly in coming years. In 2007, $522 million in R&D expenditures went toward coal and refined coal. By comparison, the 2009 legislation set aside $3.4 billion for fossil fuel R&D, particularly for carbon sequestration and related technologies.

47. National Energy Technology Laboratory. Clean Coal Power Initiative. Retrieved March 20, 2009 (http://www.netl.doe.gov/technologies/coalpower/cctc/ccpi/index.html).

48. U.S. Department of Energy. 2003. “DOE Announces 1st Projects to Meet President's Clean Coal Commitment.” Fossil Energy Techline, January 15. Washington, DC. Retrieved March 20, 2009 (http://fossil.energy.gov/news/techlines/2003/tl_ccpi_2003sel.html).

49. U.S. Department of Energy. 2008. “Projects Selected to Address Challenges of Large-Scale Hydrogen Production from Coal and Coal-Biomass.” Fossil Energy Techline, September 3. Washington, DC. Retrieved March 20, 2009 (http://www.fossil.energy.gov/news/techlines/2008/08036-DOE_Announces_Coal_Biomass_Awards.html).

50. U.S. Public Law No. 111-005. 111th Congress, 1st Session, February 17, 2009. The American Recovery and Reinvestment Act of 2009.

51. “Reps. Rogers, Davis Secure $1.425 million for UK coal-to-liquid research.” August 14, 2008. Retrieved December 1, 2008 (http://halrogers.house.gov/Read.aspx?ID=287).

52. http://www.istockanalyst.com/article/viewiStockNews+articleid_2821112.html

53. See for example, http://kftc.org/our-work/canary-project/campaigns/filthy-fuels/coal-to-liquid-fuel/.

54. Government Accountability Office. 2007. Federal Electricity Subsidies: Information on Research Funding, Tax Expenditures, and Other Activities That Support Electricity Production, p. 28. Retrieved December 21, 2008 (www.gao.gov/new.items/d08102).

55. This chart comes from an analysis of Department of Energy data by the Government Accountability Office. Government Accountability Office. 2007. Federal Electricity Subsidies: Information on Research Funding, Tax Expenditures, and Other Activities That Support Electricity Production. Retrieved December 21, 2008 (www.gao.gov/new.items/d08102).

56. “A Magic Way to Make Billions.” 2006. Time, February 26. Retrieved December 2, 2008 (http://www.time.com/time/magazine/article/0,9171,1167738-1,00.html).

57. Kentucky Legislative Research Commission. 2004. The Competitiveness of Kentucky’s Coal Industry (Research Report No. 318). Frankfort, KY: 30-31.

58. Energy Information Administration. 2008. Coal Demand. Retrieved January 9, 2009 (http://www.eia.doe.gov/neic/infosheets/coaldemand.html).

59. This chart comes from an analysis of Department of Energy data by the Government Accountability Office. Government Accountability Office. 2007. Federal Electricity Subsidies: Information on Research Funding, Tax Expenditures, and Other Activities That Support Electricity Production. Retrieved December 21, 2008 (www.gao.gov/new.items/d08102).