This document and trademark(s) contained herein are protected by law as indicated in a notice appearing later in this work. This electronic representation of RAND intellectual property is provided for non-commercial use only. Unauthorized posting of RAND PDFs to a non-RAND Web site is prohibited. RAND PDFs are protected under copyright law. Permission is required from RAND to reproduce, or reuse in another form, any of our research documents for commercial use. For information on reprint and linking permissions, please see RAND Permissions. Limited Electronic Distribution Rights Visit RAND at www.rand.org Explore RAND Project AIR FORCE RAND Infrastructure, Safety, and Environment View document details For More Information Purchase this document Browse Books & Publications Make a charitable contribution Support RAND This PDF document was made available from www.rand.org as a public service of the RAND Corporation. 6 Jump down to document The RAND Corporation is a nonprofit research organization providing objective analysis and effective solutions that address the challenges facing the public and private sectors around the world. THE ARTS CHILD POLICY CIVIL JUSTICE EDUCATION ENERGY AND ENVIRONMENT HEALTH AND HEALTH CARE INTERNATIONAL AFFAIRS NATIONAL SECURITY POPULATION AND AGING PUBLIC SAFETY SCIENCE AND TECHNOLOGY SUBSTANCE ABUSE TERRORISM AND HOMELAND SECURITY TRANSPORTATION AND INFRASTRUCTURE WORKFORCE AND WORKPLACE PROJECT AIR FORCE and INFRASTRUCTURE, SAFETY, AND ENVIRONMENT This product is part of the RAND Corporation monograph series. RAND monographs present major research findings that address the challenges facing the public and private sectors. All RAND monographs undergo rigorous peer review to ensure high standards for research quality and objectivity. Producing Liquid Fuels from Coal Prospects and Policy Issues James T. Bartis, Frank Camm, David S. Ortiz PROJECT AIR FORCE and INFRASTRUCTURE, SAFETY, AND ENVIRONMENT Prepared for the United States Air Force and the National Energy Technology Laboratory of the United States Department of Energy Approved for public release; distribution unlimited The RAND Corporation is a nonprofit research organization providing objective analysis and effective solutions that address the challenges facing the public and private sectors around the world. RAND’s publications do not necessarily reflect the opinions of its research clients and sponsors. R ® is a registered trademark. © Copyright 2008 RAND Corporation All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from RAND. Published 2008 by the RAND Corporation 1776 Main Street, P.O. Box 2138, Santa Monica, CA 90407-2138 1200 South Hayes Street, Arlington, VA 22202-5050 4570 Fifth Avenue, Suite 600, Pittsburgh, PA 15213-2665 RAND URL: http://www.rand.org To order RAND documents or to obtain additional information, contact Distribution Services: Telephone: (310) 451-7002; Fax: (310) 451-6915; Email: order@rand.org Library of Congress Cataloging-in-Publication Data is available for this publication. ISBN: 978-0-8330-4511-9 Cover photo courtesy of Peabody Energy Corporation. The research described in this report was sponsored by the United States Air Force under Contract FA7014-06-C-0001. Further information may be obtained from the Strategic Planning Division, Directorate of Plans, Hq USAF. It was also supported by the National Energy Technology Laboratory, United States Department of Energy, and was conducted under the auspices of the Environment, Energy, and Economic Development Program within RAND Infrastructure, Safety, and Environment. iii Preface e increase in world oil prices since 2003 has prompted renewed interest in producing and using liquid fuels from unconventional resources, such as biomass, oil shale, and coal. is book focuses on issues and options associated with establishing a commer- cial coal-to-liquids (CTL) industry within the United States. e book describes the technical status, costs, and performance of methods that are available for producing liquids from coal; the key energy and environmental policy issues associated with CTL development; the impediments to early commercial experience; and the efficacy of alternative federal incentives in promoting early commercial experience. Because coal is not the only near-term option for meeting liquid-fuel needs, this book also briefly reviews the benefits and limitations of other approaches, including the development of oil shale resources, the further development of biomass resources, and increasing dependence on imported petroleum. A companion document provides a detailed description of incentive packages that the federal government could offer to encourage private-sector investors to pursue early CTL production experience while reducing the probability of bad outcomes and limit- ing the costs that might be required to motivate those investors. (See Camm, Bartis, and Bushman, 2008.) e research reported here was performed