WASHINGTON — Democrats are on the cusp of passing the most significant climate legislation in history, but the final product is a far cry from where they started.

The latest version of the so-called “budget reconciliation” package features hundreds of billions of dollars for climate and energy, including incentives to boost renewable energy production and the adoption of electric vehicles.

It includes taxes and fees that will impact oil and gas companies, but also features carrots to go with those sticks for fossil fuel producers. That’s thanks to the influence of coal champion Sen. Joe Manchin, D-W.Va., as well as some of the House moderates representing Texas and its oil and gas interests.

Rep. Lizzie Fletcher, D-Houston, was among those pushing her fellow Democrats to consider impacts on the industry but said in an interview the bill is still a significant effort to tackle climate change.

Fletcher said her constituents want to reduce greenhouse gas emissions, but in a smart way.

“It’s transformational and it’s a really important step forward,” she said of the legislation.

Changes to mitigate financial impacts on oil and gas producers haven’t made believers out of their chief trade association or Republican allies on Capitol Hill.

Senate Minority Leader Mitch McConnell, R-Ky., repeatedly criticized the bill’s natural gas provisions on the floor this week, saying gas remains a primary source of U.S. power generation.

“It’s also how countless families heat their homes and it’s the linchpin of our domestic energy independence and our ability to export to our allies in Europe,” McConnell said. “But the ‘Green New Deal’ Democrats are coming straight after American natural gas with huge new tax hikes.”

But the bill is not the kind of aggressive intervention favored by those who talk most about a Green New Deal.

Instead of putting an end to all drilling on public lands, the bill mandates oil and gas leasing on millions of acres onshore and in the Gulf of Mexico. And it would tie renewable energy projects on public lands to allowing oil and gas leasing.

Methane fee

It includes a new methane reduction program that would charge companies a fee on every metric ton of methane waste they release into the atmosphere.

Methane packs significantly more planet-warming punch than carbon dioxide while also dissipating from the atmosphere much more quickly, a combination that means reducing methane emissions is a relatively easy way to make rapid progress on climate change.

Massive amounts of methane have been documented spewing from operations in West Texas.

When the bill was first introduced, Fletcher and several other House Democrats raised concerns about the energy-related provisions in a letter to their leadership.

The new methane fee was one of the primary areas that drew additional protests from three of those Texans: Reps. Vicente Gonzalez, Henry Cuellar and Filemon Vela, who has since left Congress.

They said they were concerned the fee would hurt producers and ultimately be passed along to consumers. They all voted for the House version after changes that included adding a pot of money to help operators, particularly smaller ones, comply.

But Cuellar indicated he was still looking for Manchin to make additional changes in the Senate and that’s exactly what has happened.

The fee now is phased in over a longer timeline with the full $1,500-per-ton charge not kicking in until 2026 and the compliance assistance is roughly doubled to more than $1.5 billion.

The methane fee also is based on individual operators instead of a relying on a basin-wide assessment. Fletcher said the previous approach would have penalized companies already addressing methane waste.

“It was really important that the targets be realistic and achievable and that we get everybody in compliance,” Fletcher said. “If the government is properly incentivizing methane waste reduction, not just through penalties but through grants and innovation, this is the most constructive way to move this forward.”

She said including compliance funding allows small operators to access the capital they need to finance emissions reduction technology.

“So there’s a lot of funds to help make this happen because of course it’s a priority for everyone to reduce these emissions and this is a pathway to doing it,” she said.

Cuellar hasn’t said publicly what he thinks of the latest version. Gonzalez said in a statement:

“There are certainly improvements to the methane fee and the overall effect this bill has on the energy industry compared to the original Build Back Better bill. However, there are still some concerning provisions. My priority is ensuring this bill would not raise energy prices or hinder American energy jobs at such a critical time.”

Key tax credits for Texas

The legislation now would extend until 2032 the so-called “45Q” tax credits for carbon capture and sequestration that had been set to expire. It also increases a category of those credits from $50 to $85 per metric ton of carbon dioxide stored.

Fletcher said carbon capture technology is promising but the market hasn’t yet developed to justify widespread adoption.

“A lot of the people in my district have been saying they need these changes in the 45Q structure to help make it happen,” Fletcher said.

Ian Lange, director of the mineral and energy economics program at the Colorado School of Mines, said Europe has thrown a lot of money at carbon capture and storage without much to show for it.

“It’s nowhere near a sure thing,” Lange said.

Still, those tax credits could be a major positive for Texas, according to David Blackmon, an independent energy analyst based in Mansfield.

“Especially given the huge (carbon capture) project centered on Houston and the Gulf Coast being mounted by ExxonMobil,” Blackmon said, pointing to the company’s recent 2nd-quarter earnings call.

During that call, company CEO Darren Woods touted the potential benefits from federal support of low-carbon solutions such as clean hydrogen and carbon capture.

In response to questions, ExxonMobil spokesperson Casey Norton stressed that the company remains opposed to taxes and any other provisions that could make U.S. businesses less competitive or inhibit energy production.

“We have a history of advocating for well-designed policies that recognize many different technologies are needed for a lower-emissions future, including hydrogen and carbon capture and storage,” Norton said. “We are working to develop and deploy those solutions.”

Republicans slam tax hikes

The bill would reinstate a long-lapsed, Superfund-related tax on crude oil and imported petroleum products at the rate of 16.4 cents/per barrel, which would be indexed to inflation.

It also would impose a corporate minimum tax that would affect all companies, including producers, pipelines, gas processors and refiners, Blackmon noted.

“It’s not different with oil and gas than it is with any other product or commodity,” Blackmon said.

Republicans have said those taxes are misguided because they would only further drive inflation and high gas prices that already are hammering American consumers.

Sen. Ted Cruz, R-Texas, criticized the bill in a statement, saying the energy-related taxes violate President Joe Biden’s pledge to avoid raising taxes on the middle class.

“If you drive a pickup truck, suburban, or minivan and are already struggling to fill up your gas tanks, this bill will make it worse,” Cruz said.

The American Petroleum Institute says that despite “improved provisions” in the package, it opposes policies that increase taxes and discourage investment in the sector.

In addition to increased taxes, the bill would boost what companies pay when they drill on federal leases. That’s a bigger deal in neighboring New Mexico, which has large swathes of federal land, than in Texas which has relatively little.

In fact, making it harder and more expensive to drill on federal lands might ultimately boost Texas production.

A Dallas Fed report on earlier proposed restrictions suggested Permian Basin producers might move from federal lands in New Mexico across the state and into Texas, creating jobs for the Lone Star State.

Lange downplayed the potential for a major shift between the two states.

He highlighted how the bill could reduce demand for oil and gas by boosting renewable energy sources. If more Americans are able to use solar power and wind energy to heat their homes that would undermine demand for natural gas and a move to electric vehicles potentially reduces oil consumption.

“If there’s some sort of demand destruction, then that’s the tide that’s going to lower all the boats ... that demand destruction is probably the biggest thing to worry about,” Lange said of the oil and gas sector. “But it could be worse.”