When the Senate takes up the 2007 farm bill this week, one industry sector paying close attention will be one not typically associated with agriculture: Big Coal.

That’s because of a provision buried deep in an agricultural tax package expected to be joined to the farm bill on the Senate floor that extends a federal tax credit for production of renewable transportation fuels — including fuels derived from coal.

If signed into law, the tax credit extension would mark the biggest legislative victory to date for “coal-to-liquids” advocates in a debate that has reverberated across both sides of the Capitol in the 110th Congress.

The Senate Finance Committee originally had intended to extend the 50-cents-a-gallon tax credit to 2010 only for farm-based renewable fuels like ethanol when it met to mark up the bill last month.

But Senators were forced to include coal-based fuels in the tax mix after Sen. Jim Bunning (R-Ky.) held up the markup for hours when he found out the panel planned to allow an existing credit for CTL to expire.

“I found this unacceptable,” Bunning said in a speech last month. The committee acquiesced after Bunning and Sen. John Kerry (D-Mass.) struck a deal on environmental performance requirements for fuels made from coal.

The fight over CTL, which is a liquid transportation fuel derived from gasified coal, underscores the tension between two of the Democrats’ top legislative priorities this session: achieving energy independence and reducing global warming.

Proponents of CTL say it offers great potential for reducing U.S. dependence on foreign oil.

“It’s something the country needs to consider if we’re truly committed to energy independence in the United States,” said William Anderson, assistant secretary of the Air Force for installations, environment and logistics, in an interview last week. The Air Force is greatly interested in CTL as a homegrown alternative to expensive petroleum-based jet fuels.

But environmentalists and like-minded Democrats say the environmental risks of CTL — which by some estimates would double the greenhouse gas emissions of conventional gasoline — far outweigh the energy security benefits.

“Higher pollution means that getting off oil and taking up liquid coal is like moving from cigarettes to crack,” said Deron Lovaas of the Natural Resources Defense Council.

However, CTL advocates say at a minimum, they can match the carbon dioxide emission levels of conventional gasoline and eventually will be able to improve on it. They also say CTL emits less dangerous pollutants than petroleum fuels, notwithstanding carbon dioxide, the main culprit in global warming.

But the industry first has to get off the ground.

There currently are no commercial-scale CTL plants in the United States, although 15 are in the works, said Corey Henry, a spokesman for the Coal-To-Liquids Coalition, an industry group closely tied to the National Mining Association that also includes consumer and labor groups.

Environmentalists say CTL is an expensive boondoggle that won’t launch without significant help from the federal government. “They’re trying hard to figure out any incentives they can get,” said Alice McKeown, a coal expert for the Sierra Club. “They’re really starting to feel pressure to get it up and going.”

Henry readily admits the industry coalition is seeking tax credits and federal loan guarantees as well as Congressional approval for Bunning legislation to allow the Defense Department to enter into long-term acquisition contracts with CTL producers.

“DOD long-term contracting is one of our highest-priority items,” Henry said. “The military will be one of the prime markets.”

Anderson agrees and says CTL has emerged as the leading alternative to jet fuel.

“It packs a lot of power for every pound of material you have on the airplane,” Anderson said. He noted that any CTL fuel bought by the Air Force will have to meet stringent environmental performance requirements.

Anderson said extending DOD’s contracting authority “makes sense.”

“It’s not something we necessarily need, but we understand why the producers might feel it’s important,” he said, noting the Air Force equals 10 percent of the U.S. market for aviation fuel.

Bunning spokesman Mike Reynard said it was unclear when the plan would be offered, but he said the Senator remains vigilant for any opportunity to press the issue. “He takes every opportunity he can to push for it,” Reynard said.

CTL proponents will have other opportunities to press the issue in the 110th Congress, including the House and Senate bills, which both include loan guarantee provisions that would apply to CTL plants.

In addition, House Energy and Commerce Chairman John Dingell (D-Mich.) has vowed to resurrect legislation that would aid CTL producers when his committee takes up comprehensive climate change legislation later this session. The CTL provisions were part of a legislative draft that sparked a public spat with Speaker Nancy Pelosi (D-Calif.) during the House energy debate last summer. Dingell eventually dropped the plan.

Jim Bartis, an energy researcher who has studied CTL for the RAND Corp., a nonprofit think tank, said things look good for the CTL industry. “It looks like it can produce some high-quality fuels that are competitive,” he said.

He said Congress should subsidize a “modest” program of several plants to allow the industry to “get some real commercial experience.”

However, McKeown says environmentalists are keeping a vigilant watch over CTL bills and amendments to keep that from happening. “We are on our guard,” she said.