Senate Democrats Produce a Far-Reaching Climate Bill, But the Price of Compromise with Joe Manchin is Years More Drilling for Oil and Gas

To seal their surprise climate deal with Sen. Joe Manchin of West Virginia, Senate Democrats conceded that their only hope for advancing a plan for a clean energy future in Congress was to bind it up in a lifeline for fossil fuels.

The legislation they propose to bring to the Senate next week still contains the heart of President Joe Biden’s climate plan—an historic $370 billion investment in transforming the U.S. power and transportation sectors and more than $60 billion in grants to help pollution-burdened disadvantaged communities achieve environmental justice. 

But the package—now called the “Inflation Reduction Act of 2022″—also would invest in ensuring a future for U.S. fossil energy in a carbon-constrained world. The legislation hikes tax incentives for expensive carbon capture technology 70 percent. It also requires that, for the next decade, the federal government offer tens of millions of acres offshore for oil and gas drilling as a prerequisite to the expansion of offshore wind energy development.

And Manchin said that he has obtained a commitment from Biden, Senate Majority Leader Chuck Schumer and House Speaker Nancy Pelosi that they will advance separate legislation this fall that streamlines the permitting process for energy infrastructure, including pipelines and export facilities.

“It is truly all of the above, which means this bill does not arbitrarily shut off our abundant fossil fuels,” Manchin said in a statement.

Climate action advocates were poring over the 725-page draft text, coming to varying conclusions as they tried to weigh the bad against the good. 

“This is the ultimate clean energy comeback—the strongest climate action yet at the moment we need it most,” said Manish Bapna, president and CEO of the Natural Resources Defense Council, in a statement. “This is not the bill we would have written. It’s time to break, not deepen, our dependence on fossil fuels and all the damage and danger they bring. But this is a package we can’t afford to reject.” 

He urged the Senate to pass it without delay, while the climate movement continues to work on other steps “to ensure a just and climate-safe future.”

Meanwhile, other environmental groups were drafting a letter urging the Senate to reject the compromises for fossil fuel development as incompatible with goals to eliminate greenhouse gases. 

“This is a climate suicide pact,” said Brett Hartl, government affairs director at the Center for Biological Diversity.

Here are the key elements that make the deal a boon to both clean energy and the fossil fuel industry:

Historic Investment in Clean Energy

The legislation includes $369.75 billion in tax incentives and other support for clean energy—by far, the biggest federal investment ever in addressing climate change. It marks a decisive turning away from market-based schemes like cap-and-trade that Congress considered its best chance of gaining support for climate action a decade ago.

Instead, Democrats will provide federal support directly, which, among other things, allows them to include the climate program in a budget bill, meaning they can pass it with just the 50 Democrats and Vice President Kamala Harris’ vote under Senate rules. With Republicans united against any climate action, Democrats have no hope of getting the 60 votes needed for any law that did not involve direct federal spending.

Tax credits for renewable energy for the first time would be extended for 10 years, a major boost for the wind and solar industries, which have not had sufficient time to plan and develop large-scale projects when tax credits were only available for one- and two-year intervals. The legislation also gives clean energy developers new flexibility to choose the type of tax credit that works best for their project—one based on the cost of their investment or one based on the project’s production. Energy analysts like Rhodium Group have found that flexibility could help accelerate deployment, since the value of cost-based tax credits shrink as wind and solar energy gets cheaper.

“The entire clean energy industry just breathed an enormous sigh of relief,” said Heather Zichal, CEO of the industry advocacy group, American Clean Power. She called it “America’s biggest legislative moment for climate and energy policy.”

The legislation also includes tax credits for an array of technologies that do not currently get any support, such as large, grid-scale power storage, as well as incentives for the manufacturing of solar panels, electric vehicles and other hardware domestically. The bill includes $9 billion in consumer home energy rebate programs, mostly focused on low-income consumers, to electrify home appliances and for energy efficient retrofits. The bill not only would expand the current $7,500 tax credits for consumers who purchase new electric vehicles, it would add a new $4,000 tax credit for purchasers of used EVs. 

“We now have a game-changing clean energy and climate package ready to go in the Senate,” said Leah Stokes, a political scientist focusing on climate at the University of California, Santa Barbara who has long urged the kind of incentives-heavy approach included in the bill. If passed, she said on Twitter, “It would bring clean energy jobs to America and lower energy bills for American families.”

Unprecedented Support for New Drilling

Perhaps the most controversial provisions of the bill are those that would require continued development of oil and gas on federal lands and waters for a decade. The deal would prohibit the Interior Department from approving renewable energy development over that period unless it also opened lands to oil and gas development.

