President Obama from the 2011 State of the Union speech:

"This is our generation's Sputnik moment … We'll invest in biomedical research, information technology and especially clean energy technology, an investment that will strengthen our security, protect our planet and create countless new jobs for our people."

On January 25, 2011, President Obama delivered his State of the Union address before Congress and the nation, putting forth his policy agenda and political vision, which will inform some Congressional actions. With the economy still struggling to recover, the President has proposed programs that he believes will increase the number of jobs by improving U.S. competitiveness. Among his policy proposals are a "clean energy standard" , significant research and development funding for clean energy technologies, and support for biofuels and electric vehicles. Complicating action on these priorities are a Republican-led House of Representatives and a narrow Democrat majority in the Senate that will necessitate broad bipartisan agreement to ensure legislative success.

There are significant political divisions on the key issues: spending, tax policy, and the role of the Executive and Legislative branches of government in writing regulations. Still, many Democrats and Republicans view the expanded production of domestic energy resources and fuels as crucial to job creation and energy security. Unfortunately, elected officials often have their "favorite" resource or fuel. Democrats will use 2011 to protect funding for alternative energy incentive programs, as well as support some federal agency efforts to reduce greenhouse gas (GHG) emissions. Republicans will seek to spur economic growth by reducing regulatory burdens, expanding energy resource exploration and cutting the deficit. In light of these factors, we believe the following topics will be the driving forces behind the energy and environmental policy debate in 2011:

1. Environmental Protection Agency (EPA) Regulations

With cap-and-trade legislation off the table and international negotiations to adopt a successor to the Kyoto Protocol facing an uphill battle, the Obama Administration is using EPA to write regulations aimed at reducing GHG emissions across a range of industries. For example, this year, utilities, refineries and other industries will be subject to first-ever GHG permitting requirements under the Clean Air Act's New Source Review and Prevention of Significant Deterioration program. However, Republicans and some moderate Democrats will seek to temporarily or indefinitely block such permitting requirements through stand-alone legislation, provisions attached to larger bills, agency spending cuts or by other legislation such as the Congressional Review Act which allows Congress to overturn Executive Branch regulations. A showdown may occur if such a bill reaches the President's desk. Should a policy effort be attached to a critical bill, (e.g., one that funds necessary government functions), then his decision will become more difficult.

In addition, EPA is forging ahead with the following other important proposals:

  • Ozone NAAQS
  • Clean Air Transport Rule
  • Mercury Hazardous Air Pollutants
  • Coal Ash Disposal Regulations
  • Maximum Achievable Control Technology for industrial boilers

As for other policies under the Clean Air Act and Clean Water Act, Congress is certain to spend time conducting numerous oversight hearings. Legislative proposals are also emerging and many seek to stop or impede EPA regulation.

2. Federal Spending Reductions

The President set aggressive goals for research and development in new energy technologies, but funding this goal will be a challenge in an environment of bipartisan fiscal restraint. This year, we can expect increased scrutiny on many federal programs, given Republican concerns about the federal deficit and an active EPA. House Republicans have said that they plan to conduct oversight hearings on "stimulus" projects, and the GOP is already moving to reduce non-defense, federal spending to fiscal year 2008 levels. To accomplish this, a group of conservative House Republicans recently proposed taking a step further with the Spending Reduction Act, which recommends cuts of $2.5 trillion over the next decade and lowering spending to 2006 levels. In order to achieve these goals, some proposed cuts include funding for the Department of Energy (DOE) weatherization grants, DOE applied research and Energy Star. At the end of 2011, we will likely also see debate on extending the Section 1603 Treasury grant program (grants in lieu of tax credits), the advanced manufacturing tax credit, loan guarantee programs and renewable energy tax incentives. This will force businesses and other stakeholders that are interested in these programs to engage policymakers to ensure that programs continue. In the Senate, tempered spending levels are also anticipated.

3. Oil and Natural Gas Policy

With anticipated gasoline price increases, offshore oil and gas exploration will remain a hot topic in 2011. Starting almost immediately, various Congressional committees will hear from the Oil Spill Commission about its report on the BP spill in the Gulf of Mexico. A new federal agency that will oversee royalties, safety inspections and offshore resource extraction will also cause concern in Congress. Issues surrounding tax policy for the industry will again be discussed, though efforts to reduce these incentives have failed in the past. Meanwhile, natural gas production is expected to increase both domestically and internationally, especially as demand for natural gas mounts as power plants switch from burning coal to natural gas under proposed EPA GHG regulations. Hydraulic fracturing will also provide more opportunities for producing natural gas, but some in Congress will push to debate the perceived environmental impacts of such extraction methods.

4. Changing the Electricity and Fuel Mix

With a divided Congress, we will see discussion this year on differing approaches to energy legislation. The President has called for a "clean energy standard" (CES), prompting Senate Democrats and Republicans to look closely at passing a bill which would set federal targets for increased use of what Congress defines as "clean energy" (e.g., wind, solar, nuclear, clean coal technology, etc.). Meanwhile, House Republicans have pledged to do everything possible to speed up the development of nuclear power, from conducting oversight on plant licensing to pushing forth the Yucca Mountain Nuclear Repository. We will likely also see the return of bills on electric, natural gas, flex-fuel or other advanced biofuels-powered automobiles to help break U.S. dependence on imported oil. The President again reiterated his support for electric vehicles, setting a goal of one million of these cars on the road by 2015. These concepts, along with tax treatment for a range of energy inputs, could form the basis of a large energy policy effort for 2011.

5. Transportation Reauthorization Bills

After numerous extensions, Congress will again attempt to pass multi-year reauthorization legislation allocating hundreds of billions of dollars to surface transportation programs, as well as the Federal Aviation Administration (FAA). The former could serve as a vehicle for a wide variety of programs, such as Clean Air Act policy changes, natural gas vehicles, intermodal transportation and an infrastructure bank providing financing to construction projects across the nation. To pay for a surface transportation reauthorization bill, Republicans will also attempt to address shortfalls in the Highway Trust Fund, which finances surface transportation projects through revenues from gasoline, tire and other taxes.

6. Farm Bill

A new Farm Bill will also be developed over the next two years to authorize the country's agricultural programs. The prior Farm Bill set important new biofuel usage goals and included policies that promoted new research, development and demonstration projects for advanced biofuels. It also included biomass crop and biorefinery assistance funds, as well as biofuels tax incentives. The next debate is likely to include complex debates with regard to both corn-based and cellulosic ethanol subsidies, advanced biofuels subsidies and continued funding for research programs that may divide elected officials along regional lines. Here again, the President used his State of the Union speech to emphasize the importance of biofuels in lessening our dependence on foreign sources of oil.

Knowing the Playing Field

The start of the new Congress will include policy efforts on a range of energy and environment priorities, and decisions will be made that lay the foundation for large, "must pass" bills for years to come. Successfully navigating a divided Congress and the Executive Branch is key to increasing the likelihood that a federal affairs objective is realized in Washington.