The story of 2025 is full of rapid and far-reaching shifts in environmental policy. Resources for the Future is analyzing the ins and outs of these actions. I interviewed some researchers for initial thoughts on the reconciliation bill passed by Congress.
Reconciliation is a special process which can fast-track legislation and avoid the Senate filibuster, so long as that legislation is germane to the federal budget (e.g., taxes, spending, or the debt limit). Using the reconciliation process to pass legislation has become an effective way for political parties to advance their policy agenda in an era of razor-thin political majorities.
The final text of the “One Big Beautiful Bill Act” includes provisions to modify oil and gas leasing rates, end subsidies for electric vehicles, and effectively repeal many of the clean energy tax credits put in place by the Inflation Reduction Act in 2022. I asked a group of researchers at Resources for the Future (RFF) to briefly explore the implications of some of these particular changes.
Oil and Gas Leasing
Brian Prest is an economist and fellow at RFF specializing in the economics of climate change, energy economics, and oil and gas supply. He recently published a blog post for If/Then that estimates the effects of reduced oil and gas royalty rates on state and federal revenues.
Liam Burke: What are the key issues you were tracking as this bill approached the finish line, Brian?
Brian C. Prest: When it comes to the royalty provisions I focused on, there wasn’t much change between the House and Senate versions—just one small change. But taking a step back, the focus of my work was the changing royalty rates on federal lands and waters.
Prior to the Inflation Reduction Act (IRA), rates for drilling on federal lands hadn’t changed in over 100 years. Rates were fixed at 12.5%, which might have made sense a century ago, but have really fallen out of step with the modern market. Private landowners typically charge something like 18% to 20%, and states can charge up to 25%. The IRA recognized the mismatch and raised royalties closer to market rate, to 16.67%. That new rate was only for new leases, of course—the ones issued after the bill passed.
What this reconciliation bill does is revert that rate to the older 12.5% value for onshore leases, while opening the door for the Secretary of the Interior to cut rates for offshore leases down to 12.5%. Also, while the onshore leasing changes sunset after 10 years, the offshore ones are permanent.
Those are two pretty big changes. What are the impacts of cutting rates?
BCP: Reducing the royalty rates will affect the government revenues collected from onshore and offshore oil and gas production. The revenue from those leases doesn’t just go to the feds; it’s split with the states. Offshore revenue sharing is slightly different, but it’s still shared with states. I looked into the effects of the changed royalty rates on revenues to the federal treasury and the impacts on the states.
Short answer? These rate cuts will lead to $6 billion in losses for the federal government within the 10-year budget window, and $42 billion lost from 2036 to 2050—due in large part to the permanent change in offshore rates. At the state government level, you’ll see billions of dollars in losses, as well, concentrated in the big production states like New Mexico. It’s a substantial change.
Any major differences between the House and Senate versions?
BCP: No—just that the Senate repealed a House provision that would levy royalties on all extracted natural gas. Methane, which is the primary component of natural gas, leaks throughout the supply chain or sometimes is vented intentionally due to safety issues or lack of takeaway capacity. And sometimes, methane is flared, meaning burned off. Either way, it’s a wasted resource.
Credit: Leonid Ikan / Shutterstock
The Senate bill essentially says you don’t have to pay royalties on that wasted resource, as companies had to do before. While I didn’t expect that to be a major sticking point between the chambers, the House version would do more to address environmental concerns by providing an extra incentive to capture the methane, which is a powerfully detrimental greenhouse gas, rather than letting it escape into the atmosphere.
Clean Electricity Tax Credits
Aaron Bergman is a fellow at RFF. He recently coauthored a blog post for If/Then focused on the effects of repealing the Section 45Y and 48E technology-neutral tax credits.
Aaron, let’s jump right in—what have you been keeping an eye on in this reconciliation bill?
Aaron Bergman: The main provisions we wanted to keep an eye on from the House bill were the significant restrictions on developers in receiving the tech-neutral production and investment tax credit for clean electricity. Particularly the placed-in-service dates—which require the electricity generation to come online by a specific time to receive the tax credit—and the provisions for foreign entities of concern, which restrict the ownership and sourcing of raw materials. We were interested to see whether the Senate would make changes to these provisions, and to the phaseout timelines for the tax credits, both of which would create significant uncertainty for developers.
Ultimately, the Senate did make changes to the timelines, mainly by moving to a “commence construction” date requirement, which means projects are eligible for the tax credit based on when construction starts versus when a plant starts delivering power. This requirement gives developers a little more certainty and provides a longer timeline. But plants need to start construction a year after the bill passes to receive the credit, and the provisions on foreign entities of concern remain in the Senate version.
