Just as the American Recovery and Reinvestment Act of 2009 delivered a dramatic increase in government investment in clean energy, including $35.2 billion in appropriations to the Department of Energy and more than $21 billion in tax incentives, 2011 is expected to bring an even more dramatic decrease in federal investment, for both clean and fossil energy.

The debt deal reached by President Obama and congressional leaders at the beginning of August set in motion two rounds of spending cuts, which will necessarily impact federal support for energy spending.  Immediately, Congress is charged with finding $917 billion in discretionary cuts over the next 10 years.  Based upon legislative priorities thus far in the 112th Congress, House Republican appropriators are expected to target programs related to climate change and the regulation of oil and gas, Environmental Protection Agency emissions programs, clean energy research funding, and funding to assist foreign countries in adapting to climate change. Senate Democratic appropriators are expected to fight these efforts and seek to preserve clean energy funding.

The second round of deficit reduction, totaling a minimum of $1.2 trillion, will be developed by the newly appointed, 12 Member, bipartisan Joint Select Committee on Deficit Reduction (Joint Committee).  While reaching a bipartisan deal will be difficult, should the Joint Committee fail to agree upon recommendations or should Congress reject its recommendations in December, $1.2 trillion in spending sequestrations would automatically be activated -- targeting conservative and liberal energy priorities equally.  The sheer amount of deficit reduction requires that all federal energy support be on the table.  In fact, some unlikely coalitions, of environmental and fiscally conservative groups, have already formed to propose cuts to the Joint Committee, such as elimination of oil and gas tax credits; nuclear power loan guarantees; and the Department of Energy’s Advanced Research Projects Agency-Energy (ARPA-E). 

Among the tax incentives likely to be considered by the Joint Committee are renewable and ethanol incentives that must be reauthorized by Congress every year or two.  For instance, the ethanol tax incentive is scheduled to expire at the end of 2011 and is estimated to cost $5 billion per year.  In a sign of the forces coalescing to reduce energy subsidies, earlier this year, Senators Tom Coburn (R-OK) and Dianne Feinstein (D-CA) succeeded in passing, by a vote of 73-27, an amendment to repeal the ethanol subsidy.  Although the House has yet to act, their amendment signaled a bipartisan willingness to eliminate at least some politically popular tax incentives.  Other energy related tax provisions that are scheduled to expire at the end of this year are: tax incentives for biodiesel and renewable diesel, estimated to cost $2 billion per year; Section 1603 Investment Tax Credits directed at renewable energy and estimated to cost $3 billion; and various tax credits that support certain electric and alternative fuel vehicles.  At the end of 2012, the Renewable Electricity Production Tax Credit for wind, estimated to cost $1.5 billion per year, will phase out unless extended. 

Although the Obama Administration has tried unsuccessfully to repeal oil and gas tax incentives, the $4 billion per year of tax deductions or credits will also be considered by the Joint Committee.  Unlike the renewable and ethanol incentives, these tax credits are embedded in the tax code and do not have to be renewed every year or two. 

With the size and scope of deficit reduction likely to come from Congress this year, companies may ask how the Obama Administration can fulfill its pledges on clean energy, i.e. its promise to put one million electric vehicles on the road by 2025, or to double the share of electricity from clean energy by 2035.  One way is to use the regulatory tools at its disposal.  In July, the Obama Administration, following weeks of negotiations with automakers, labor representatives, and environmentalists, announced a 2025 Corporate Average Fuel Economy (CAFE) standard of 54.5 miles per gallon, which will begin taking effect in 2017.  More recently, the Obama Administration announced that the Departments of Energy and Agriculture, and the U.S. Navy, will partner with advanced biofuels companies to invest $500 million in biofuels for the military’s transportation.  Navy Secretary Ray Mabus is leading an effort within the military to use biofuels, committing that “by no later than 2020 the Navy will get at least half of all of its energy sources…from non-fossil-fuel sources.” 

The next several months promise to bring significant changes to government investment in energy.  As a result, companies with an interest in the area should closely monitor Congressional action.