Onshore, the department would have to lease at least 2 million acres each year or half of what was requested by oil companies, whichever figure is smaller, in order to issue rights-of-way for wind or solar development. Offshore, it would need to lease at least 60 million acres for oil and gas development each year in order to open leasing for offshore wind development.

“It’s self-defeating to handcuff renewable energy development to massive new oil and gas extraction,” said Hartl of the Center for Biological Diversity. “The new leasing required in this bill will fan the flames of the climate disasters torching our country, and it’s a slap in the face to the communities fighting to protect themselves from filthy fossil fuels.”

Manchin, however, viewed the drilling provisions as a must-have element in what he called “a realistic energy and climate policy.”

“As the super power of the world, it is vital we not undermine our super power status by removing dependable and affordable fossil fuel energy before new technologies are ready to reliably carry the load,” he said in a statement announcing the deal.

While the transition to renewable energy will take time, and everyone agrees that some oil and gas production will be necessary for years, forcing the government to hold large lease sales in 2032 still seems hard to reconcile with the broader goal of cutting greenhouse gas emissions in half from 2005 levels by that time.

But if the administration’s climate policies, and similar ones around the globe, are somehow able to usher in a rapid shift away from fossil fuels over that period, oil companies might have less appetite for submitting large bids to drill ten years from now. The market has already proven to be a powerful force in the global energy transition, driving down the cost of wind and solar power. 

In this way, the bill’s provisions could effectively refocus the Biden administration’s climate agenda to more traditional efforts that curb emissions by curtailing the demand for fossil fuels, through increased use of electric vehicles or heat pumps, and away from his campaign promise to restrict new oil and gas production on federal lands.

Earlier this month, the administration released a proposed plan for offshore drilling through 2028 that left open the possibility that it would curtail or even prohibit new development in the final plan. The deal announced Wednesday, however, would require that leasing proceeds largely as it has under previous administrations.

The Biden administration also held a series of lease sales onshore in June that opened more than 120,000 acres of public land across the West to new development. That figure was significantly less than what oil companies had sought.

The bill would also require the administration to reinstate an offshore lease sale it held last year, and which was later nullified by a federal judge in part because of a determination that officials had failed to adequately assess the climate impacts of the development. That lease sale was the largest ever, offering up about 80 million acres, though less than 2 million acres were leased by energy companies. The Interior Department would also be required to hold a series of offshore lease sales before September 2023 that it had previously canceled.

From Clean Hydrogen to Climate-Smart Agriculture, the Devil is in the Details

The bill includes a new tax credit for “clean hydrogen” production, with levels of the credit varying depending on the lifecycle greenhouse gas emissions associated with manufacturing the fuel. 

The American Petroleum Institute had called on Congress to enact a clean hydrogen tax credit in June, as part of a broader plan for encouraging domestic energy production.

Hydrogen could play an important role in cleaning up certain sectors of the economy, including heavy-duty transportation and certain industrial operations, and the Biden administration has put substantial resources toward research and development. Last year’s infrastructure bill included $8 billion to help fund clean hydrogen “hubs” around the country.

Currently, hydrogen is mostly produced using natural gas, in a process that releases carbon dioxide, making it far from “clean.” But there are various ways the fuel can be made with a lower climate impact, including by using electricity generated by renewable energy sources, like wind or solar, or by applying carbon capture equipment to operations that use natural gas.

Some research has questioned the benefits of using natural gas with carbon capture to produce hydrogen, however, because methane can leak from natural gas wells and pipelines upstream. Those leaks are widespread in many parts of the country.

The bill’s language could help address these concerns, by requiring a look at lifecycle emissions that should account for those leaks. By creating different levels of credit based on lifecycle emissions, the bill would favor cleaner operations.

The bill also includes changes to a federal tax incentive for carbon capture and storage that could help the technology get deployed much more widely, by increasing the amount companies can claim for capturing and storing carbon dioxide, to up to $85 per metric ton from the current level of up to $50. The increase in value could make many more applications of the technology economically viable, including at some power plants and industrial operations like cement and steel manufacturing.

The bill also would substantially raise the value of the credit, to up to $180 per metric ton, for companies that can pull carbon dioxide directly from the air, a process known as carbon removal. There are no commercial-scale operations doing this today, though Occidental Petroleum has said it plans to begin construction on one such plant this year. The changes in the bill would provide this effort an enormous financial lift.

