Wednesday, November 03, 2010

Interpreting the Election Results

The results of yesterday's election will be interpreted and spun in many ways in the days and weeks ahead. Republicans gained control of the House of Representatives and several key governorships but fell short of capturing control of the Senate. In the process they picked up enough seats--along with at least one like-minded Democratic Senator-elect--to put cap & trade or a national carbon tax out of reach for at least the next two years. Meanwhile, voters resoundingly defeated a ballot initiative in California that would have forestalled implementation of the state's tough greenhouse gas policies. But even if comprehensive federal energy legislation is off the table, divided government doesn't rule out the possibility of a national renewable energy standard or other energy measures, provided they don't involve significant additional expenditures.

On the surface, the election outcome appears to set up a return to the pre-2009 situation, when California and other states were pushing aggressively for action on climate change while the federal government remained deadlocked on the issue. Too much has changed since then for that picture to be accurate. In the absence of Congressional action on greenhouse gas emissions the EPA is forging ahead with its own regulations under the Clean Air Act, and that could provide an early test of the willingness of the new Congress to try to modify the administration's regulatory approach. Meanwhile, although the proposition that would have suspended California's A.B. 32 climate rules was swamped after being portrayed--unfairly, in my view--as mainly benefiting out-of-state oil companies at the expense of the state's new Cleantech industry, California voters passed another initiative, Proposition 26, that will make it harder to impose a variety of new fees on businesses and consumers, including fees related to the environment. Further complicating the outlook, the results of several key governor's races, including in New Mexico and possibly Oregon, could limit the number of other states that might "opt in" to A.B. 32, as well as raising the possibility of more defections from the Western Climate Initiative.

Although as I noted on Monday our fundamental energy situation is largely pre-determined for at least the next few years, last night's results could affect energy policy in a number of other ways, aside from climate change. One example is the President's desire to eliminate subsidies for conventional energy, as part of an initiative of the G-20 group of nations. The main subsidies targeted by this international effort are those that increase demand by limiting the price of fossil fuels for consumers, particularly in developing countries, yet President Obama has linked this to his goal of eliminating a variety of tax breaks benefiting domestic energy production, including the Section 199 tax deduction that all US manufacturers enjoy. Unless this measure is somehow passed in the lame duck session when Congress returns from its election break, it looks dead on arrival come January. From an energy security perspective we should be glad of that.

The change in control of the House also puts the extension of the expiring ethanol blending credit in doubt, along with the prospect of extending eligibility for Treasury renewable energy stimulus grants beyond the end of this year. Even though the latter appears deficit-neutral, and might thus attract bi-partisan support, it accelerates benefits that project developers would otherwise have to wait until their next tax filing to receive, and it probably lets some marginal projects that might not otherwise find private funding escape winnowing. If the lame duck doesn't pass this, the odds of the 112th Congress extending it or anything else connected to the stimulus look poor.

Ultimately the likelihood of meaningful energy legislation of any kind will hinge on the willingness of the President and the new Congress to meet somewhere in the middle to get things done. Otherwise, the scope is limited to a few lowest-common-denominator efforts, which might include a modest national renewable electricity standard, with everything else effectively blocked by the other chamber of Congress or the President's veto pen. I don't expect to lack for topics on which to blog in the next two years.

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