The Senate also said that these timelines apply only to wind and solar energy generation, leaving technologies like geothermal and nuclear still able to receive the tax credit.
While the final language of the Senate bill that was enacted in final legislation represents a compromise from the original House language, it’s still a significant reduction in subsidies for clean energy as compared to the status quo.
Can you talk a little more about the uncertainty aspect?
AB: To receive financing, renewable energy developers need to understand what their revenues will look like. A placed-in-service date comes with a lot of uncertainty over whether a project will receive the tax credit, given potential construction delays.
The provisions about foreign entities of concern also lead to a lot of uncertainty, because those will likely require the issuance of guidance from the administration on how to comply. Without that guidance, developers won’t know how hard or easy it will be to follow the rules.
This uncertainty over how to comply with the new provisions will make it extremely challenging for renewable energy projects to receive financing.
In your recent research on these credits, you do some analysis of the impacts of repeal on cumulative emissions and electricity prices—can you speak to that piece?
AB: When we modeled the House bill, we determined that the phaseout of the tax credits and the level of uncertainty effectively would be akin to a full repeal of the IRA tax credits. Our modeling shows a significant increase in annual electricity bills for consumers, as high as $300 a year in some parts of the country, so rescinding these credits for developers has a major impact on energy affordability.
Any final thoughts, now that the bill has passed?
AB: A surprise that we saw in the final Senate bill was the semi-preservation of the 45V tax credit for clean hydrogen production. It will be interesting to see the impact of extending 45V, since the Department of Energy’s hydrogen hubs program is under review by the administration, and the viability of a lot of these projects is contingent on receiving the credit. With 45V extended, there could be an opening for the hubs to be economical.
Carbon Capture
Alan Krupnick is a senior fellow at RFF and an expert on the oil and gas sector, reducing greenhouse gas emissions from this and the industrial sectors, and cost-benefit analysis.
Alan, what caught your eye during the negotiations on this bill?
Alan Krupnick: I’ve been tracking the 45Q tax credit in the IRA, which gives subsidies to companies for projects that reduce carbon dioxide (CO₂) emissions by capturing gas—either from an exhaust stream, such as from a power plant, or from direct air capture—and then storing that CO₂, reusing it in industrial processes, or embedding it in long-lasting products.
This subsidy structure goes back to the Energy Improvement and Extension Act of 2008, and the approach was updated and made more generous by the IRA. However, the Senate bill introduced new negative implications from a social perspective that were preserved in the enacted legislation.
What kind of negative implications?
AK: Well, the Senate bill increases the subsidy for the use of CO₂ in enhanced oil recovery, equal to that for, let’s say, permanently sequestering the greenhouse gas by other means.
Over time, oil wells can lose their pressure, even if recoverable oil is still in the well. CO₂, or another substance, can be used to bring the oil to the surface. Thus, the CO₂ used for enhanced oil recovery is something that oil companies are willing to pay for, as opposed to CO₂ captured and permanently stored.
Credit: Alex Verrone / Shutterstock
When the 45Q provision was put into the IRA, a subsidy was still available for using captured CO₂ for enhanced oil recovery, but the credit was lower than the amount available for pure CO₂ sequestration—$60 per ton versus $85 per ton. The lower credit level reflected the fact that companies using CO₂ to produce oil were getting a benefit—more product to sell—so they didn’t need as high of an incentive. The Senate boosted that $60 to the $85 level of permanently stored CO₂. Similarly, the Senate increased the credit from $135 to $180 for capturing CO₂ directly from the atmosphere and using it for enhanced oil recovery, matching the credit level for direct air capture that’s permanently sequestered.
What will the impact of this change be?
AK: I think $60 per ton was already sufficient to stimulate carbon capture efforts for enhanced oil recovery, so while the increased credit may drive some additional enhanced oil recovery and CO₂ stored, the extra value of the credit also is likely to increase profits from a practice that was already profitable.
Were you expecting any fireworks as the two chambers reconciled their language?
AK: I thought the final bill would go back to the subsidy structure that existed before: the $60- and $135-per-ton credit for using captured CO₂ in enhanced oil recovery, with higher incentives for permanent sequestration. But the Senate did one thing which I think has a negative impact on the industry: inflation has ramped up since the IRA passed, so maybe these credits overall are too low now, given where we are.
