HIGHLIGHTS:

  • Although energy and environmental issues are not expected to be among the top priorities for either party in the 116th Congress, this Holland & Knight client alert addresses several opportunities for limited bipartisan compromise on these subjects over the next two years.
  • With Democrats regaining control of the House in the midterm elections, the introduction, consideration and House passage of ambitious bills on climate and clean energy could be possible in the 116th Congress.
  • The lame-duck congressional session could see movement on tax and public lands issues particularly pertinent to the energy and environment sectors.

The 2018 midterm elections are in the books, and while some races are still too close to call, control of both the U.S. House of Representatives and the Senate are no longer in doubt. The members of the 116th Congress spent a disproportionate amount of time and money campaigning on the issues of immigration, healthcare, taxes, trade and allegations of corruption. Accordingly, energy and environmental issues are not expected to be among the top priorities for either party in a divided government.

With Democrats regaining control of the House, the introduction, consideration and House passage of ambitious bills on climate and clean energy could be possible. Minority Leader Nancy Pelosi has also pledged to reconvene a select committee on climate change that could lead efforts on such legislation and conduct oversight should she be re-elected Speaker of the House. However, stronger Republican control in the Senate – to say nothing of the legislative filibuster – means these bills are not likely to receive a vote in the Senate and will be primarily used as messaging instruments for Democrats.

While partisan disagreement may stymie progress on the issues central to the 2018 campaign, energy and environment could present a number of opportunities for limited bipartisan compromise in the coming years. Perennial legislative subjects such as transportation, infrastructure and tax reform could be used as vehicles for bills that couldn't otherwise pass on their own. This Holland & Knight client alert highlights those areas – from energy efficiency to public lands – that present opportunities for legislative progress. This is not intended to be a comprehensive catalogue of all possible legislation that may move in this space; rather, these are the issues expected to dominate the time and political appetite of the congressional committees of jurisdiction as well as the national conversation on energy and environment during the upcoming lame-duck congressional session and over the next two years.

What to Expect in Lame-Duck Session

As of this writing, the House and Senate are each scheduled to be in session for just four weeks between the elections and the convening of the 116th Congress in January. But given the results of the elections, this lame-duck session is likely to be a flurry of activity, as Republicans work to pass as much of their agenda as possible before they lose control of the House. Democrats, meanwhile, will be aiming to push consideration of as much as possible into the 116th Congress in hopes of growing their footprint on legislation such as the Farm Bill. Here's what to look out for through the end of the year.

Appropriations: Despite a concerted effort from Republicans, Congress was unable to enact all 12 government funding bills before the end of the fiscal year (FY) on Sept. 30, 2018, though all have been voted out of committee in both chambers. Five have been enacted into law (Defense, Energy and Water, Labor/Health and Human Services/Education, Legislative Branch, and Military Construction/Veterans Affairs), and the rest were temporarily extended through Dec. 7, 2018, as part of a so-called "continuing resolution."

With much work left to be done – particularly on a potential Commerce/Justice/Science, State/Foreign Operations and Homeland Security package, which has not yet entered conference negotiations – appropriations could take up much of the oxygen over the coming weeks. House Republicans will likely make a push to include their political priorities as riders on appropriations bills before losing control of the chamber; meanwhile, Senate Republicans will likely struggle to find enough support from their Democratic colleagues to reach the 60-vote majority needed to pass these packages without making concessions. Alternatively, Democrats may push for a continuing resolution through the start of the 116th Congress in hopes of more closely aligning those bills with their political priorities.

Notably, President Donald Trump has signaled a willingness for a partial government shutdown should Congress fail to send him a bill with adequate funding to construct a wall on the U.S.-Mexico border. Such a proposal is unlikely to garner the 60 votes needed to overcome a Democratic filibuster in the Senate. Trump has wavered on his veto threats in the past, and time will tell whether the midterm results have strengthened his resolve or revealed a newfound willingness to compromise – if, of course, Congress is able to work out a deal to send him before the end of the year.

Tax extenders: In some years, a deal on "tax extenders" addressing expiring provisions throughout the tax code has been packaged with the end-of-year appropriations legislation. With several expiring provisions on the energy front, including some with bipartisan support like the biodiesel blenders credit, there is likely to be an effort to pass at least a small package of bills addressing the expiration of some more popular provisions. Democrats typically favor tax extenders, which could create an opening for a win-win negotiation before the end of the year, though many Republicans oppose the coupling of appropriations and tax extenders, signaling an uphill battle to passage – if Congress is able to wrap FY 2019 appropriations before the start of the 116th Congress.

