The U.S. House Republicans will unveil their proposed budget cuts on Thursday for the remaining of fiscal 2011. The steep cuts proposed for energy and environmental programs foreshadow the continued trends that will dominate the foreseeable future, FBR Capital Markets said in a note to clients.

The proposal would cut nearly $2 billion from the U.S. Environmental Protection Agency (EPA) and $3 billion from the Department of Energy (DOE).

House Republican leaders are proposing about $35 billion in discretionary spending cuts (below 2010) for the remainder of fiscal 2011 (September 30). The current “continuing resolution” of fiscal 2010 levels expires on March 4, and the House and Senate must reach agreement or risk a government shutdown.

On Wednesday, House Appropriations Chairman Harold Rogers floated cuts to 70 programs. On February 14, U.S. President Barack Obama will introduce his fiscal 2012 budget request, and the House is expected to begin several days of debate on the fiscal 2011 continuing resolution on February 15.

The House plan would cut $1.4 billion from the Department of Energy's loan guarantee program, which was primarily funded through the stimulus. The White House has said that remaining funds likely need to be committed by first quarter of 2011 to close by the September 30, 2011 deadline to begin construction.

Other proposed cuts largely focus on research, including science ($893 million below FY10's $4.9 billion), $786.3 million from energy efficiency and renewable energy programs ($786.3 million below FY10's $2.2 billion), $116 million from fossil energy research and $18 million from clean coal technology research (FY10's $404 million, FY11's requested $404 million).

Although U.S. President Barack Obama has floated a spending-freeze Low Income Home Energy Assistance Program (LIHEAP) cut, we expect him to continue his push for clean-energy research spending as part of his competitiveness initiative, said Benjamin Salisbury, an analyst at FBR Capital Markets.

High-priority programs include DOE Advanced Research Projects Agency-Energy (ARPA-E), and Salisbury noted that the President tends to focus on research and manufacturing rather than installation. Democrats also proposed bolstering the electric vehicle tax credit program or expanding incentives for natural gas–fueled vehicles.

Salisbury believes that the downward pressure on spending makes DOE funding a formidable hurdle. However, summer gas prices and a more Republican majority more favorable to natural gas could change this dynamic.

When the President unveils his FY12 budget on Monday, Salisbury expects him, once again, to propose cutting oil industry tax incentives to help fund alternative-energy programs. Even if the proposal comes in closer to $4 billion than to $32 billion, as in years past, Salisbury still expects stiff opposition from Republicans and oil-patch Democrats. Salisbury continues to see little appetite for raising taxes on one sector to subsidize another.

House Republicans floated a plan to fund the EPA for the remainder of FY11 at $8.4 billion, a significant reduction from FY10's funding of $10.3 billion. Republicans propose $14 million for the new program for the inventory of greenhouse gas emissions ($9 million below FY10.)

Salisbury said a number of legislative proposals would change the Clean Air Act to delay or eliminate the EPA’s regulations. However, this stand-alone legislative strategy faces a high risk of filibuster in the Senate or a veto from the President. Another legislative strategy known as de-funding would be harder for Democrats to stop.

Congress could insert into the annual funding bill for the Environmental Protection Agency a provision that prohibits the agency from using any funds to enforce a regulation, such as greenhouse gas (GHG) regulation.

Salisbury said wrapped in a larger bill, this creates the opportunity for a legislative showdown, whereby a filibuster or veto could allow existing spending bills to expire and threaten a shutdown of the EPA -- or even the entire government, in the case of an omnibus spending bill or continuing resolution. The disadvantage of this approach is that the prohibition only lasts for the fiscal year.

However, some annual appropriations riders are perennially included in spending bills for years. Salisbury expects efforts to add EPA preemption to the CR next week. However, the key action will take place in the Senate, where the reduced Democratic majority may open the door for de-funding.

Some Republicans have floated the idea of using de-funding to prevent stricter enforcement of EPA utility regulations, including the Transport rule, the Utility Maximum Achievable Control Technology (MACT), mountaintop mining, and coal ash.

However, at this stage, we view Congressional intervention as less likely, given the political sensitivity of preventing health benefits when compared with the ethereal benefits of reducing greenhouse gas emissions, said Salisbury.

Although Salisbury expects the President to continue lobbying for expanding clean-energy research and manufacturing, he believes that downward spending pressure makes very large new programs, such as electric car grants and natural gas vehicles, unlikely. At the same time, Salisbury sees little appetite for raising oil industry taxes to fund clean-energy programs.

Finally, Salisbury expects the President to continue defending the EPA’s regulatory regime -- in the face of increasingly likely Congressional intervention on greenhouse gases but a lower probability of legislative hurdles to upcoming Clean Air Act regulations of traditional pollutants.

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