Benchmarks

Fortnightly Magazine - September 15 2000
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SEEMINGLY OVERNIGHT, SYNTHETIC FUEL from coal, or "synfuel," has evolved from an industry novelty to a significant and growing force in U.S. fuel markets. (See "Benchmarks," , May 15, 2000.) RDI expects production from the 55 qualified synfuel plants to grow from just 3.9 million tons of output in 1999 to 43 million tons by 2003. This rapid expansion is a source of both elation and consternation to coal industry participants. For those that own synfuel facilities and sell synfuel to unrelated parties, Section 29 tax credits can significantly offset the company's regular tax liability. On the other hand, coal sellers without a synfuel position face further undercutting of weak coal prices and declining market share.

Though they have not quenched enthusiasm for synfuel, concerns that an explosion of tax credit claims will evoke more intense Internal Revenue Service scrutiny have nagged the industry. However, in recent months, discussion regarding the propriety of certain claims on Section 29 tax credits has become more heated.

The dialogue entered the public forum in late May, when Canadian coal producer Fording Coal Ltd. requested that Canada file a formal complaint with the World Trade Organization against the United States. Fording asked that the synfuel credit be eliminated on the basis that it provides "an unfair subsidy to [synfuel] producers."

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