Should such a package move forward, it likely won't include major changes to energy tax provisions. The two parties, and the two chambers, have committed to phasing down tax credits for various forms of clean energy. While some House Republicans may push to eliminate some or all of those credits, as they have in the past, those efforts are likely to fall short again.

Public lands: The Sept. 30, 2018, expiration of the Land and Water Conservation Fund (LWCF), one of Congress's most popular conservation programs, could create an opening for bipartisan cooperation on a public lands deal in the lame-duck session. Although the expiration of the LWCF affects only its sources of funding rather than disbursement, as of Sept. 30 the fund is no longer authorized to continue drawing revenue from a variety of sources, primarily oil and gas leases on the Outer Continental Shelf (OCS).

As there is broad, bipartisan support for reauthorization of the LWCF, ultimately some kind of reauthorization is all but certain. Congress is currently grappling with three issues pertaining to the nature of this reauthorization:

  1. Whether the fund should be permanently authorized to draw revenues from the OCS, rather than requiring legislative reauthorization. There is broad, bipartisan support for permanent reauthorization, and it is very likely to be a component of any final deal reached on the LWCF.
  2. The balance of disbursements of LWCF funds between states and federal land acquisition. Many members, particularly Republicans, would like to see more emphasis on state funding and less on land acquisition; amendments addressing this question are expected should a permanent reauthorization bill come to the floor in either chamber.
  3. Whether the disbursement of funds should continue to be subject to the annual appropriations process or if mandatory funding for the program is desired. Legislative proposals to permanently reauthorize the LWCF differ on this point, though there is strong support in the Senate for S. 569, the Land and Water Conservation Authorization and Funding Act of 2017, which would make the funding mandatory and remove it from the appropriations process. This would ensure that revenue taken in from OCS leases is directly disbursed. Introduced by Sen. Maria Cantwell (D-Wash.) with 48 bipartisan cosponsors, S. 569 passed out of the Senate Energy and Natural Resources Committee on Oct. 2, 2018, by a vote of 16-7. This tees up the potential for a Senate floor vote in the coming weeks. The mandatory funding component stands a tougher test in the House; earlier this year, the House Natural Resources Committee cleared by voice vote a version that permanently reauthorized the LWCF but left the funding as discretionary.

There is significant political will cutting a path toward passage before the end of the year. Permanent reauthorization is among the top priorities for Sen. Richard Burr (R-N.C.), who has previously single-handedly derailed major Republican-backed legislation in an effort to push through LWCF. Republican leaders in the Senate will want to avoid meeting this fate once again. Moreover, House Natural Resource Committee Chairman Rob Bishop (R-Utah) said recently, "[w]e will solve the problem before the end of the year. Whether it's Sept. 30 or Dec. 1 doesn't make a damn bit of difference."

A final deal may be passed as standalone legislation, but it is more likely to be tacked onto a package of public lands bills teed up for the lame-duck session or an end-of-year appropriations deal. The lame-duck deal could potentially include another compromise bill, H.R. 6510, that would create a dedicated funding source to address billions in the maintenance backlog in national parks and other public lands.

Nominations: With Republicans maintaining control of the Senate, there likely won't be a rush to confirm all outstanding nominees. However, some of the more controversial nominees could be approved during the lame-duck session in the interest of clearing a nomination backlog and obviating the need for President Trump to re-nominate his selections next year and draw additional, unwanted attention to them. These include the nominees for Chair of the Council on Environmental Quality, a commissioner on the Federal Energy Regulatory Commission (FERC), an Assistant Secretary of the Interior, and two Assistant Administrators at the U.S. Environmental Protection Agency (EPA).

What to Expect in the 116th Congress

Shifting to what can be expected from the 116th Congress, legislation could be possible on energy, tax, public lands and more. Expectations for each of these sectors are detailed individually below.

With deep disagreements between the parties on the necessity and scale of efforts to address climate change, the role of government in supporting new energy technologies and many other facets of federal energy policy, gridlock will be more likely than any significant breakthroughs. But there are more areas where groundwork has been laid for bipartisan agreement than many casual observers would expect. In the 116th Congress, advances in grid resilience, advanced nuclear power, and carbon capture and sequestration, among other issues, can be expected.

Comprehensive Legislation

Congress has not passed major energy legislation since 2007, though bipartisan negotiations between the House and Senate almost resulted in a breakthrough in late 2016, with the Energy Policy Modernization Act of 2015passing the Senate with 85 votes and the North American Energy Security and Infrastructure Act of 2015passing the House, 249-174. The House and Senate ultimately failed to reach a compromise as they reconciled the differences between the two bills. Though each bill was more limited in scope than some critics hoped, they included language on grid modernization and resilience, including both cybersecurity and physical protections; energy efficiency incentives, performance contracting and reauthorizations of U.S. Department of Energy (DOE) efficiency programs; hydropower licensing; and reauthorizations of some DOE clean energy research programs.

