Book excerpt: This technical report explains an analytic way to design and assess packages of financial incentives that the government can use to cost effectively promote early experience with coal-to-liquids (CTL) production of liquid fuels in the face of significant uncertainty about the future. The report applies two complementary analytic methods. The first uses observations from successful voluntary agreements in the commercial world to identify principles that the government can use to design a relationship with a private investor that is likely to ensure that early CTL production experience occurs cost effectively. Such a relationship yields investor and government behavior that, in turn, generates a set of cash flows to and from investor and government over time. The second analytic method takes these cash flows as given and assesses their effects on the investor and the government. It measures effects on an investor in terms of changes in the investor's real (adjusted for inflation) after-tax internal rate of return (IRR). It measures effects on the government in terms of changes in the real net present value (NPV) of cash flows to and from the government when assessed at the discount rate set by the Office of Management and Budget (OMB) for investments of this kind. The cash-flow analysis focuses on a hypothetical CTL combined-cycle production plant that uses a Fischer-Tropsch (FT) technology to convert coal into about 30,000 barrels per day (bpd) of diesel and naphtha; significant amounts of electricity, some of which can be sold off site; and carbon dioxide, which can be sequestered or sold for use in enhanced oil recovery (EOR) off site.