at the request of the U.S. Air Force and the U.S. Department of Energy. e Air Force sponsor was the Deputy Chief of Staff for Logistics, Installations and Mission Support, Headquarters, U.S. Air Force, in coordination with the Air Force Research Laboratory. e Department of Energy sponsor was the National Energy Technology Laboratory. Within RAND, it was conducted as a collaborative effort under the auspices of the Resource Management Program of RAND Project AIR FORCE and the RAND Environment, Energy, and Economic Development Program (EEED) within RAND Infrastructure, Safety, and Environment. During the preparation of this book, the U.S. Congress and federal departments were considering alternative legislative proposals for promoting the development of unconventional fuels in the United States. is book is intended to inform those delib- erations. It should also be useful to federal officials responsible for establishing civilian and defense research programs; to potential investors in early CTL production plants; iv Producing Liquid Fuels from Coal: Prospects and Policy Issues and to state, tribal, and local government decisionmakers who are considering the costs, risks, and benefits of early CTL production plants. To promote broad access to this book, we have avoided detailed technology descriptions and have relegated supporting econometric analyses to the appendix and the companion volume. is book builds on earlier RAND Corporation publications on natural resources and energy development in the United States. Most relevant are the following: Oil Shale Development in the United States: Prospects and Policy Issuest (Bartis et al., 2005) Understanding Cost Growth and Performance Shortfalls in Pioneer Process Plantst (Merrow, Phillips, and Myers, 1981) New Forces at Work in Mining: Industry Views of Critical Technologiest (Peterson, LaTourrette, and Bartis, 2001). RAND Project AIR FORCE RAND Project AIR FORCE (PAF), a division of the RAND Corporation, is the U.S. Air Force’s federally funded research and development center for studies and analyses. PAF provides the Air Force with independent analyses of policy alternatives affecting the development, employment, combat readiness, and support of current and future aerospace forces. Research is conducted in four programs: Force Modernization and Employment; Manpower, Personnel, and Training; Resource Management; and Strat- egy and Doctrine. Additional information about PAF is available on our Web site: http://www.rand.org/paf/ The RAND Environment, Energy, and Economic Development Program e mission of RAND Infrastructure, Safety, and Environment is to improve the development, operation, use, and protection of society’s essential physical assets and natural resources and to enhance the related social assets of safety and security of indi- viduals in transit and in their workplaces and communities. e EEED research port- folio addresses environmental quality and regulation, energy resources and systems, water resources and systems, climate, natural hazards and disasters, and economic development—both domestically and internationally. EEED research is conducted for government, foundations, and the private sector. Information about EEED is available online (http://www.rand.org/ise/environ). Preface v Questions or comments about this book should be sent to the project leader, James T. Bartis (James_Bartis@rand.org). vii Contents Preface iii Figures xi Tables xiii Summary xv Acknowledgments xxvii Abbreviations xxix CHAPTER ONE Introduction 1 About is Book 2 CHAPTER TWO e Coal Resource Base 5 e Adequacy of the U.S. Coal Resource Base 6 e Distribution of U.S. Coal Reserves and Production 9 Coal Variability 10 Mine Size 12 Policy Implications of the Coal Resource Base 12 CHAPTER THREE Coal-to-Liquids Technologies 15 e Fischer-Tropsch Coal-to-Liquids Approach 15 e Methanol-to-Gasoline Coal-to-Liquids Approach 23 e Direct Coal Liquefaction Approach 26 Baseline Greenhouse-Gas Emissions from Production of Coal-Derived Liquid Fuels 31 Carbon Capture and Sequestration 32 Alternative Carbon-Management Options 37 Technical Viability and Commercial Readiness 41 Production Costs 42 Timeline for Coal-to-Liquids Development 46 viii Producing Liquid Fuels from Coal: Prospects and Policy Issues CHAPTER FOUR Other Unconventional Fuels 49 Commercially Ready Unconventional Fuels 50 Emerging Unconventional Fuels 52 Summary 57 CHAPTER FIVE Benefits of Coal-to-Liquids Development 59 Economic Profits 60 Reductions in the World Price of Oil 61 National Security Benefits 66 Improved Petroleum Supply Chain 67 Oil-Supply Disruption Benefits 68 Employment Benefits 69 Confounding or Inconclusive Arguments 70 e Economic Value of a Domestic Coal-to-Liquids Industry 71 CHAPTER SIX Critical Policy Issues for Coal-to-Liquids Development 73 Environmental Impacts of Coal-to-Liquids Production 73 Impediments to Private-Sector Investment 81 CHAPTER SEVEN Designing Incentives to Encourage Private Investment 85 Designing an Effective Long-Term Public-Private Relationship 86 Assessing Financial Effects Under Conditions of Uncertainty 88 Findings and Policy Implications 91 Promoting Competition 100 Summary 101 CHAPTER EIGHT Moving Forward with a Coal-to-Liquids Development Effort 103 Prevailing Uncertainties 103 e Military Perspective 104 Federal Policy Options 106 An Insurance Policy 109 Air Force Options for Coal-to-Liquids Industrial Development 113 Scoping Federal Efforts: How Much Is Enough? 