The key to understanding Washington over the course of the next few months to a year is grasping all that came of the debt ceiling and deficit agreement. In the shadow of this agreement, both parties seem to be coalescing around their own general energy and environment narrative for the coming year. Democrats are pivoting from the debt fight towards a jobs agenda, with a heavy focus on clean energy development. Through Rep. Steny Hoyer, the Democrats have already announced a renewed push for the “Make it in America” agenda, a suite of old and new legislation aimed at job creation in manufacturing, clean energy, and other areas. Pitted against this, will be a program of policy riders targeting EPA regulations anathema to industry and continued budget cutting from the Republicans. Expect a big push this fall from House Republicans on the Regulations from the Executive in Need of Scrutiny (REINS) Act, with 159 co-sponsors including some Democrats. REINS would require all significant regulations to be authorized by Congress – with the EPA in the forefront of many Republican minds. Policy riders intended to neuter regulatory agencies and environmental programs will characterize the coming battles over energy and environmental spending bills being almost as much as the actual dollars and cents.

Bipartisan Debt Ceiling Agreement

The Budget Control Act requires that the new Joint Select Committee on Deficit Reduction, known as the Super Committee make its recommendations for spending cuts totaling between $1.2 trillion and $1.5 trillion over the next decade by November 23, and for Congress to approve the cuts by December 23. The twelve members of the Super Committee, equally divided into groups of three members of each party from both chambers, are required to be named by the four leaders of the House and Senate no later than August 16, giving them just over three months to develop their recommendation. The Budget Control Act requires reductions in discretionary spending for FY12 totaling $7 billion.

Should the Super Committee fail to meet their November 23 deadline, or should Congress fail to enact the bicameral committee recommendations by December 23, there is an enforcement mechanism, or trigger, that will automatically make $1.2 trillion in spending cuts with half allocated to defense, and half to non-defense spending. A failure to meet these deadlines would also allow the president to further increase the debt ceiling by $1.2 trillion.

Annual Appropriations Process

The process for identifying spending reductions will begin almost immediately, with the first hurdle being the Fiscal Year (FY) 2012 appropriations bills, which had already begun to wind their way through the annual appropriations process. It is fair to say that the new norm for congressional appropriations is no longer for the House and Senate Appropriations Committees to pass twelve spending bills as stand-alone measures as we all learned in Government 101. Instead, we are almost assured of seeing a series of Continuing Resolutions (CRs) funding the government for short periods of time once FY12 begins on October 1, with the ultimate funding bill being an Omnibus spending measure, under which everything will be on the table for consideration. Look for the CR, or, more likely, multiple CRs, to extend through these dates with the final Omnibus not being approved until the very end of the year, or even early in 2012.

Energy & Environment Appropriations

The FY12 Energy & Water Development was approved by the House on July 15 and included significant spending cuts, and the FY12 Interior & Environment bill was approved by the House Appropriations Committee on July 13, with steep spending cuts. The spending reductions required by the Budget Control Act mean that the federal programs funded by these two bills are going to undergo further scrutiny and will likely see even greater cuts in the final Omnibus later this year. House Republicans have already targeted FY12 funding for clean energy programs focused on energy efficiency and renewable energy, although Senate Democrats are likely to resist those cuts to whatever extent possible.

It is difficult to predict where these additional spending reductions will come from, but we can say that “plus-ups”, or increases in funding for existing programs, are going to be very difficult, while funding for “new starts”, or newly created federal programs, will be minimal, or perhaps non-existent, for the time being.

Environmental Policy Riders

The FY12 Interior & Environment Appropriations bill includes at least 39 policy riders, many meant to halt or delay Environmental Protection Agency regulatory efforts. This is a fight that will play out over the coming months, with an outcome that is difficult to predict at this point. In the FY2011 appropriations process Republicans attached policy rides to the bill, but in the final Omnibus almost all were dropped. However, if Republicans and conservative to moderate Democrats strongly argue this time around that EPA regulations are hampering the economic recovery, we could see some of the 39 riders included in the final spending bill. The riders cover a wide range of issues including Greenhouse Gas (GHG) regulation by EPA, the ozone rule, the Boiler MACT rule, and mountain top mining.

