The U.S. is plump with coal. The country has one quarter of the world's reserves, and coal accounts for about 50 percent of the nation's electricity. To cut the reliance on oil imports, why not also use it to power cars and trucks or to heat homes, too?

That may happen soon. This year Waste Management and Processors, Inc. (WMPI), will break ground for the first U.S. coal-to-diesel production facility, in Gilberton, Pa. The plant will process 1.4 million tons of waste coal a year to generate approximately 5,000 barrels a day of diesel fuel. Other states, such as Illinois, Virginia, Kentucky, Wyoming and West Virginia, are also considering coal-to-liquid facilities.

Interest in the technology is certainly welcome news to WMPI president John Rich, who has been trying to finance such a facility for more than a decade. "Coal to liquids hadn't taken off, because the price of crude was at $30 to $40 a barrel," Rich says. Oil at about $60 makes coal more attractive.

To create the fuel, coal is first mixed with oxygen and steam at high temperature and pressure to produce carbon monoxide and hydrogen. The second step, referred to as Fischer-Tropsch synthesis, uses a catalyst to transform the gas into a liquid synthetic crude, which is further refined. Along the way, mercury, sulfur, ammonia and other compounds are extracted for sale on the commodities market.

The type of technology required to gasify the coal depends on the starting material. Pennsylvania alone has an estimated 260 million tons of waste coal--coal discarded because of its low energy content. "For every two tons of coal mined, up to half ends up in the reject pile," Rich says. Existing nearby facilities are not equipped to burn it. WMPI will rely on approaches innovated by South African energy giant Sasol; those methods are optimized to work with energy-poor coal, which include lignite and bitumen.

The resultant fuel is cleaner than conventional, sulfur-free diesel. In comparison tests, Daimler-Chrysler showed that the coal-derived fuel spews 10 percent of the carbon monoxide and hydrocarbons and 70 percent of the particulates. The firm had plans to unveil a demonstration vehicle with a tweaked V-6 engine in April that cuts nitrogen oxides and other emissions even further, says Stefan Keppeler, senior manager of fuels research at the company.

Though relatively clean at the tailpipe, the fuel is dirty at its source. A similar coal-based power plant discharges about four million tons of carbon dioxide a year. In some facilities, the greenhouse gas can be repurposed--it can be pumped into oil fields or, in the case of WMPI's plant, sold to the beverage industry. Unless scientists develop methods to sequester CO2 and find other uses for the gas, the technology might languish, warns Rudi Heydenrich, business unit manager at Sasol. The gasification step is also expensive, accounting for two thirds of the cost of a facility. "You need a structure where there is government support to ensure sustainable economics in the long run," Heydenrich remarks.

Under the Bush administration's Clean Coal Power Initiative, a $100-million federal loan guarantee jump-started the new WMPI facility. The state of Pennsylvania also chipped in with tax credits and a plan to buy up to half the plant's output to power its vehicles. Investors may contribute the additional $500 million necessary to build the plant. The initial cost of the fuel is expected to be about $54 a barrel.

Coal is not the only source of synthetic diesel; the fuel can be derived from natural gas and more cheaply, too. In fact, Qatar and Nigeria are building gas-to-liquid plants, and Sasol estimates that by 2014, gas-to-liquid fuel may account for at least 5 percent of the global market. But the U.S. does not have nearly as much natural gas as coal. And considering the vast coal reserves in China, which is also considering the technology, coal-derived diesel seems likely to play a bigger role in helping to liberate some countries from dependence on oil imports.