Dark clouds on the horizon — and drilling rigs too.
Photo: iStockphoto

The GOP-controlled 109th Congress went out with a bang — that of drills hitting sea bottom.

In the waning hours of the final legislative session earlier this month, Republican leaders pushed through a provision to open up 8.3 million acres on the outer continental shelf of the eastern Gulf of Mexico to oil and gas development. But, perhaps trying to avoid fossil-fuel deposits in their stockings, members of Congress also extended a number of tax incentives for renewable energy.

All of these measures were wedged into the corpulent folds of the Tax Relief and Health Care Act of 2006, along with heaps of other non-tax-related miscellany on everything from Medicare payments to abandoned-mine cleanups. “It was the last train leaving the Capitol Hill station,” said Steve Ellis, vice president of programs at Taxpayers for Common Sense, “one of those must-pass bills that became a smorgasbord of special-interest projects.”

The House overwhelmingly passed the behemoth on Dec. 8. Enviros tried to convince senators to purge the drilling provision, but on Dec. 9 the Senate passed the same version as the House, in a landslide vote of 79-9. President Bush is surely chomping at the bit to sign it. (Oil drilling and tax cuts? Two great tastes that taste great together!)

The offshore-drilling provision will “greenlight the first production oil-drilling activity off Floridian shores in the history of the state,” says Mark Ferrulo, director of Environment Florida, who collaborated with activists from the Sierra Club, Friends of the Earth, and Defenders of Wildlife in trying to block the provision. “There are 4,000 rigs glutting the central and western gulf, but oil development has always been prohibited in the eastern gulf region. The new bill changes that.”

The drill-drill-drill contingent in Congress had been holding out for a much broader measure that would have opened waters around the country to offshore exploration, and only at the 11th hour did House leaders back down and agree to support the more limited measure expanding drilling only in the Gulf of Mexico.

Strangely, one of the biggest boosters of the drilling provision that was ultimately passed was Florida Sen. Mel Martinez (R), even though he has vehemently opposed drilling off the Florida coast since his election campaign in 2004. As he said last year, “Look, it’s give an inch and take a mile with these [oil] folks … nothing Floridians offer in exchange for permanent control over our own waters will ever be enough for the pro-drilling interests. They will always want more. That’s why we need to stand firm in maintaining all current protections off Florida’s coast.”

But in the end, Martinez gave that inch. He decided to support the measure because it included a compromise clause establishing a buffer zone around Florida’s coastline that will prohibit any offshore drilling closer than 125 miles until 2022. Martinez spokesperson Ken Lundberg said the senator sees the provision as “a victory for the Florida environment.”

Enviros aren’t so impressed. While drilling rigs won’t be visible from the state’s coastline, Ferrulo worries that the routine pollution from extraction activities could imperil Florida’s beaches, coral reefs, and aquatic life. And he worries about the possibility of a catastrophic spill, which could threaten marine ecosystems and the huge tourism industry that depends on them.

Ferrulo also argues that the drilling measure could lead to more oil and gas exploration in other regions. “It’s a slippery slope,” he says. “Once you open the door to this kind of activity on Florida’s outer continental shelf, then you make coastal regions in the rest of the country all the more vulnerable. Now drilling advocates in North Carolina, California, wherever, can have an easier time arguing, ‘We want to do this too.'”

Ellis of Taxpayers for Common Sense raises another concern about the drilling provision: nearly 40 percent of royalties will be going to four gulf states: Alabama, Louisiana, Mississippi, and Texas. (Florida declined the royalty option with the idea that doing so would put the state in a better bargaining position to get the buffer zone.) That’s a sharp departure from the usual course of business, which sends oil royalties from federal waters to the federal treasury. “Oil royalties are one of the biggest sources of revenue for the federal government next to income tax,” says Ellis. “All of us Americans own those oil and gas resources, but the states are hijacking the funds to go back to their own coffers.” This scenario not only cheats the nation’s taxpayers, he argues, but short-shrifts endeavors like clean-energy development that could otherwise benefit from federal funds.

And Now for the Good News

But while this leg up for the démodé oil and gas industry grabbed the headlines, boosts for cleaner energy garnered less attention. The omnibus tax bill included new or extended tax benefits for wind, solar, biomass, and ethanol producers, totaling about $3.3 billion over 10 years (though many of the extensions will last only through 2008).

Rosy news for wind and other renewable-energy industries.

Photo: iStockphoto

Solar advocates applauded a one-year extension of a 30 percent tax credit on solar panels that heat water and produce electricity for homes; a credit of the same percentage was also extended for solar and stationary fuel-cell equipment for commercial buildings. Wind and biomass advocates cheered a one-year extension of a tax credit that will give new wind and biomass power projects a 1.9-cent-per-kilowatt-hour credit for electricity generated over the first 10 years of their operation.

Cellulosic ethanol developers will benefit from a new provision allowing them to deduct 50 percent of the cost of their facilities from their taxes in the first year of operation, according to Erich Pica, an economic policy analyst with Friends of the Earth. Much to the delight of the corn lobby, the tariff on imported ethanol of 54 cents per gallon was also extended.

Renewable-energy innovators will also profit from a general research-and-development tax credit worth $16 billion, which will allow a broad range of industries to offset a percentage of their expenditures on the development of new technologies.

Green builders were tossed a few bones too. The legislation extended a tax credit of $1,000 to eligible contractors for the construction of new homes that use 30 percent less energy than conventional homes, and $2,000 for homes that use 50 percent less energy.

Taken as a whole, these credits play an invaluable role in moving clean-energy markets forward, says Pica: “They are the transitional bridge to the new economics of renewable energy.”

Of course, it would be far more beneficial to clean-energy industries if all of these credits were extended for several years at a time rather than in one-year increments, so investors and innovators could have certainty as they make future plans — but apparently that approach would be less beneficial to members of Congress. Says Pica, “Lawmakers like to give themselves the option of re-extending the incentives every year largely so they can put green window-dressing on the dirty stuff that inevitably gets embedded in the bill.”

But Pica’s greater concern is the continued emphasis on exploiting domestic oil resources. Don’t be fooled that this tax bill poses a net benefit for clean energy, he says: “In the context of the drilling provision, it’s one step forward, two steps back.”