It is hard to see how all of the riders could survive, but we could see moderate Democrats, especially those up for reelection, joining with Republicans in arguing that we need to move slowly on environmental regulations in order to not cause any more job loss.

As a signpost of how some riders may survive, a bipartisan measure was introduced last month in the Senate by Republican Susan Collins and Democrat Ron Wyden that would slow the EPA's ability to write an air toxics rule for industrial boilers. House passage of a similar plan is considered a slam-dunk. Senate prospects would seem to be improved by the fact that Wyden and Collins aren't typical industry allies, but some say they may still be short of 60 votes, underscoring just how high the bar is in Congress.

Democrats could use their allowance of these policy riders as a trade-off to secure support for a Clean Energy Standard, extension of the 48C tax credit, or the 1603 grant program. This is an outlier scenario, but not beyond the realm of possibility.

Tax Reform & Revenues

In addition to across the board spending cuts, it is conceivable that we will see certain industry-specific tax provisions done away with. For example, Democrats are increasingly critical of tax incentives for the oil and gas industry; while many Republicans are loathe to accept a continuation of renewable energy tax credits.

In the wind sector, we see an effort from land-based wind energy companies to protect their production tax credit (PTC), while off-shore wind companies are looking to secure a new investment tax credit (ITC) for their sector. Solar companies are going to fight to protect their ITC, which is not due to expire until 2016, but could be shortened as various incentives are reviewed. The solar industry will also look to extend the 1603 grant program established by the Recovery Act. The Volumetric Ethanol Excise Tax Credit (VEETC) expires at the end of the year, and many Republicans and Democrats have agreed it will not be extended in its current form. A Thune-Feinstein-Klobuchar compromise to end the VEETC mid- 2011 and devote a portion of the savings to incentives for next generation biofuels has stalled for a lack of a legislative vehicle. With the tightened federal belt, protecting any existing tax provisions will be a tough fight, and creating new incentives even more difficult, although not impossible.

Authorizing Measures

With all of that said, and many feeling at the outset of this week that the future was going to be played entirely on the defensive, the President, in his Rose Garden speech on congressional approval of the Budget Control Act, appears to be pivoting to making the upcoming debate on spending reductions more about job creation, calling the spending cuts a good “first step.” Senate Majority Leader Reid and House Minority Whip Hoyer both echoed the President, with Reid announcing on the Senate floor, shortly after passage of the Budget Control Act, that when Congress returns after Labor Day, he wants to see quick action on energy legislation as part of a job creation agenda.

Areas where Senate Democrats are believed to be focusing their post-recess job creation agenda include a proposed national infrastructure bank, renewal of the 48C Advanced Energy Manufacturing Tax Credit, and the electric vehicles legislation introduced by Senators Alexander (R-TN) and Merkley (D-OR).  

Senate Democrats could also push forward one or several of the bills that the House Energy and Natural Resources Committee has cleared this year – dealing with topics such as nuclear energy, carbon capture and sequestration and clean energy financing, among others.

Reid said other items on the Senate jobs agenda are patent reform legislation and a surface transportation reauthorization bill. Senator Boxer (D-CA), Chair of the Senate Environment and Public Works Committee, which has jurisdiction over the highway bill, said she plans to take it up during the first two weeks after recess.

Conclusion

Clearly, there are a lot of factors that are unknown at this point, but there is going to be a lot of give and take on federal programs and tax incentives, making it imperative that interested stakeholders work with decision makers on Capitol Hill to ensure that their priorities are taken into consideration. With so much at play at one time, there are going to be multiple winners and losers, but this new era of austerity does not appear to be shaping up to be a period of decreased activity on Capitol Hill as the focus looks to be broadening from simply cutting spending to working to find ways for the federal government to operate more efficiently with the limited dollars and resources available.