Energy Campaign

Synfuels: Windfall profits for a fuel that will never come to market

UPDATE: IN APRIL 2005, REP. LLOYD DOGGETT (D-TX) INTRODUCED AN AMENDMENT TO THE ENERGY BILL TO RESCIND SYNFUELS' ELIGIBILITY TO RECEIVE SECTION 29 CREDITS. IT WAS DEFEATED IN THE HOUSE WAYS & MEANS COMMITTEE.

In 1980, Congress established a tax credit in Section 29 of the Internal Revenue Code for companies producing fuels from nonconventional sources. Created as a part of the Crude Oil Windfall Profit Tax Act of 1980, proponents of the Section 29 credit argued it would increase development of alternative domestic energy sources at a time when concerns about oil import dependence and natural security were high. Section 29 applies to fuels such as oil produced from shale or tar sands; synthetic fuels (synfuels) produced from coal; gas produced from pressurized brine; Devonian shale; tight formations; biomass; and coalbed methane, all of which were deemed "uneconomical" for conventional production.
Section 29 grants a $3 per barrel or $0.50 per thousand cubic feet tax credit. The production tax credit began at $3 per barrel of oil equivalent and was designed to phaseout as oil prices rose form $23.50 to $29.50 per barrel. However, both the credit and the phaseout were tied to inflation. Currently, the credit is worth more than $6 per barrel and more than $1 per thousand cubic feet, and oil prices must reach between $47 to $60 for the phaseout to occur. Despite the record-high prices of oil, producers have still been able to claim this credit. According to the Joint Committee on Taxation, the credit will cost $2.8 billion over the next five years.

The final energy bill would have extended the tax credit currently expired for coalbed methane and allowed four new fuels to qualify for the credit. Despite the fact that the legislation would have reset the phaseout to begin at $35 per barrel, the provision was still estimated to cost taxpayers more than $3 billion over the next ten years.

Last year, Representative Doggett introduced a bill that would have reset the phase-out and the credit to their original level (prior to inflationary adjustments) while simultaneously eliminating synthetic fuels from the list of fuels eligible for the credit. This bill failed.