The Inflation Reduction Act: Topline Oil and Gas Reforms

In a historic achievement, President Joe Biden signed into law the Inflation Reduction Act (IRA) on August 16, 2022.

This bill, which until recently was thought to be on life support with very little chance of congressional passage, is a sprawling piece of legislation. It lowers prescription drug costs for those covered by Medicare and raises taxes on large corporations. It also represents the largest climate investment in American history. A preliminary assessment by the Rhodium Group estimates that it can reduce net U.S. greenhouse gas emissions to 31%-44% below 2005 levels by 2030, as compared to 24%-35% under current policy. According to the White House, the IRA will also reduce the deficit by hundreds of billions of dollars. Specifically, it will raise over $700 billion in revenue for the federal government over the next 10 years, some of which will be put toward paring down the national debt and some of which will go toward lowering carbon emissions and extending subsidies for health insurance under the Affordable Care Act.

Among the mountain of provisions in the IRA is also language that reforms the oil and gas industry for the first time in decades. As POGO has been advocating for since the 1990s, it is imperative that the administration, specifically the Department of the Interior, take meaningful steps to ensure that U.S. taxpayers are paid their fair share for industry’s use of public lands.

Here's our take on the good and the bad when it comes to the oil and gas provisions in the IRA.

The Good

Onshore oil and gas royalties. The IRA raises the onshore oil and gas royalty rate for the first time in decades, ensuring that taxpayers get a better return for industry’s use of publicly owned lands than they have since 1920. Specifically, it raises the rate from the current 12.5% to 16.67%, and will sustain that rate for 10 years after the enactment of the bill. This increase will be particularly beneficial to western states and tribal nations because approximately half of the royalties collected by the federal government are returned to the area where the extraction occurs. Though POGO has advocated in the past for this onshore royalty rate to be raised to 20%, this change in the IRA still represents a meaningful step in the right direction.

Offshore oil and gas royalties. The IRA also raises the oil and gas royalty rate for certain offshore leases from the current 12.5% to 16.67%, capping them at 18.75% for 10 years after the enactment of the bill. The 18.75% cap is commensurate with the minimum offshore royalty rate for leases in water depth exceeding 200 meters. Similar to the increase in onshore oil and gas royalty rates, this provision in the IRA will go far in honoring the federal government’s fiduciary obligation to taxpayers to ensure a fair market value for natural resources.

No more noncompetitive leasing. The IRA also puts a stop to the practice of noncompetitive leasing, which in the past has allowed the Department of the Interior to sell leases on tracts of land below predicted market price. Ending this wasteful practice will ensure that the federal government is better able to secure the appropriate amount of money for oil and gas companies’ extraction, rather than continuing to give industry a sweetheart deal at the expense of taxpayers’ best interests.

The Bad

Renewable energy tied to industry interests. The IRA contains a provision that inextricably links renewable energy development to fossil fuel interests. For instance, the bill provides that the government must offer at least two million acres of federal land for onshore oil and gas leasing before any proposed wind or solar lease is issued. Additionally, in order for solar and wind projects to proceed, the government must hold a quarterly lease sale that results in an oil and gas lease. This means the IRA could open up approximately 20 million acres of public land for oil and gas leasing over the period of a decade. While some of this usage will generate an increased return in royalties for taxpayers, these provisions do constitute a handout to the oil and gas industry, which has historically taken every opportunity to deny taxpayers their fair share.

Conclusion

The IRA is the culmination of intense negotiation and deal making over the past year and a half. Chairman of the Senate Energy and National Resources Committee Senator Joe Manchin (D-WV) had previously held up passage of the bill for many months, demanding that his priorities be put front and center — many of which are in line with wishes of big industry.

This legislation will have a dramatic impact on the United States’ ability to lead climate action on a global stage. While it is undoubtedly the most ambitious step forward against the climate crisis that has been signed into law in American history, it also includes language that gives unnecessary handouts to the oil and gas industry. POGO applauds the passage of this law, but we recognize that there is still much need for transparency and oversight that holds the implementing agencies of the IRA accountable to the American people.