Statement of The Honorable Mike Doyle, a Representative in Congress from the State of Pennsylvania

Testimony Before the Subcommittee on Select Revenue Measures
of the House Committee on Ways and Means

April 24, 2007

Background

Thank you, Mr. Chairman.  Today, we will hear about the nexus between energy policies and tax incentives.  At a local level, this is an important issue for my constituents in Pittsburgh, Pennsylvania; on a broader scale, it is an important issue for residents of the Commonwealth of Pennsylvania and of our Nation.  Energy policy and taxes intersect in many areas and Congress has often provided tax incentives, such as tax credits, to promote projects that exploit domestic sources of energy.  The tax credits are necessary to attract the financing for projects that might not otherwise prove economically viable in the short term.  However, in the long-term, these projects often provide significant positive externalities, such as the use of alternative energy sources, environmental benefits, and reduce reliance on foreign energy sources.  For this reason, tax incentives play an important role in the development of energy resources and provide an important public-private partnership for the continued advancement of energy policy.

The key to the Nation’s long-term energy health is a comprehensive and inclusive national energy policy.  Such a policy would include both traditional fossil fuels:  coal, oil, gas, etc.  It would also diversify the portfolio of fuels with renewable energy sources such as fuel cells, solar, wind power and combined heat and power systems, as well as developing new technologies, like the research that is ongoing to extract gas from methane hydrates.

One type of fuel source combines both a traditional fossil fuel, coal, with a substance that would otherwise be a hazardous waste to create a fuel product that is used in coke batteries as a feedstock for the production of coke.  This type of fuel is known as refined coal from a qualified coal waste sludge recycling process and last week I submitted a bill that would expand the existing Section 45 refined coal credit to include a tax incentive for the production of this fuel.

I believe that refined coal from a qualified coal waste sludge recycling process provides significant energy and environmental benefits because the process recaptures the BTU content of “coal waste sludge” (described below) and has the associated environmental benefits of disposing of the coal waste sludge in a manner approved by the Environmental Protection Agency.  The use of coal waste sludge as a fuel product offsets other fuels that would otherwise be used in the coke manufacturing process.  This is exactly the type of alternative energy technology that Congress has desired to encourage in the past and the provision of a tax incentive for the production of refined coal from a qualified coal waste sludge recycling process significantly furthers sound energy, environmental, and economic policies.

Description of Process

The qualified coal waste sludge recycling process combines coal and coal waste sludge to create a solid fuel product that is used by the domestic steel industry as a feedstock for the manufacture of coke.  Coal waste sludge is the tar decanter sludge and other byproducts of the coking process, including such materials that have been stored in ground, in tanks and in lagoons, that have generally been treated as hazardous wastes under applicable Federal environmental rules. 

Presently, there are three primary methods for disposal of coal waste sludge:

1. Manufacture of refined coal from a qualified coal waste sludge recycling process.
2. Transportation to incinerators.
3. Transportation to foreign landfills.

The most favorable method, from an energy and environmental perspective, is to use a process (described in patent numbers 4,579,563 (April 1, 1986), 4,758,246 (July 19, 1988) and 4,778,115 (October 18, 1988)) that processes liquefied coal waste sludge with coal into a refined coal fuel product for use in steel producers’ coke batteries.  This method recaptures the significant energy content of the coal waste sludge and can be performed on the site of the steel producers’ coke operations.  The disposal of coal waste sludge in this manner has been approved by the EPA.  See 50 Federal Register No. 120 (June 22, 1992). 

The alternative methods of disposal are to transport the coal waste sludge off-site for incineration or to foreign countries for land-filling.  The alternative methods have significant drawbacks, including the need to physically convey a hazardous waste (which is a dangerous, cumbersome and expensive undertaking) and the failure to recapture the energy content of the coal waste sludge if it is incinerated or land-filled rather than combined with coal to create a coke feedstock.

The manufacture of refined coal from a qualified coal waste sludge recycling process is a technology that should be promoted.  While currently the process is primarily used to convert coal waste sludge produced in the current operations of coke batteries into a fuel product, there are other sources of coal waste sludge available to be processed into a refined coal product.  For example, coal waste sludge was historically stored in domestic storage lagoons and storage tanks.  There exists an abundant supply of coal waste sludge in these areas.  In addition, “town gas” waste sites, which date back to the 19^th century when coal gas was widely used as an energy source, also provide another potential source for an alternative fuel that could be capitalized upon by using the coal waste sludge recycling process.  However, to fully achieve these benefits, technological advances are needed to spur other industrial developments allowing economical and efficient clean up of these sources of coal waste sludge.

