The Energy Crisis is Real – Is the Inflation Reduction Act a Realistic Answer?
Posted August 9, 2022
Latest News: On Sunday, the U.S. Senate passed the Inflation Reduction Act of 2022 (IRA) by a party-line 50-50 vote, with a tie-breaking vote cast by Vice President Kamala Harris. This Senate-passed “IRA” reconciliation bill now heads to the House of Representatives for consideration later this week. What began as the $4 trillion “Build Back Better” plan raises approximately $739 billion in taxes while providing approximately $370 billion for new federal spending or tax incentives for numerous energy and climate programs.
What’s At Stake? For months, independent energy experts have warned the world is in or at the brink of a serious energy crisis, potentially more challenging and damaging than the global supply shocks and energy embargoes of the 1970s. In fact, the International Energy Agency said the surge in energy demand and subsequent supply chain disruptions and price increases could soon grow worse. As everyone is painfully aware already, the U.S. is not isolated from the chaos. Since June 2021, gasoline prices have shot up 60% and sky-high diesel prices are driving higher transportation costs for the delivery of consumer goods, especially food. As The Wall Street Journal recently pointed out, this energy crisis has been exacerbated by overregulation on one hand and abysmally slow permitting approvals on the other.
- The IRA could open the door to more federal onshore and offshore lease sales and expands credits for carbon capture, which is encouraging for the oil and natural gas industry.
- Other IRA policies that raise taxes and discourage ongoing investment in U.S. oil and natural gas are ill-advised. Amid a global energy crisis, too many provisions fail to address the questions many American families are asking. API encourages a comprehensive plan for critical investment in American oil and natural gas and associated infrastructure, which provide nearly 70% of America’s energy needs.
Below are six problematic provisions that undermine our industry's ability to promote energy security for the American consumer. Left unaddressed, Congress could be missing the moment to bring needed relief to potential energy shortages caused by failed Administration policy.
1. Reinstates a Massive Tax on Energy Companies During an Energy Crisis (Section 13601)
- What It Is: The IRA reinstates the Hazardous Substance Superfund Financing Rate on crude oil and imported petroleum products at 16.4 cents per barrel, indexed to inflation. This provision imposes $11.7 billion in new costs on energy producers across America.
- Big Takeaway: This excise tax would shift the burden of cleaning up Superfund sites away from those responsible and could result in new costs on consumers at a time when Americans are suffering from record-high inflation and facing increased energy prices.
- Bottom Line: Some commentators have noted that this provision “could result in higher prices to consumers” and violates President Biden’s pledge to not increase taxes on Americans earning less than $400,000 in annual income.
2. Imposes Additional Costs on Energy Companies with Minimum Book Tax (Section 10101):
- What It Is: The IRA imposes a new 15% minimum tax on adjusted financial statement income for corporations with income over $1 billion.
- Big Takeaway: This is poorly designed tax policy. It will likely increase taxes on the already highly taxed oil and gas industry, introduce even more tax and financial complexity, and drastically increase compliance costs for American businesses. (Read this to learn more.)
- Key Nuance: While the new tax allows some depreciation and investment expensing, it leaves out the ability of domestic oil and natural gas producers subject to this tax to deduct the majority of their investments incurred in developing and drilling new wells.
- Bottom Line: At a time when the Biden Administration is claiming to be seeking more domestic energy supplies and encouraging U.S. companies to step up production (U.S. Energy Secretary Jennifer Granholm: “We need oil and gas production to rise.”), this provision is counterproductive to that objective.
3. Taxes Methane Emissions When Cost-Effective Regulation Would Suffice (Section 60113):
- What It Is: The IRA creates a so-called Methane Emissions Reduction Program that imposes a new natural gas tax on U.S. oil and natural gas companies. The fee starts at $900 per ton in 2024 and escalates to $1,500 per ton in 2026. This provision would impose new total costs of more than $6 billion on U.S. energy companies.
- Even Worse: In Section 50263, the IRA also imposes a new royalty on all extracted methane. Expanding the scope of existing royalties for such emissions, on top of the natural gas tax, would add even more costs to production at a time when the U.S. needs more energy supply to help provide relief for American families and businesses. This legislation applies new costs on top of new costs, which will be counterproductive to the shared goal of providing additional energy to meet demand while driving down emissions.
- A Better Way: Reducing methane emissions is a top priority for the oil and natural gas industry. That is why the industry has called on EPA to issue cost-effective federal regulations to address methane emissions from new and existing sources.