During the past two years, there was a tacit acknowledgment that the political dynamics had not changed enough to reach a different outcome, though Sens. Lisa Murkowski (R-Alaska) and Cantwell did introduce a bill – the Energy and Natural Resources Act of 2017 (S. 1460) – that was largely identical to the 2015 bill, save some revisions to the energy efficiency sections whose elimination was unpopular with environmental groups.

With Democrats in charge of the House, the Energy and Commerce Committee is apt to pass a series of smaller bills for House leadership to package into something resembling the Senate bill; on passage, these bills would go to conference to work out the differences between the two versions, and odds are good that Congress succeeds in making at least some of these provisions law. Although any successful bill is unlikely to comprehensively transform the American energy landscape, the most likely outcome is legislation that looks a lot like S. 1460, plus or minus additional DOE programmatic reauthorizations and potential reforms to the DOE loan guarantee program.

RFS Reform

Stakeholder groups interested in the Renewable Fuel Standard (RFS) – namely obligated parties in the oil industry, the ethanol industry (including feedstock producers), the advanced biofuels industry delivering fuels with higher greenhouse gas (GHG) emissions reductions and environmental groups working to reduce GHG emissions – have differing priorities when it comes to the RFS. Given the electoral politics that resulted in his election, President Trump has thus far prioritized the needs of the ethanol industry and farm interests with support of both Republicans and Democrats from corn-growing states. Meanwhile, EPA and congressional Republicans representing states with a heavy oil and gas presence have committed to working with refiners to lower compliance costs for obligated parties, and a number of congressional Democrats continue to support fuels that deliver significant GHG reductions, prioritizing the environmental aspects of the program.

In reforming the RFS, obligated parties want to reduce their compliance costs; proposals that have circulated on Capitol Hill in the last year include placing a cap on the cost of the D6 Renewable Identification Number (RIN) for ethanol from corn and sorghum, and granting RINs for exported ethanol. Additionally, they continue to seek compliance waivers under the RFS, including waivers for the unrealistic statutory mandates and more exemptions for "small refineries," which the Trump Administration has defined broadly. They will also likely advocate for limited ethanol blending mandates after 2022.

The ethanol industry continues to oppose any statutory changes to the RFS and is working to protect their blending mandates post-2022. The industry will also continue trying to increase opportunities for blending through regulatory avenues; for example, by allowing the blending of E15 year-round, which President Trump announced as a priority in October, with or without direction from Congress.

Environmentalists will seek to limit the production and blending of corn ethanol given the limited GHG emissions reductions associated with the fuel and their concerns about land use change in the U.S. and abroad. To this end, they will look to phase down or phase out the conventional ethanol mandates, further support the advanced and cellulosic sectors through technical changes to the RFS and maintaining mandates for those fuels, and create a source of funding for RFS-related conservation activities.

Congress, particularly the House Energy and Commerce Subcommittee on Environment, laid significant groundwork in the 115th Congress on a potential compromise deal between these interests. Both chambers can build on this progress and revive momentum on RFS reform in the 116th Congress, especially as 2022 approaches. The RFS does not necessarily "sunset" in 2022 as many believe; however, the current statutorily mandated blending requirements will be supplanted by ones established by the EPA, DOE and U.S. Department of Agriculture (USDA), which could further politicize the annual renewable volume obligation (RVO) process.

With Democrats regaining the House, a renewed focus on climate could set up the opportunity to broker a deal that limits federal support for conventional ethanol, satisfying both the oil industry and environmental groups at the expense of the ethanol industry. However, with Republicans maintaining control of the Senate, advancing an RFS reform bill that satisfies at least two the four stakeholder groups mentioned above will continue to prove challenging for the Senate Environment and Public Works (EPW) Committee in the 116th Congress.

The current makeup of the EPW Committee is farm state-heavy, particularly on the Republican side, meaning a deal between environmentalists and the oil industry that is disadvantageous to corn ethanol will face an uphill battle in the upper chamber. As in the 115th Congress, there will be opportunity for the committee's Democrats to garner support from a handful of Republicans for such a proposal. However, committee leadership on RFS reform has been lacking thus far. Without a Democratic champion on the issue, this political dynamic has produced stalemates in recent years on RFS-related subjects such as E15. Should Democrats choose to prioritize this issue in the 116th Congress as the party advances its climate agenda, an EPW Committee champion for RFS reform could without a doubt grease the wheels for a deal to be brokered before 2020.