The Senate added another year before any inflationary adjustment would be made to the credit; if they had adopted the House’s approach to modifying the credit, that inflation adjustment would come sooner, and the credit equalization between enhanced oil recovery and permanent storage wouldn’t have happened. The House’s approach is a more economically sensible one for this credit. It’s important to de-risk these technologies so they can get funding and become viable, and 45Q is a sensible policy to continue incentivizing carbon capture.
Final takeaways from this reconciliation process, in your view?
AK: All versions that have led to the final bill are a blow to renewable energy and increase costs for consumers.
Right now, we’re not accounting for climate externalities through policy. If we were, then solar and wind energy, as the most prominent zero-carbon emitters, would have an advantage—as under a carbon tax scheme or cap-and-trade system, to give some examples. The subsidies for wind, solar, clean hydrogen, and all those zero- or low-carbon options essentially are taking the place of a more comprehensive system to reduce carbon emissions, which is why they’re so important to keep in place, irrespective of the jobs, innovation leadership, and economic development they can bring.
Transportation
Beia Spiller is a fellow at RFF and director of RFF’s Transportation Program. Joshua Linn is a senior fellow at RFF and a professor in the Department of Agricultural and Resource Economics at the University of Maryland. They recently collaborated on a blog post for the If/Then series, which focused on the impacts of eliminating federal tax credits for electric vehicles.
Which provisions in the reconciliation megabill were of particular interest to you?
Beia Spiller: The IRA tax credits broadly, but the 45X advanced manufacturing production tax credit is one that’s also very important to watch.
Joshua Linn: Agreed. I also think that the purchase subsidies for electric vehicles (EVs) would have an immediate effect on sales.
Credit: Ganzoben / Shutterstock
Our modeling indicates reductions in EV market share by almost one-third. Longer term, if you no longer have those subsidies and you don’t have the 45X subsidies, companies will scale back their investments in new production capacity for batteries and for vehicles.
What does that impact look like for manufacturers? How will it be felt by consumers?
BS: The manufacturing production tax credit and the vehicle purchase tax credits work well together because one policy reduces the cost of the batteries, which can bring down the cost of EVs; at the same time, the purchase subsidy induces demand for consumers to buy EVs. If you remove the purchase credits, you reduce the demand for the vehicles, which reduces the incentive for manufacturers to make the batteries.
More broadly, because battery manufacturing has been historically concentrated in Asian countries, part of the intent of 45X was to increase US supply-chain resilience and increase our ability to participate in these markets. However, it’s more expensive to make these batteries domestically, so the subsidies were necessary for the United States to be globally competitive in this industry. The crux, though, was the sourcing requirements.
Specifically, under the IRA, the EV purchase subsidy required the vehicle’s battery to be made in the United States, creating this important linkage across the two credits: create demand for US-made batteries and help manufacturers make those batteries.
Basically, the subsidies worked together to ramp up US battery manufacturing and increase EV adoption.
What are your takeaways from this bill for the electric vehicle sector?
JL: Consumers benefit from subsidies, of course, because subsidies expand EV choices for consumers and reduce EV prices. For consumers, those incentives will be going away.
Beyond the purchase subsidy, the bill also removes the fines related to compliance with Corporate Average Fuel Economy standards, so there’s no longer a penalty for noncompliance. In the short term, the regulatory bodies—the Environmental Protection Agency, the National Highway Traffic Safety Administration—are going to want to weaken the standards to align with the administration’s goals.
BS: And weakening vehicle emissions regulations is another hit to EV prices. Because manufacturers faced requirements to make and sell some amount of EVs—through the emissions standards, for example—they didn’t have as much leeway to raise EV prices.
People are only willing to pay a certain amount for these vehicles, so if you weaken the vehicle regulations, you reduce the downward pressure on the price of EVs, because now the manufacturers don’t care, to a certain extent, whether they sell electric instead of gasoline cars. Pair the deregulation with an eliminated subsidy, and prices for EVs will further increase. Automakers are not going to take losses if they don’t have to comply with the regulations.
JL: Now, even before federal agencies get involved, Congress is already moving to weaken the standards. But I don’t think the rapid changes in regulations mean manufacturers are going to start ripping out their hybrid and electric offerings. Some companies still will be committed to higher fuel economy and EVs.
BS: I agree. The companies have already made investments in their technology and their assembly lines—consumers expect a certain amount of fuel economy. It would be strange for companies to make investments now to undo that work. But losing the purchase tax credit will be costly overall, from the point of view of society.
For more timely insights about developments in environmental and energy policy, browse the If/Then series.
