Record world oil prices have prompted renewed interest in producing liquid fuels from coal. The United States leads the world in recoverable coal reserves. Moreover, the technology for converting coal to liquid fuels already exists, and production costs appear competitive at prices well below current levels. Yet, despite its promise, private investment in coal-to-liquids (CTL) is being impeded by three uncertainties: where oil prices are heading, what it actually costs to produce coal-derived fuels, and how greenhouse-gas emissions will be regulated. A domestic CTL industry could produce as much as 3 million barrels per day of transportation fuels by 2030. Having such an industry would yield important energy-security benefits, most notably a lowering of world oil prices and a decrease in wealth transfers from oil users to oil producers. But establishing a large CTL industry also raises important policy and environmental issues associated with climate change, coal mining, and water consumption. Weighing both benefits and costs, it makes sense for the United States to pursue an insurance, or hedge, strategy that promotes the early construction and operation of a limited number of commercial CTL plants and that establishes the foundation for managing associated greenhouse-gas emissions, both in a way that reduces uncertainties and emphasizes future capabilities.