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January 14, 2016
Following An Historic Budget Compromise Congress Will Remain Focused On Energy Issues For The Rest Of The Session
By Mercury Strategies

On December 18 2015, President Obama signed into law a $1.15 trillion budget and $629 billion package of tax extenders. The omnibus bill, together with the tax extenders package otherwise known as the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”), yielded a surprising compromise on energy and environmental issues where both political parties advanced or protected important priorities. The compromise, however, left numerous high level energy and environmental policy issues unresolved. While many clean energy tax incentives are set to expire in the next several years, lawmakers remain focused on taking up permanent tax reform. Republican lawmakers continue to target the President’s environmental agenda. Both parties are circulating comprehensive energy bills. Accordingly, a wide variety of energy tax and policy issues will remain high on the congressional docket through the remainder of the current session.

The most conspicuous compromise on energy policy included in the omnibus package was an agreement to lift a decades old ban on crude oil exports in exchange for the extension of key tax credits for wind and solar power. The crude oil export ban was passed in the early 1970s as part of a plan to enforce Nixon-era price controls. With some exceptions for close trading partners and subject to limited executive waiver, the law prohibited the export of U.S. crude to foreign countries. Although the ban proved advantageous to some domestic refineries, most economists believe that lifting the ban will be favorable to the U.S. economy under current global market conditions. The primary argument for leaving the ban in place was its impact on climate change. Allowing exports expands the market for domestic crude and, thus, encourages more domestic production. Accordingly, although lifting the export ban on its own had some bipartisan support in both chambers of Congress, it was eventually paired with the long term extension of two green tax incentives important to the wind and solar energy industries. These tax credits, known as the Production Tax Credit (PTC) and the Investment Tax Credit (ITC), were set to expire at the end of 2016. Both were extended for five years and are now scheduled to phase-out in 2020-21. The continued availability of these green credits for the next several years took on greater importance in the context of the Clean Power Plan regulations EPA recently promulgated under the Clean Air Act. These regulations require states to develop strategies to ensure sustained increases in electricity produced from renewable energy sources such as wind and solar.

While significant, each aspect of the crude oil export for renewable tax credit compromise enjoyed a fair measure of bipartisan support on its own merits. Moreover, the politics inherent in the deal were driven as much by regional economic considerations as by party affiliation. However, a broad variety of energy related issues remain on the current congressional agenda and they break down more closely along traditional party lines. These issues include a series of energy related riders coveted by Republicans who wish to rein in President Obama’s environmental agenda, short term tax subsidies for renewable transportation fuels, and reform of the federal program for renewable transportation fuel. In the midst of this tax and spending debate, both parties have staked out their positions on comprehensive energy legislation and are preparing to move forward with those efforts.

The omnibus budget package stayed clear of a number of major policy riders advanced by Republicans to slow down President Obama’s environmental agenda. Earlier in the year, for example, a suite of four House Republican bills floated in response to recent EPA rulemakings cleared committee. These bills, known respectively as the RAPID Act (H.R. 348), the SCRUB Act (H.R. 1155), the Providing Accountability Through Transparency Act (H.R. 690), and The Sunshine for Regulatory Decrees and Settlements Act (H.R. 712), attempt either to limit administrative rulemaking power or to add numerous procedural hurdles to the rulemaking process. Now that the crude export card has been played, Republican leadership is again teeing up these bills in spite of sharp Democratic criticism. Other legislative efforts aimed at curtailing EPA efforts to clarify the reach of the Clean Water Act (the so-called Waters of the United States or WOTUS rule) also are moving ahead with some bi-partisan support.

The crude oil export ban was lifted permanently. By contrast, although the PTC and ITC tax subsidies for wind and solar were extended through the 2020-21 phase-out period, both credits remain temporary and they will eventually have to be extended again. While some other clean energy tax subsidies also survived the process, they were extended only through 2016 and will also have to be taken up again in short order. These include the biofuel production credit, the biodiesel blenders credit, the alternative fuel tax credit, and the tax credit for certain energy efficiency retrofits. The intermittent extension of these subsidies can erode investor confidence and undermine capital deployment in these industries. Further, as permanent tax reform takes center stage, the stakes are raised for those repetitive tax extenders that are in danger of being left on the outside looking in.

The temporary extension of tax subsidies for the biofuels industry comes at a time when EPA’s Renewable Fuel Program finds itself at an inflection point. EPA’s recent rulemaking setting renewable fuel standards for a variety of transportation fuels (including ethanol, biodiesel, and other advance biofuels) over the next several years is highly controversial and is being challenged in the courts both by traditional petroleum interests and renewable fuel advocates. Many on the Hill are calling for a legislative fix and a variety of bills seeking to repeal or reform the program have been introduced by members of both parties.

Blanketing each of these matters continues to be central to the debate over broader energy legislation. Last fall, leading Senate Democrats on the Energy and Finance Committees introduced the American Energy Innovation Act (S.2089). Unlike prior, stalled, efforts to pass a carbon tax, this bill does not put a price on carbon. Rather, it sets concrete targets on emissions reductions and employs complementary policies for reaching those targets with a heavy emphasis on tax reform, including major changes to both the production and investment tax credits. Senate Republicans had earlier moved their version of comprehensive energy reform known as the Energy Policy Modernization Act (S.2012) through the Energy and Natural Resources Committee. While this draft legislation includes numerous provisions designed to promote clean energy technology, it is more favorable than its Democratic counterpart to traditional energy sources and the increased domestic production of fossil fuels. The House has also passed the North America Energy and Infrastructure Act (H.R.8). This is a narrower energy bill fashioned by Republican Leadership that also modifies the tax code to drive energy policy.

Comprehensive energy legislation may not gain passage during the 114th Congress. But as election year politics begin to heat up, both parties will look to advance their respective agendas and contrast their energy priorities. There will be ample opportunity and incentive to do so.