Energy-Related Tax Credits

Republicans were able to pass a sizeable tax reform package in 2017 without Democratic votes, but it is doubtful either party will be able to enact such wide-reaching changes in the next Congress. Instead, there could be some nibbling around the edges and perhaps some legislative fixes to unforeseen loopholes in last year's tax bill, potentially packaged to assist with political messaging, as H.R. 6760, or "Tax Reform 2.0," was used this year after passing the House of Representatives.

In terms of energy tax issues, there likely won't be enough support to get any changes to the clean energy investment and production tax credits, which are being phased out over the next few years. However, the tax-writing committees may take up a few of the remaining "orphan tax extenders," energy provisions accidentally left out of the grand tax extender bargain reached in 2015 with the PATH Act. While many of these provisions were afforded longer-term extension in the tax extenders package passed in February 2018, several energy efficiency and biofuels credits were given only one-year, retroactive extensions. The House Ways and Means Committee held a series of hearings in the 115th Congress in an attempt to move toward making permanent or eliminating some of these credits. While the House's appetite for this issue may shift with Democrats gaining control, expect a bipartisan effort to address these extenders in an effort to avoid the annual end-of-the-year political shuffle to extend these provisions.

Moreover, changing Senate Finance Committee dynamics could help grease the wheels on this front. The Senate Committee has typically led the charge on energy tax provisions, and with current Chairman Orrin Hatch's (R-Utah) upcoming retirement, Sen. Chuck Grassley (R-Iowa) is next in line for the gavel should he opt to relinquish his chairmanship of the Judiciary Committee. A perpetual champion for the orphan energy extenders, especially the biofuels credits, Grassley's chairmanship could create opportunities for bipartisan cooperation on an energy tax agreement. Should Grassley choose to remain at the helm of the Judiciary Committee, Sen. Mike Crapo (R-Idaho) is on deck for the Senate Finance Committee; his position on the tax extenders is less certain.

Carbon Tax

The idea of a market-oriented tax on GHG emissions has been slowly gaining momentum on Capitol Hill, though conservative support so far has largely come from outside the halls of Congress. Significant developments on this issue over the next two years are unlikely, but supporters will be keeping an eye on two trends that will serve as bellwethers for the prospect of a national carbon tax early 2020s.

First, the establishment of the Climate Leadership Council has given high-profile Republicans such as James Baker, George Shultz and Gregory Mankiw a platform and a reasonably detailed proposal to rally behind. The proposal has the support of a number of major corporations – including multinational oil and gas, health and personal care, and automotive companies – many of whom are also contributing money to the associated advocacy campaign run by Americans for Carbon Dividends. Although outside Republican support for a carbon tax is not new, a committed and well-funded lobbying campaign supported by multinational corporations and respected Republican statesmen and economists has the potential to move the needle over time.

Second, 2018 saw the introduction of the MARKET CHOICE Act (H.R. 6463) by recently ousted Rep. Carlos Curbelo (R-Fla.) and two Republican colleagues. While the bill was less ambitious than many of those introduced by Democrats in the House and Senate, it nevertheless marks an important milestone in the long-running debate over whether and how to address GHG emissions. The Climate Solutions Caucus in the House, with 45 members from each party immediately prior to the election, offers an imperfect but potentially valuable forum for socializing the idea of a carbon tax and other climate change legislation. This said, changes in the Caucus are imminent with the election downfall of Curbelo, its current Republican leader from Florida's 26th district.

Republican support inside and outside of Congress, and the support of major oil and gas and manufacturing interests, are necessary but not sufficient predicates for a national carbon tax. Moreover, the industrial and commercial sectors could have more appetite for a negotiation on this front should they continue to face the prospect of sector-by-sector regulations on emissions from the industrial and commercial sectors despite the Trump Administration's efforts to deregulate. And while catastrophic and expensive natural disasters have further elevated discussions around climate change and adaptation, the odds that Congress will turn to a carbon tax as one potential way to raise revenue for a substantial infrastructure bill or other spending priorities remains low for the foreseeable future.

Storage and Electric Vehicles (EVs)

Another area in which there might be some substantive movement is in energy storage and electric vehicles. With battery costs falling rapidly and demand for increased resilience from both utilities as well as end-users on the rise, the industry may need additional government support to move beyond lithium-ion technology and to maintain a U.S. manufacturing base.

Bipartisan proposals to create and expand tax incentives on both of these issues were introduced in the 115th Congress, one or both chambers could move toward substantive consideration of these proposals over the next two years.