Finally, it is important to note that the production of domestic steel would benefit greatly from the Section 45 tax credit for qualified coal waste sludge recycling.  Steel companies can directly or indirectly share in the benefits of the tax credit and this results in cheaper coke, which can result in the steel companies being more competitive against coke imported from foreign countries such as China.  In the past, cheap Chinese coke has flooded the domestic market and played a role in the demise of various coke operations that could not compete.  Such competition has drastic implications because, once a coke battery shuts down, it is no longer able to function to produce coke and new coke batteries must be built to fill the void let behind.  The potential for cheap coal through unfair foreign competition is a threat to domestic energy security.  The availability of the credit has a secondary benefit of helping to mitigate such a threat.

Explanation of Section 45 Amendment

The bill that I have submitted would amend Section 45 to provide (i) that refined coal from a qualified coal waste sludge recycling process is eligible for a credit, (ii) a definition of “coal waste sludge” (i.e., the tar decanter sludge and related byproducts of the coking process, including such materials that have been stored in ground, in tanks and in lagoons, that have been treated as hazardous wastes under applicable Federal environmental rules absent liquefaction and processing with coal into a feedstock for the manufacture of coke), (iii) that a qualified coal waste sludge recycling facility shall be treated as placed in service for purposes of this amendment when such facility is in place and functioning to process coal with coal waste sludge, (iv) a placed-in-service window of one year from the date of enactment of the bill allowing for the construction of new qualified coal waste sludge recycling facilities, and (v) that the credit period would be for such refined coal that is produced and sold during the period beginning on the date of enactment of this amendment and ending on the date that is four years after the later of the first day of the fifth full month after the date of enactment or the facility’s placed-in-service date.

Additional details set forth in the legislation include the following:

• A qualified coal waste sludge recycling process liquefies and distributes approximately one-quarter to one-half gallon of liquefied coal waste sludge per ton of coal.  Liquefied coal waste sludge in excess of such amounts would have adverse effects on the operations and equipment of the coke batteries that use refined coal from a qualified coal waste sludge recycling process as a feedstock to produce coke.  Based on industry research, an excessive amount of coal waste sludge causes extreme and irreparable damage to the coke battery.  Coal waste sludge has an energy content of approximately 7,000 to 16,000 BTUs per pound.
• For purposes of this amendment, a “qualified coal waste sludge recycling facility” includes a plant, comprised of one or more batch tanks and/or one or more storage tanks, steam and spray pipes, processing pumps, variable speed drives, a flowmeter and related electrical equipment, that processes coal and liquefied coal waste sludge.

The amount of the credit would be set at an inflation-adjusted $3.00 per barrel-of-oil equivalent for refined coal from a qualified coal waste sludge recycling process produced and sold to an unrelated party.  Producers of refined coal from a qualified coal waste sludge recycling process would only be able to claim credits once; i.e., if an income tax credit for the fuel production is claimed under Section 45, an income tax credit could not be claimed under any other Code provision.  However, the section 45 credit shall be available for refined coal that meets the requirements of Section 45, notwithstanding the fact that such refined coal is purchased for use as a feedstock for coke by a taxpayer that has previously claimed credits under Section 45K for the production of coke of coke gas.  Coke or coke gas produced from refined coal from a qualified coal waste sludge recycling process for which credits have been claimed under Section 45 would not be eligible for an income tax credit under Section 45K.  However, a coke or coke gas credit under Section 45 may be claimed if such coke or coke gas was produced from a feedstock for which the refined coal credit under Section 45 has not been claimed.

Final Remarks

Tax incentives are an important component to the development of a national energy policy that includes a diverse portfolio of energy resources.  Tax incentives can be used to effectively promote the development of projects that would not otherwise go forward – notwithstanding their positive energy and environmental benefits.  Such incentives have seen success in areas like landfill gas an other alternative fuels.  The amendment of Section 45 to include refined coal from a qualified coal waste sludge recycling process is part of an effort to follow the past successes with tax incentives that will have similar results.  Refined coal from a qualified coal waste sludge recycling process will achieve this benefit by utilizing a traditional fossil fuel, coal, together with what would otherwise be a hazardous waste, coal waste sludge, to create an alternative fuel.  For this reason, tax incentives should be provided to attract the capital necessary to develop these projects.