117 A Stable Framework for Reducing World Oil Prices 118 [...]... using coal to produce liquid fuels can stanch the large transfers of wealth from oil consumers to oil producers, thus providing significant benefits to U.S consumers and potentially enhancing U.S national security But there is also opposition to the concept of transforming coal to liquids Without measures to manage carbon dioxide emissions, the use of coal- derived liquids to displace petroleum fuels. .. a record 1.16 billion tons of coal, nearly all of which was used to produce electric power Dedicating only 15 percent of recoverable coal reserves to CTL production would yield roughly 100 billion barrels of liquid transportation fuels, enough to sustain three million bpd of CTL production for more than 90 years (see pp 12–13) Technology for Producing Coal- to-Liquids Fuels Has Advanced in Recent Years... Combination of Coal and Biomass to Produce Liquid Fuels May Be a Preferred Solution Biomass can be converted to a synthesis gas that FT reactors can use to produce fuels identical to those derived from coal or natural gas The biomass-to-liquids (BTL) approach results in low total-fuel-cycle release of greenhouse gases because the emissions at the plant are balanced by the carbon dioxide absorbed from the... demonstration SRC solvent-refined coal process ULSD ultralow-sulfur diesel USDA U.S Department of Agriculture USGS U.S Geological Survey CHAPTER ONE Introduction Rising petroleum prices have once again prompted interest in using coal to manufacture liquid fuels that can displace petroleum-derived gasoline and diesel fuels Coal is abundant in the United States and throughout the world Coal- to-liquids (CTL) technology... Goals and Methodology This study analyzed the costs, benefits, and risks of developing a U.S CTL industry that is capable of producing liquid fuels on a strategically significant scale Our research approach consisted of the following basic steps: xv xvi Producing Liquid Fuels from Coal: Prospects and Policy Issues To understand commercial development prospects, we examined what is known and not known regarding... 5.1 5.2 A.1 B.1 B.2 B.3 B.4 B.5 B.6 C.1 C.2 C.3 C.4 Nations Dominating Reported Reserves of Coal 5 Recoverable Coal Reserves and 2005 Coal Production by State 10 Coal- to-Liquids Development Timelines Showing Constraints That Reduce Estimated Maximum Coal- to-Liquids Production Levels 47 Calculated Changes in U.S Consumer, Producer,... production levels from domestic oil shale and biofuel resources as well as both domestic and international production of coal- derived liquid fuels Looking only at coal- derived liquids, it is possible that total world production could reach about six million bpd by 2030 (See p 62.) By reducing oil prices, consumer and business users of oil in the United States (and elsewhere) would benefit From a national... technology for converting coal to liquid fuels already exists Commercial coal- to-liquids (CTL) production has been under way in South Africa since the 1950s Moreover, CTL production appears to be economically feasible at crude oil prices well below the prices seen in 2007 and 2008 However, without effective measures to manage greenhouse-gas emissions, the production and use of coal- derived liquids to displace... fuels derived from conventional light crude oils For nearly full capture of plant-site carbon dioxide emissions, we estimate that product costs would increase by less than $5.00 per barrel (See pp 32–33.) There are two principal methods for disposing of the captured carbon dioxide The first is to use the captured carbon dioxide to enhance oil recovery in partially xviii Producing Liquid Fuels from Coal: ... to displace petroleum-derived gasoline and diesel fuels If successful, this course of action would lower prices and reduce transfers of wealth from U.S oil consumers to foreign oil producers, resulting in economic gains and potential national-security benefits Oil shale, tar sands, biomass, and coal can all be used to produce liquid fuels Of these, coal appears to show the greatest promise, considering . 42 Timeline for Coal- to-Liquids Development 46 viii Producing Liquid Fuels from Coal: Prospects and Policy Issues CHAPTER FOUR Other Unconventional Fuels 49 Commercially. the Coal Resource Base 12 CHAPTER THREE Coal- to-Liquids Technologies 15 e Fischer-Tropsch Coal- to-Liquids Approach 15 e Methanol-to-Gasoline Coal- to-Liquids