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Congress will lift the oil export ban, boost clean energy subsidies. Is that a good trade?

A deal. A sort of sunny, vaguely ominous deal. (Photocreo Bednarek/Adobe Stock)

Late Tuesday night, as part of a sweeping budget deal, congressional leaders forged an unexpected compromise around a few key energy provisions. Basically:

  1. Democrats agreed to lift the 40-year ban on US crude oil exports, a provision long sought by the oil industry because it could bolster domestic drilling.
  2. In exchange, Republicans agreed to extend key tax subsidies for wind and solar for another five years, phasing them out only gradually. This is a big victory for the renewable industry. The 30 percent tax credit for solar was set to expire next year, putting a dent in the nascent solar boom. Same for the tax credit for wind, which lapsed back in 2014. Total cost: $25 billion over 10 years.
  3. Republicans also won't block a $500 million payment that the Obama administration plans to make to the UN Green Climate Fund, which will distribute aid to developing countries as part of the Paris climate deal. Some conservatives had wanted to block these funds, to toss a wrench in the UN climate talks. So much for that.

So... is this a good trade? Bad trade? From a climate standpoint, this looks quite helpful in the near term. The wind and solar credits will reduce US greenhouse gas emissions moderately for the next half-decade (around 0.3 percent per year, by one estimate), at least until the EPA's Clean Power Plan takes effect.

Conversely, few analysts expect the repeal of the export ban to matter much for the next few years, since conditions aren't currently favorable for exports. But in the longer run, if those conditions shift, this provision could bolster US oil production and increase emissions, which is why so many green groups hate it. It's a temporary clean energy boost, they say, in exchange for broader support for fossil-fuel extraction.

Now, there's more than just raw emissions to consider. By speeding up deployment, the wind and solar tax credits could drive further cost reductions for both technologies. (At least, that's the hope.) Conversely, the repeal of the oil ban could shake up global markets in the decades to come, with far-reaching geopolitical effects.

Barring any last-minute drama, congressional leaders are hoping to pass these budget bills this week. Let's take a closer look.

The wind and solar tax credits will give a major boost to both industries

Right now, if you build a solar farm or install solar panels on your roof, you can claim a 30 percent Investment Tax Credit (ITC). This helps defray the cost of solar, which has been dropping fast but is still often pricier than other energy sources.

That tax credit was set to lapse for homeowners and shrink to 10 percent for commercial developers by the end of 2016, at which point the recent boom in solar power was expected to slow (but not sputter out entirely). Here are Bloomberg New Energy Finance's projections for what would happen if the solar credits were allowed to expire:

(Bloomberg New Energy Finance)

Now things have changed. As part of the deal, the ITC will remain at 30 percent for projects started through 2019, drop to 26 percent in 2020, then to 22 percent in 2021, and then to 10 percent after 2022 for developers.

Here's BNEF's projection for how solar power will grow through 2021 under the new extension:

(Bloomberg New Energy Finance)

They're predicting an extra 18 gigawatts of solar installations — an increase of about one-third.

Then there's wind power. Up until the end of 2014, anyone who built a wind farm could claim a Production Tax Credit (PTC) worth 2.3 cents for every kilowatt-hour of electricity generated. This is a big reason why wind now provides 5 percent of the country's electricity. But Congress has also been fairly erratic in renewing the credit, so construction has come in fits and starts.

Here are BNEF's projections on wind power installations if the PTC remained moribund:

(Bloomberg New Energy Finance)

Except now it won't remain moribund. As part of the deal, Congress will extend the PTC and phase it out only gradually between 2017 and 2020.* Here are the new projections:

(Bloomberg New Energy Finance)

The extension will lead to another 19 gigawatts of wind capacity installed between now and 2021.

It's tough to translate this precisely into emissions reductions, since it depends on what other energy sources these wind turbines and solar panels displace. But one 2014 study in the American Economic Review estimated that the ITC and PTC reduced US greenhouse gas emissions by about 0.3 percent per year.

What happens after 2020? That's when the EPA's Clean Power Plan, which aims to cut carbon-dioxide emissions in the power sector, starts kicking in. Although states don't officially have to start cutting their CO2 output until 2022, they can get early credits by expanding wind and solar capacity (or efficiency) starting in 2020.

So think of these tax credits as a bridge until the EPA incentives take effect. Manufacturers can keep trying to drive down costs, solar companies can keep experimenting with new financing models, and so on. Grid operators will keep facing pressure to figure out how to integrate intermittent renewables. Over the long term, the United States will likely need large amounts of wind and solar to cut emissions significantly. This deal, essentially, ensures that the prep work continues.

Oil exports are harder to game out — but they could increase production long-term

oil wells Shutterstock

The lifting of the export ban is the most controversial part of this deal, at least among environmental groups who worry that it'll increase oil production and emissions for decades to come. The impact here, unfortunately, is a little harder to forecast.

