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While Senate leaders have reached agreement on a $2 billion extension of the cash for clunkers program, many lawmakers are already bracing for a more distant confrontation: The likely debate over how to return that funding to another stimulus program that it came from.

Illustration by: Matt Mahurin

The House last Friday provided the generous lifeline to the wildly popular clunkers program — which grants drivers up to $4,500 to scrap their gas guzzlers for more fuel efficient vehicles — and the Senate is poised to pass that bill Thursday. But there’s a glitch. The proposal steals its funding from a Department of Energy program encouraging the development of renewable energy technologies. That initiative, granted $6 billion under this year’s stimulus bill, provides federal loan guarantees to clean energy projects — including solar, wind and biofuel innovations — in hopes of spurring private investment in those industries. Tens of billions of dollars in loan applications are before the DOE, but the program funding was seen by lawmakers as low-hanging fruit because it wouldn’t be spent until next year, at the earliest.

The saga has created a dilemma for a number of lawmakers who support the cash for clunkers extension but don’t want to pilfer from the loan guarantee program to fund it. “I would hate to see us take money from that source,” Sen. Jeff Bingaman (D-N.M.), who chairs the Senate Energy and Natural Resources Committee, told CNBC on Tuesday. “I hope we can find an alternative.”

They didn’t. Although seven amendments to the House proposal will be offered on the Senate floor Thursday afternoon, none aims to locate a new source of the $2 billion. The Senate plans to vote on final passage later in the day, Senate Majority Leader Harry Reid (D-Nev.) announced Wednesday night.

Indeed, with the House having left town Friday for a five-week vacation, any changes at all to the House-passed bill are unlikely. The reason? If the Senate alters the proposal, then either (1) cash for clunkers will have to forgo the additional funds until Congress returns in September, or (2) House lawmakers will have to return from recess to iron out the differences between the two bills. In light of the overwhelming popularity of the program, the former option is a political landmine. And on Wednesday, the office of House Speaker Nancy Pelosi (D-Calif.) pretty much ruled out the latter scenario. “The House isn’t coming back,” said Pelosi spokesman Brendan Daly, “so that‘s just a dumb idea.”

More likely, the Senate will pass the House bill, and push to replenish the $2 billion loan funding at a later date. Indeed, Democratic leaders have gone out of their way to assure Bingaman and other loan guarantee supporters that the money will be replaced. Shortly after Friday’s House vote, for example, President Obama vowed to work with Congress to replace the funding “down the road.” On the same day, Pelosi promoted the importance of having all $6 billion available for the loan program. And, responding to concerns voiced by Rep. Edward Markey (D-Mass.), House Appropriations Committee Chairman David Obey (D-Wis.) said Democratic leaders “have every intention of restoring these funds.”

But that might be easier said than done. With the Democrats hoping to pass a health reform agenda tickling the $1 trillion mark, finding ways to pay for another $2 billion program won’t be easy. And in the wake of spending hundreds of billions of dollars salvaging the economy, many in Congress have lost their tolerance for deficit spending. This is true not only in the eyes of conservative deficit hawks, but also some Democrats as well. Sen. Claire McCaskill (D-Mo.), for example, had hinged her support for cash for clunkers on a single mantra: No new spending. On her Twitter account, the Missouri Democrat said Monday that she “may support” the addition funding –”if it is $ already appropriated for stimulus.”

A failure to reinstall the “borrowed” $2 billion would spell bad news for the renewable fuels and technologies industries, which are banking on the loan program to jump-start the innovations that might wean the country from its current reliance on foreign oil.

“For the U.S. long-term auto and fuel needs, it seems counterproductive to limit the renewable fuels industry,” Bob Dinneen, president and CEO of the Renewable Fuels Association, said in a statement last week.

Supporters of the loan guarantee program also argue that, even if it lacks the catchy name and political appeal of cash for clunkers, it provides much more bang for the buck. Indeed, each $1 provided under the loan guarantee program is estimated to spur $10 in additional investment and spending.

“$2 billion in the cash for clunkers program results in $2 billion worth of economic activity,” Sam Jaffe, senior research analyst at IDC Energy Insights, a consulting firm, wrote for Greentech Media on Tuesday. “$2 billion in loan guarantees will result in at least $20 billion worth of economic activity, all of which will have to take place on U.S. soil.”

Not that cash for clunkers doesn’t have any environmental or stimulus benefits. On Wednesday, the Department of Transportation released figures revealing that, of the nearly 185,000 transactions prompted by the program, the average fuel efficiency of new purchases is 25.3 miles per gallon, while the average mileage for the trade-ins is 15.8 mpg.

Figures like those have alleviated some lawmakers’ criticisms that the program’s mileage requirements don’t go far enough to encourage the purchase of small, energy efficient vehicles. Sens. Dianne Feinstein (D-Calif.) and Susan Collins (R-Maine), for example, had vowed to oppose any new funding unless the mileage thresholds were made more stringent. On Monday, however, the lawmakers backed off of their threat.

“The original intent of the ‘clunkers’ program was to encourage people to buy more fuel efficient vehicles, and the data so far tells us that’s exactly what’s happening,” Feinstein said in a statement announcing her support.

Still, there is growing recognition that, as a long-term environmental strategy, the DOE’s loan program will have much greater effect. “It is not appropriate for us to take money to do one thing for fuel efficiency,” Pelosi said, “out of an account that is designed to do just that.”

Following yesterday’s revelation that cap-and-trade legislation would not be included in the fiscal year 2010 budget, Energy Secretary Steven Chu and Vice President Joe Biden today rolled out a $3.2 billion program to improve efficiency at the state and local level.

The Energy Efficiency and Conservation Block Grant (EECBG) Program commits $1.9 billion to cities and counties and $770 million to states and territories for “energy audits and energy efficiency retrofits in residential and commercial buildings, the development and implementation of advanced building codes and inspections, and the creation of financial incentive programs for energy efficiency improvements,” according to a White House press release. An additional $456 million will be available for local efficiency project bids at a later date.

These measures come on the heels of an even larger $8 billion weatherization program, announced exactly two weeks ago.

Energy efficiency is being enacted much more quickly than the administration’s other environmental goals, in large part because it costs comparatively little and is simpler to implement.

“The funding will be used for the cheapest, cleanest and most reliable energy technologies we have – energy efficiency and conservation – which can be deployed immediately,” Chu explained.

A full description of the EECBG program can be found on the Department of Energy Website.

Shortly after the Treasury announced the auto supplier funding, President Obama, speaking at an electric car plant in southern California, President Obama said that $2.4 billion of the Department of Energy’s stimulus funds would go toward the development and production of plug-in hybrid vehicles.

“This investment will not only reduce our dependence on foreign oil,” Obama said. “It will put Americans back to work.” According to a White House press release, the plan will create “tens of thousands of U.S. jobs.”

Most of the funds — $2 billion — will go to grants to companies that produce electric vehicles and their components. That leaves “up to $400 million to demonstrate and evaluate Plug-In Hybrids and other electric infrastructure concepts — like truck stop charging station, electric rail, and training for technicians to build and repair electric vehicles,” according to the press release.

While the $2 billion figure should go a long way toward jumpstarting (ha, ha) the electric car industry, the $400 million can do little more than “demonstrate and evaluate” the broad array of other projects. And the unfortunate timing of the announcement that conventional parts suppliers would get twice as much funding as manufacturers of new, energy-saving technology detracts from the impact what would otherwise be a milestone in the road toward low-emissions transportation.