Manchin-Schumer Inflation Reduction Act Is A Watershed Moment For U.S. Energy

In constructing the grab-bag of goodies contained in their Inflation Reduction Act of 2022, West Virginia Senator Joe Manchin and Senate Majority Leader Chuck Schumer (D-NY) were careful to include something for everybody. While much of the reporting on the $369 billion in energy-related provisions in the bill - which Schumer plans to bring up for a Senate vote this week - has focused on the cornucopia of new tax provisions and subsidies targeting renewables and electric vehicles, it also includes language designed to attract support from the biggest of “Big Oil” companies.

One such section mandates that the Department of Interior hold oil and gas lease sales on 2 million acres of public lands and 60 million acres offshore each year this decade, and ties rights of way permits for renewable projects to on-going onshore lease sales. At the same time, though, the bill raises federal royalty rates on new onshore leases from the current 12.5% to 16.75%, and also imposes major increases in minimum bids, rental rates and bonding requirements for federal leaseholders. In other words, it’s a mixed bag with a lot of qualifiers and offsets that in the end won’t attract a lot of oil industry support but will likely dampen any sort of major opposition from that sector.

Interestingly, the bill would also restore the results of the lone offshore lease sale held thus far by the Biden administration. That sale was held in November, 2021, but its results were annulled by a federal judge over the Interior Department’s alleged failure to properly account for environmental impacts. The judge’s decision was not appealed by the Biden administration.

Predictably, these provisions generated conflicting responses depending on whose ox was being gored. "That's where this bill is a bitter pill to swallow," Erik Schlenker-Goodrich, executive director of the Western Environmental Law Center, was quoted by Reuters. "On the one hand you are very much moving us forward on climate action. And on the other hand you're taking it away."

On the other hand, Erik Milito, President of the National Ocean Industries Association, said “We’re excited to see the way that this has played out and what language actually has made it into this proposed piece of legislation.” Milito’s membership includes both offshore offshore oil and gas companies and wind producers.

Another provision that will appeal to many in the oil and gas sector is the extension of the definition of “clean energy” projects that qualify for a new investment tax credit to include carbon capture and storage projects. That attracted a positive statement from ExxonMobil XOM CEO Darren Woods, who told participants in last Friday’s earnings call that “We’re pleased with the broader recognition that a more comprehensive set of solutions are going to be needed to address the challenges of an energy transition.” Woods added that “the discussion evolving from just wind and solar and EV's to carbon capture and storage, and biofuels, and hydrogen is really important. And the recognition globally with governments, particularly our government that those are important technologies that need to be developed.”

But the American Petroleum Institute, whose membership tilts heavily towards the companies regularly identified as “Big Oil” by critics, was less enthusiastic in its assessment of the bill. “While there are some improved provisions in the spending package released last night, we oppose policies that increase taxes and discourage investment in America’s oil and natural gas,” the association said in a statement.

Indeed, much of the bill’s energy-related provisions are focused on tax credits and incentives that do not apply to oil and gas. There are an array of investment tax credits designed to incentivize new infrastructure to manufacture renewable energy products, transmission lines and infrastructure projects; an extension of the existing production tax credits for both wind power and solar power; and a 10-year consumer tax credit for investments in wind and solar.

And of course, the bill includes an expansion and extension of the federal consumer tax credit for the purchase of new electric vehicles, while also creating a new tax credit for the purchase of used EVs. It expands the current new vehicle credit of $7,500 by eliminating the current cap of 200,000 vehicles per manufacturer. Obviously, both Tesla TSLA and General Motors GM love that one, since they’ve both used up their vehicle allotments, and Ford and Toyota are equally pleased given that they’re both approaching that threshold. The bill creates a new credit of $4,000 per unit on the purchase of used EVs in their effort to expand that market.

Not included is the $12,500 consumer credit that had been part of the various versions of the Biden “Build Back Better” act, an amount that would have come much closer to closing the current huge price gap between EVs and gasoline-powered vehicles. EV makers are also likely to be unenthusiastic about the means-testing qualifiers the new bill places on eligibility for the credit. This could be especially true for Tesla, given its current appeal to wealthier Americans.

The draft bill would deny the federal credit to individuals earning over $150,000 per year and married couples who earn more than $300,000. The bill also denies credits for the purchase of sedans priced over $55,000, and for SUVs, pickups and vans that retail for more than $80,000. Those limits will also present problems for Ford, whose F-150 Lighting model is priced upwards of $100,000 for fully-equipped models.

In the end, the Manchin/Schumer compromise bill adds up to a package that does not fully satisfy any interest group or industry sector, one that is without question far less appealing to the renewables and EV sectors than “Build Back Better,” which would have enacted $555 billion in new subsidies and tax incentives targeting those industries. But it’s the best they can get so long as Sen. Manchin’s vote is needed for passage.

Now, all of Washington DC will await the verdict from the other Senate Democrat who opposed the “Build Back Better” legislation, Arizona’s Kyrsten Sinema. The Manchin/Schumer draft includes limitations on tax benefits for carried interests, a feature of “Build Back Better” that Sinema opposed. Media reports have also indicated Sinema felt insulted that Manchin and Schumer announced their compromise last Thursday without giving her any advance notice.

The partisan math in the Senate dictates that this bill cannot pass without the support of all 50 Democrat senators plus a tie-breaking vote by Vice President Kamala Harris. Just as it was on Manchin, the pressure on Sen. Sinema to vote along party lines is now enormous.

Manchin ultimately gave into the pressure; we will see what Sinema will do very soon. One way or the other, hers will be a momentous decision for the energy sector in this country.