First, some background: Back in 1975, spurred on by the OPEC oil crisis, Congress passed a ban on (most) crude oil exports from the United States. Companies could extract oil from US lands and waters. But they couldn't sell that crude directly abroad. Instead, they had to ship it to US refineries first, to be turned into gasoline and other fuel. Only then could it be exported.

(Note, though, that this ban has always been porous. The Commerce Department had leeway to grant exceptions: Crude from Alaska's Cook Inlet got a pass. So did oil that went through the Trans-Alaskan Pipeline. So did any oil shipped to Canada for consumption there. So did heavy oil from certain fields in California. There were also exceptions for re-exporting foreign oil and for small swaps with Mexico.)

For a long time, this law wasn't really a hot-button issue, since the United States was importing way more oil than it was exporting. No one cared.

Then... a few years ago, the oil industry suddenly began lobbying Congress to revisit the ban. Their reason: Thanks to fracking and other new techniques, more drillers were extracting light, sweet crude from places like North Dakota and Texas. And they were having trouble finding refineries to process all that oil (many of the Gulf refiners had been set up for heavier stuff from Mexico and Venezuela). That, in turn, depressed prices. So the industry wanted to be able to ship the crude directly abroad, to prop up prices and support drilling.

Now fast forward to late 2015. Congress is finally ready to lift the ban as part of this budget deal. Except... things have changed a lot in the last two years.

Global prices have crashed, which means there's not a ton of appetite overseas for US oil right now. And some US refiners have retooled to accommodate the boom in light, sweet crude. The "Brent-WTI spread" — the difference between what companies can sell their oil for in Europe and what they can sell for in the midwestern US — has shrunk to nearly zero. Not much incentive to export:

So for the foreseeable future, analysts say, it's unlikely we'll see very many oil exports if the ban is lifted. At best, companies that currently have allowances to send oil to Canada or Mexico might ship elsewhere instead. But the provision is likely to have little impact on US oil production, global oil prices, or carbon-dioxide emissions. At least, for the next few years.

But, of course, oil markets change. Sometimes they change quite drastically and unexpectedly. So what happens then? One good place to turn is this comprehensive analysis by the US Energy Information Administration, which goes through a number of different scenarios.

The EIA expects relatively few exports in its "reference case." But, it says, if global prices rise again and US oil resources turn out to be more plentiful than thought, then it's possible the refinery bottleneck could return — at which point allowing exports would help prop up domestic production. At the extreme end, lifting the ban could increase US production by nearly 500,000 barrels per day. That'd be a big deal. (Total US production right now is about 9.4 million barrels per day.)

The effect on CO2 emissions is more complicated to calculate, since a lot depends on whether that extra US crude displaces oil elsewhere or simply adds to global supplies (and thus induces demand).

Over at the Council on Foreign Relations, Michael Levi does some back-of-the-envelope calculations and estimates that the oil ban could conceivably increase US greenhouse gas emissions by 0 to 0.2 percent per year over the next decade. So it might offset the reductions from the solar and wind credits. Or it might not. Hard to say. (Helpful, I realize.)

What does seem clear is that the overall effect is likely to be much smaller than that from, say, the Clean Power Plan or Obama's fuel-economy standards for cars and trucks. Still, with the United States struggling to push down emissions and meet its climate pledge, every little bit matters.

Meanwhile, emissions aren't the whole story here. Environmentalists argue that allowing oil exports could also lead to more crude shipments by train through some areas — a problem given that oil trains can occasionally blow up. Activists in the Pacific Northwest are trying to block export terminals for exactly this reason. And, greens say, enacting a provision to boost the oil industry would send a terrible message right after the world just ramp down fossil-fuel use in Paris.

"The logic of the Paris accords," wrote climate activist Bill McKibben in an op-ed yesterday, "with their theoretical commitment to a world that will warm just 1.5 or two degrees, means that we don’t get to keep making this kind of tradeoff."

Oh, one last twist: There's not really much time to debate this stuff. Congressional leaders are hoping to pass this budget deal before Friday. And, despite the fact that President Obama has opposed repealing the oil-export ban in the past, he's widely expected to sign this bill.

* Correction: This post originally said that the PTC would be extended through 2020 and then phased out. That's wrong. It will be phased out gradually between 2017 and 2020. Apologies for the error.

Further reading

-- The big new budget deal, explained

-- Michael Levi of the Council on Foreign Relations has an analysis of the lifting of the oil-export ban here. He says the deal "looks likely to be a win-win."

-- Meanwhile, the analysts at Oil Change International are much less fond of the deal — they think repeal of the oil-export ban will be much more significant from a climate standpoint. You can read their arguments here and here.

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