Should the lame-duck session not prove fruitful for a deal to reauthorize the LWCF, the bipartisan, bicameral appetite to support the program will drive certainly drive momentum for swift action in the 116th Congress. This may take the form of standalone legislation or a broader public lands package as discussed above in the lame-duck section.

Recent Republican-led efforts to reform the listing process under the Endangered Species Act, national monument designations under the Antiquities Act, and other environmental and lands statutes will face significant opposition from the now Democrat-controlled House Natural Resources Committee. That said, it's possible that smaller, more targeted efforts to reform certain aspects of these programs that could garner bipartisan support. Bipartisan activity is also possible on the Recovering America's Wildlife Act, which redirects fees from federal energy and mineral leases to state-led wildlife conservation efforts. Introduced on a bipartisan basis in both chambers in Congress and having received committee consideration on the House side in the 115th Congress, this bill will likely continue to gain momentum in 2019.

Given the divided government, Democratic priorities at the Natural Resources Committee will likely focus on oversight. Topics that could be quickly addressed as the 116th Congress kicks off include Puerto Rico's recovery from Hurricane Maria, President Trump's efforts to speed environmental impact review of dams and canals in California, and concerns about possible ethics violations by Interior Secretary Ryan Zinke. Legislatively, the Committee could quickly move through a handful of bills for the purpose of messaging, such as proposals to permanently withdraw lands from mining operations. However, because anything highly partisan will inevitably be dead on arrival in the Senate, along with numerous competing Democratic priorities from other committees, the prospects of such proposals securing a vote on the House floor are less certain.

Federal funding for wildfire prevention and response has also been a perennial bone of contention. The FY 2018 omnibus spending bill included a bipartisan deal to afford new budget authority to the U.S. Forest Service and USDA to combat wildfires. Disbursement of these funds are still in progress, and Democrats may move appropriations language to narrow how this money will be spent, while Republicans may push for broader acceptable uses, such as additional forest clearing.

Generally speaking, over the past year, Republican leadership has insisted on a return to "regular order" in passing annual government funding bills; i.e., they have tried to pass all 12 bills before the end of the fiscal year and have found success by curtailing the practice of attaching unrelated policy provisions to appropriations bills. With the House Freedom Caucus decrying spending levels and the 60-vote threshold to overcome a filibuster in the Senate, appropriators have worked in a bipartisan manner to get these bills over the finish line.

What that means in practical terms is that funding levels for most agencies have remained level or increased over the past two years, despite President Trump's veto threats and Office of Management and Budget (OMB) Director Mick Mulvaney's severely pared-down budget requests. Going forward, expect more of the same. In a divided government, it is usually in both parties' interest to keep the government running, which would seem to rule out any significant funding cuts or drastic increases.

To that end, expect level or increasing funding for discretionary DOE research programs. Both parties have agreed on increasing support for research activities such as grid security and advanced nuclear. With Democrats gaining the upper hand in the House, a continuation of this trend is likely, along with potentially increased support for renewable energy or technology-neutral programs.

With Democrats regaining control of the House, they have also regained subpoena power; as such, an onslaught of investigations, records requests and committee hearings can be expected. While most of those will not be energy-related – for example, President Trump's tax returns, business dealings of cabinet secretaries before and during their government service, anything to do with election interference or the Robert Mueller investigation – Democratic committee and subcommittee chairmen will do their best to require the political leadership of federal agencies to use their time and staff resources to respond to requests and prepare for oversight hearings.

The list of energy-related topics likely to be a focus of congressional committees includes:

  • hurricane response in Puerto Rico
  • scientific advisory boards at EPA and other agencies
  • energy industry influence in decision-making at EPA, DOE and other agencies
  • ethics concerns at the Departments of Interior, Energy and EPA
  • the Trump Administration's treatment of climate science
  • the proposed replacement of the Clean Power Plan with the Affordable Clean Energy rule

Additionally, the early months of the 115th Congress saw an unprecedented surge in the utilization of the Congressional Review Act (CRA) to overturn Obama-era regulations that were finalized in the last six months of 2016. Democrats could return fire in the 116th Congress, though with less success given the larger Republican majority in the Senate. Moreover, President Trump is unlikely to sign any legislation that would undo his own rulemakings. Rather, CRA resolutions should be seen as a way for Democrats to focus and force votes on what they consider to be unpopular moves by the administration. And with CRA resolutions being a privileged vehicle in the Senate – they can't be filibustered, and can be introduced and voted on at any time, by any member – they are also a means to slow down Senate business with Republicans expanding their majority in that chamber.