- Bottom Line: The language in the IRA is counterproductive to these efforts and fails to provide a clear provision to allow an implementable safe-harbor or off-ramp for regulatory compliance due to the potential disconnect in timing of the implementation of this methane tax before the new EPA regulation would be in effect. The resources expended in these new taxes and royalties would be better spent in complying with a federal standard and achieving real reductions in methane emissions.
4. Finds New Ways to Hike Costs on American Energy Producers (Section 50262):
- What It Is: The IRA increases costs through a number of federal onshore oil and natural gas provisions.
- Key Details: The IRA provisions double rental fees on onshore leases, imposes a new fee to simply nominate acreage to be leased, and increases onshore royalty rates to 16 2/3% from 12.5% under the previous administration.
- Bottom Line: It bears repeating – at a time of high energy costs, when Americans need more energy supply, it does not make sense to raise costs for American energy production.
5. Uses Federal Policy to Pick Winners and Losers in Auto Market (Sections 13401-13403)
- What It Is: The bill includes the $7,500 consumer tax credit extension for the purchase of new “clean cars” (i.e., electric vehicles) and $4,000 consumer tax credits for previously owned “clean cars” with conditions. The bill also eliminates the 200,000-vehicle-per-manufactrurer limit. The credits will terminate Dec. 31, 2032.
- A Better Way: The provisions pick winners and losers and are not technology-neutral tax provisions. Vehicle technologies should compete in a competitive market without the hand of subsidies tipping the scales.
- Additional Context: While these provisions make strides to provide income-testing to the subsidy regime, the IRA still provides subsidies for joint-filing taxpayers earning up to $300,000 in annual income, approximately 4 ½ times the average annual U.S. family income.
6. Omits Essential and Necessary Permitting Reform
- What Lawmakers Pledged: In the IRA summary, Senate Democrats, including Senate Energy and Natural Resources Chairman Joe Manchin, stated that the agreement to proceed with the IRA bill, in part, called “for comprehensive permitting reform legislation to be passed before the end of the fiscal year. The focus of permitting reform is essential to unlocking domestic energy and transmission projects, which will lower costs for consumers and help us to meet our long-term emissions goals.” API could not agree more, and we look forward to working with Senator Manchin on domestic energy priorities like the critical need for permitting reform.
- What Lawmakers Did: To date, the provisions related to this agreement have not been acted on in the Senate. In fact, they have yet to be introduced.
- Quotable: “Glaringly absent in the bill is permitting reform, which is required for America’s infrastructure needs and to bolster critical oil, natural gas and renewable supplies to meet our current and future energy demand. We urge Congress to take up and pass permitting reform without delay.” – Mike Sommers, API president and CEO
Final Thoughts: API recently unveiled its “10-in-2022” plan to ensure that essential energy resources are unlocked; to encourage investment opportunities and accelerate infrastructure development; and to strengthen global energy security, affordability and reliability. Given the high prices Americans are paying for the necessities of life, Americans are desperate for an energy reawakening and smart changes to federal policy from the Biden Administration, which already possesses numerous tools in its toolbox under existing authority to deliver this critical relief.
More can be done. Any bill should take a comprehensive approach and result in the increase of American natural gas and oil supply consistent with the goals of the “10-in-2022” plan. IRA does not, but there is still time to make a few tweaks for the better.
As the world now knows, American oil and natural gas have never been more important. Policymakers must make it their mission to help consumers and American allies now.
About The Author
Lem Smith is API’s vice president for Federal Relations. Lem joined API in February 2020 as vice president for Upstream Policy & Industry Operations. He previously served as a principal at Squire Patton Boggs, an international law and public-policy firm, where he advised private and public sector clients on federal and multi-state policy matters and provided counsel on communications strategies, campaign affairs and crises management. Previously, Lem was director, U.S. Government & Regulatory Affairs at Encana, and responsible for all aspects of U.S. government relations and regulatory policy matters at the state and federal levels. Prior to that, Lem was director of Government Relations for Kerr-McGee Corporation. Lem began his career on Capitol Hill, working for U.S. Senate Majority Leader Trent Lott, U.S. Rep. Roger Wicker (Mississippi) and the late U.S. Rep. Charlie Norwood (Georgia), where he negotiated key member priorities within the 2005 Energy Policy Act (EPAct). Lem is a graduate of the University of Mississippi.