January 21, 2021

Climate and Energy Policies That Could Pass Congress via Budget Reconciliation

3 min

While the filibuster's 60-vote threshold may preclude passage of sweeping climate and energy legislation such as the Green New Deal, major climate and energy policy can pass Congress via a process called budget reconciliation. It's an often misunderstood term for a process that lets the Senate fast-track certain types of legislation.

The Congressional Budget Act of 1974 ("Budget Act") created a Budget Committee in each chamber and charged them with annually passing a budget resolution that sets forth spending allocation thresholds for each Appropriations Subcommittee. The Budget Act also provided a mechanism to address tax revenues, mandatory spending programs (e.g., Medicare, Medicaid), and the debt limit. That mechanism is called reconciliation.

The adopted budget gives the committees of jurisdiction (e.g., Ways and Means) reconciliation instructions to craft and report legislation that increases or decreases a specified amount of revenue, mandatory spending, or the debt limit. Each Budget Committee then combines the committee reported bills and sends the combined package to the floor. In the Senate, consideration is time limited, is not subject to a filibuster, and can pass with a majority vote. Congress has previously used reconciliation to pass major bills, such as the Trump administration's Tax Cuts and Jobs Act of 2017 and some of the Obama administration's Affordable Care Act.

The Budget Act prohibits the reconciliation package from containing "extraneous matters." If a Senator raises a point of order that a provision contains extraneous matter (i.e., invokes the "Byrd Rule," named after former Senator Robert Byrd (D-WV)), the Senate parliamentarian rules whether the provision must be stricken from the bill. In general, matters are considered extraneous if they do not change outlays or revenues or the changes in outlays or revenue are "merely incidental" to goals of the provision. For example, a reconciliation package could likely provide tax credits for electric vehicles, but the establishment of a national clean energy standard would likely be struck for violating the Byrd Rule.

Other policies that would seem consistent with reconciliation include:

  • A carbon tax (possibly one that pays back a dividend to certain taxpayers)
  • Increased tax credits to promote wind power, solar power, hydropower, energy storage, electric vehicles and infrastructure, a modernized electric grid, advanced manufacturing, carbon capture, energy efficiency, green building, green research and development, etc.
  • Federal purchase of clean energy technology (vehicles, batteries) and increased funding for Department of Energy loan guarantee programs
  • A rollback of favorable tax treatment for fossil fuel producers
  • Raising royalties for fossil fuels extracted from federal lands
  • Grants to provide transition assistance for climate-impacted workers and carbon-intensive manufacturers
  • Grants to the agricultural sector to reduce greenhouse gas emissions
  • Block grants to states to help achieve the Biden administration's climate goals

We expect many, if not all, of these policies to be considered by the House and Senate committees of jurisdiction. But because of the slim Democratic majority in the Senate, any reconciliation package will need the votes of incoming Energy and Natural Resources chairman Joe Manchin (D-WV) and other Democrats from states with fossil fuel production. Furthermore, because of the similarly narrow Democratic majority in the House, some Democratic members may resist voting for an overly ambitious climate and energy package out of concern the legislation is likely to fail in the Senate. Therefore, we believe reconciliation is most likely to be used to incentivize behaviors rather than to punish producers and emitters. But the scale of the incentives would be orders of magnitude above what Congress has previously spent to promote energy and climate polices – for example, hundreds of billions of dollars for tax credits and to promote innovation.