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The Big Picture

US Climate Policy Gets Real

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  • The surprise agreement on US climate legislation appears to codify a “more now, less later” strategy for oil and gas production while still funding massive investments in clean energy.
  • This type of balancing act could play out elsewhere as OECD producers grapple with high prices and supply shocks that have made low-carbon policy a trickier needle to thread.
  • The hard-fought Democratic compromise still yields net climate gains despite its oil-friendly trade-offs — and would give the US a stronger foothold in global climate diplomacy.

    Global supply shocks and high fuel prices in recent months have given more currency to arguments that advancing the energy transition should not come at the expense of focusing on traditional fuels. That shift may have created inroads for US Senate Democrats to hammer out last week's agreement on climate legislation with Democratic Sen. Joe Manchin, who represents fossil fuel producer West Virginia, at a time when energy is more divisive than ever on Capitol Hill.

    The administration of US President Joe Biden first set out the two-track idea of increasing short-term supply while committing to a faster transition last autumn, after six months of struggling with its messaging to the oil industry as prices rose. But translating it into policy action has proved a tall task, with congressional climate legislation repeatedly hitting the buffers — until now.

    “It’s not a vision of leave it in the ground," Jennifer Wilcox, head of the US Department of Energy’s office of fossil fuels and carbon management, tells Energy Intelligence. "It’s about making sure everybody first has access and then that it is clean,” which in some cases means decarbonized fossil fuel, and others, renewables or nuclear, she explained.

    The US breakthrough comes as Norway, the UK, and Canada also walk the tightrope — albeit in a relatively less polarized political environment — of advancing the transition while managing oil and gas resources in anticipation of more supply shocks in coming months.

    Surprise Breakthrough

    The legislative breakthrough, unveiled Jul. 27, stops short of giving Biden everything he wanted. The bill expands upstream access, which flies in the face of Biden’s campaign pledges to end federal oil leasing. A handshake deal brokered between key swing vote Manchin and Democratic leadership could lead to new oil and gas pipelines being constructed.

    But the legislation, if passed absent major changes, would also lock in tens of billions of dollars in long-term green tax incentives to drive investment in renewables, electric vehicles (EVs), hydrogen, carbon capture, energy storage, batteries and other clean energy technologies. A legislative win could also offer Democrats a leg up ahead of midterm elections in November — and go some distance toward shoring up Biden’s platform on climate leadership.

    Prospects for sweeping climate legislation during Biden’s term had been all but written off after Manchin previously twice rejected Democrats’ climate and energy package. That left Biden with few robust tools for meeting the US topline target of slashing 50%-52% of emissions from 2005 levels by 2030, especially after a US Supreme Court ruling limited the reach of executive climate actions. Biden faced pressure to declare a national climate "emergency" — a move that would unlock stronger executive authorities but not replace the congressional power of the purse.

    Green Tax Credits, Methane Fee

    On balance, the legislation still favors Biden’s climate agenda, barring any changes as it undergoes vetting with Senate officials. A Rhodium Group analysis found that while more action across other rungs of US government is needed to hit Biden’s targets, the Senate legislation could cut emissions between 31%-44% below 2005 levels by 2030 — depending on inflation, energy prices, and technology costs — compared to a status quo estimate of 24%-35%.

    The legislation would extend currently sunsetting tax credits for new wind and solar generation and investments before moving in 2024 to a "clean electricity" performance standard. Some oil company executives in earnings calls cautiously welcomed the bill as ultimately catalyzing investments in technologies like hydrogen and carbon capture integral to their own transition strategies. Carbon capture and storage tax credits see a sizeable hike from $50 per ton to $85/ton, and captured CO2 from enhanced oil recovery from $35/ton to $60/ton — which Democrats initially wanted to phase out. Direct air capture gets an even bigger boost, to as much as $180/ton. Hydrogen, EVs, and green fuels would also get long-term tax incentives.

    A contentious methane fee for oil and gas operators also made it into legislative text. The charge would start at $900 per metric ton of methane over a 25,000 metric ton threshold in 2024 and escalate each year, increasing to $1,500/ton in 2026 and thereafter. Earlier iterations of the methane fee set an $1,800/ton fee starting in 2023. But in one key change, the fee stops when a company complies with federal methane standards, which the Biden administration is yet to finalize.

    Upstream, Permitting Victories

    Some of the less subtle trade-offs are around the “more now” side of the dynamic — and involve upstream access, which has been a tension point for Biden. The legislation proposes mandatory reinstatement of the Biden administration’s Gulf of Mexico lease sale in November, which a court had vacated, and restoring plans to hold several other canceled auctions for acreage in the US Gulf and Alaska’s Cook Inlet.

    Language also requires the US Interior Department to offer a certain threshold of acreage up for oil and gas leasing before it can auction territory for renewable projects, which one green group referred to as a “climate suicide pact.” But here the market will steer the direction, and likely toward the transition: Bids for recent offshore wind leases have far outshone those for oil and gas leases.

    In negotiations with Democratic leadership, Manchin also reportedly ironed out a permitting overhaul that would streamline approvals for pipelines — including the Mountain Valley gas pipeline in his home state — along with renewable projects and much-needed transmission buildout to bring more wind and solar online. Details of that separate legislation have not been disclosed. But it appears to reflect more of the same sort of trade-offs as the broader bill, albeit ones that lock in oil and gas infrastructure for decades.

    Big Win?

    How well the bill manages to strike the difficult "more now, less later" balance may be tested during the complicated budget reconciliation process. But Biden has called it the most significant climate bill in history. He also keeps the lever of declaring a climate emergency in his back pocket.

    More broadly, the legislation — although maybe made more extreme by US political divides — shows one way big consumer countries with fossil fuel resources can navigate the increasingly bumpy energy transition, using more now and less later.

    Topics:
    Policy and Regulation, Low-Carbon Policy, Oil Prices, Elections, Resource Access
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