Together with more than $12 billion allocated for carbon capture and removal in last year’s infrastructure bill, “this package would provide the most transformative and far-reaching policy support in the world for the economy-wide deployment of carbon management technologies,” said Madelyn Morrison, external affairs manager of the Carbon Capture Coalition, which advocates for policies on behalf of energy companies, unions and some pro-carbon capture environmental groups.

While a few advocacy groups support this carbon capture tax credit, many environmental activists have come out strongly against it, arguing that it would effectively subsidize fossil fuel operations like power plants and even refineries. A coal-fired power plant, for example, could stand to reap hundreds of millions of dollars in federal tax benefits if it captures CO2 emissions, even as it continues to produce toxic coal ash waste.

The deal would deliver $20 billion to farmers to support “climate-smart” agricultural practices, drawing applause from some farm groups Thursday. Mike Lavender, the interim policy director of the National Sustainable Agriculture Coalition (NSAC), said the package includes “much-needed investments to help farmers and ranchers adopt conservation practices to build climate resilience, reduce emissions, and play a central role in our national response to the climate crisis.”

Critics of some of the provisions in these programs, however, noted that some practices potentially funded through them, including manure digesters, have the ultimate effect of promoting polluting industries.

“If the $20 billion for ’climate-smart agriculture’ goes to manure digesters, then you might as well light the money on fire,” Austin Frerick, a farm policy expert and researcher at Yale University, tweeted Thursday. “Not only won’t it do anything. It will make the climate crisis worse by incentivizing a polluting industry.”

Yet to Come… New Help for Pipelines and Other Infrastructure

The details are yet to come on one of the most important aspects of the deal with Manchin—an agreement for streamlining the process for permitting energy infrastructure. One possibility is for changes in the law that spells out the authority of the Federal Energy Regulatory Commission (FERC), the agency that oversees permitting of pipelines and export facilities and which has come under fire from Manchin and Republicans for recent efforts to incorporate more consideration of climate change and environmental justice in its decisions.

“I am heartened by the bipartisan recognition that for America to achieve our energy and climate goals, it is critical we reform the broken permitting process,” Manchin said in a statement. 

He expected that Congressional leaders this fall would advance “a suite of commonsense permitting reforms… that will ensure all energy infrastructure, from transmission to pipelines and export facilities, can be efficiently and responsibly built to deliver energy safely around the country and to our allies.”

To pass such a measure, Schumer and Pelosi almost certainly would have to rely on Republican votes as they would not have the full support of the Democrats. This would be a plus, in Manchin’s view.

“For too long, the reconciliation debate in Washington has been defined by how it can help advance Democrats’ political agenda called Build Back Better,” he said. “Build Back Better is dead, and instead we have the opportunity to make our country stronger by bringing Americans together.”

But that’s not what the view looks like from the Appalachian Mountains in Manchin’s home state and neighboring Virginia, where activists are rushing to meet a Friday deadline to submit comments to FERC on the future of the Mountain Valley Pipeline. They’ve been fighting eight years against the proposed 300-mile conduit to deliver fracked natural gas from the shale region to Virginia. 

The project developers, who have had to pay millions in fines over local environmental damage during construction and are now seeking a federal permit extension, stand to benefit from the deal extracted by Manchin, one of its biggest supporters.

“It’s just kind of confusing for folks to watch as our communities are used as a bargaining chip,” said Russell Chisolm, co-chair of Protect Our Water, Heritage Rights (POWHR) in southwestern Virginia. 

The region has been pummeled in recent weeks by torrential downpours and flooding so severe that homes were torn from their foundations.

“What we used to call 500-year storms are now happening more and more frequently, and here we are building a massive methane pipeline through some of those very same communities that are impacted by these floods,” said Chisholm. He said the people who are opposing Mountain Valley Pipeline are doing so not only because of the local impacts like erosion and risks to groundwater, but the “national and global harm downstream to everyone that is on the frontlines who is dealing with climate chaos.”

And now, changes to the law that help get the Mountain Valley Pipeline completed may be among the prices that will be paid to get climate provisions through Congress.

“I don’t know if you want to call it a climate bill—it’s a major piece of legislation that has some good things in it for climate and for renewables,” said Chisholm. “But I don’t think it goes nearly far enough, moving us off of fossil fuels. And I just think people down here are frustrated at being put in that position of being, you know, a point of leverage.”

After the Senate votes on the “Inflation Reduction” bill, which includes health care spending and deficit reduction measures as well as the climate and energy provisions, the House will either have to pass the same measure, or the House and Senate will have to work out differences, all within weeks of the midterm election, before the legislation winds up on Biden’s desk. 

Staff writer Georgina Gustin contributed to this report.