Some of the wealthiest coastal cities and towns in the United States — with sizable tax bases, good schools and robust job opportunities — are getting a special tax incentive intended for communities left behind.
The federal government is currently labeling cities like Alexandria, Virginia, Greenwich, Connecticut, and Cape Cod, Massachusetts, as “energy communities” — areas considered to be struggling from the move away from coal and other fossil fuels to clean sources of energy.
“Energy communities” qualify for an extra incentive for clean energy development, a bonus provided by the Inflation Reduction Act intended to ensure that the places most hurt by the decline in fossil fuels are given the most help in the clean energy transition.
Before the Inflation Reduction Act, there were no “place-based” federal policies devoted to ensuring these gutted communities had a chance at new and diversified economies, said Brian Anderson, the director of the Biden administration’s interagency working group for energy communities.
Making wealthy communities eligible for these financial incentives is not a mistake in the federal government’s implementation of the policy — but it is perhaps an error by design, policy experts say.
“It really does seem like they just designed it in a way that very poorly targets fossil fuel communities,” said Noah Kaufman, now a climate economist at Columbia University who served in both the Biden and Obama administrations. “These regions need targeted support, but the support is a mile wide and an inch deep.”
About half of the country, geographically, qualifies for the IRA’s energy community tax credit bonus. If the wealthiest communities in the country are pulling from a pot of money meant to even the playing field during a clean energy transition, then the policy is not working — and runs the risk of wasting taxpayer dollars, he said.
Making matters worse, the tax credit bonus excludes parts of southern and eastern Pennsylvania, large swathes of Oklahoma, and chunks of North Dakota — areas experts and lawmakers consider to be some of the most important traditional energy communities. These problems play out in the data: More than 100 counties with very high fossil fuel dependence aren’t qualifying as “energy communities,” and about 80 counties with very low fossil fuel importance are qualifying, according to a peer-reviewed February study from researchers at the Massachusetts Institute of Technology.
In North Dakota, the Biden administration’s own map of the top 25 most critical energy communities in the country includes almost the entire western half of the state, but the tax credit bonus only covers about half of that area. In Utah, the tax credit bonus covers most of the eastern half of the state, but the Biden administration’s map covers parts of the western half, overlapping in only part of the identified priority area. Parts of Colorado and Wyoming face the same contradiction.
In Pennsylvania, most of the towns surrounding the state capital and to its south and east will not qualify for the bonus, despite the fact that many of these areas have lost fossil fuel power plants and host areas that have been ravaged by pollution.
Pennsylvania Democratic Sen. Bob Casey, who fought to include the energy community bonus in the IRA, continues to pressure the Treasury Department and the Department of Energy to try to find a way to change the guidance on the tax credit. (Treasury has not yet responded to his June letter.)
“I am going to keep pushing the Biden administration to get this right. Without clarifications, some Pennsylvania communities with former natural gas sites may risk missing out on this opportunity for economic growth,” Casey said to NOTUS.
The Biden administration has explicitly stated that it will prioritize places left behind by the fall of the mining industry in the United States, pledging repeatedly to target those communities. Biden has pitched himself as different from previous presidents specifically for this reason. Many Senate Democrats voted for the IRA because of these provisions.
The government has made some progress. Before the IRA, the Biden administration set up Anderson’s group to coordinate investments in projects, which now includes $2 billion for an experimental advanced nuclear reactor in Kemmerer, Wyoming, hundreds of millions of dollars for economic diversification programs in southwestern Pennsylvania and tens of millions of dollars for Kentucky coal mine rehabilitation and West Virginia coalfield communities.
Anderson told NOTUS that while he agrees that the tax credit has some undeniable problems, it’s just one tool in that “holistic” toolbox. The administration’s working group can layer many other financial incentives to attract companies, from government loans to other tax credits to support for programs like AmeriCorps, functioning as a concierge service for states, communities and companies. He does not believe that the tax credit’s structure is a real barrier to this work.
“It was the very first attempt to try to use the tax code to incentivize investments in the energy transition,” Anderson said. “I have to give real applause to that.”
But there’s a limit on how much money will be invested in clean energy, so any poorly targeted incentive programs dilute the transformative potential of the investments that are actually underway, argues Daniel Raimi, the director of the equity in the energy transition initiative at Resources for the Future. Raimi is the lead author of an August RFF report questioning the broad nature of several tax credit bonuses administered by the Biden administration.
“When you incentivize investment across a huge area of land, there’s only so much investment that’s going to happen out there in the world,” Raimi said.
The tax credit bonus is very effective at attracting investment, according to Anderson. Companies regularly tell the working group that they are specifically seeking a place eligible for the bonus and that the additional funds makeprojects financially feasible.
While it’s impossible to determine whether the bonus is always responsible for a company’s decision to locate somewhere, both Raimi and Kaufman characterized some of the outcomes as “absurd.”
In California alone, the list of projects that could potentially qualify for additional “energy community” incentives based on location includes a $26 million hydrogen project in Santa Barbara and $5 million battery projects in Imperial Beach and La Mesa. (These examples are based on comparisons of the DOE’s energy community bonus mapping tool and the Clean Investment Monitor mapping tool.)
“It’s just a complete waste of taxpayer money at that point,” Raimi said.
The problems Raimi has identified with the credit are far deeper than just administrative guidance — and much harder to fix. The key number that appears responsible for expanding the credit so widely is the bar for fossil fuel employment: .17% of an area’s population. That number is much lower than the average fossil fuel employment rate in the United States, which probably hovers between half a percent and 1% nationally, depending on the year, according to Raimi.
Raimi estimates that an actually effective, tailored bar for fossil fuel employment should probably be around 1% or higher in order to eliminate the many communities that have no ties to the industry.
DOE did not respond to a request for comment on the .17% threshold. Anderson said that he is not advocating for changes to the tax credit.
“It was very obvious to me that that number was much too low, and anyone who works extensively in the world of energy-related employment would see quickly that it is too low,” Raimi said.
Adjusting that threshold would require Congress to amend the law, an unlikely outcome in the current political environment. Neither Casey’s office nor Raimi has heard any interest in such a move, which would likely open the door to a wider congressional debate on the IRA’s future that no Senate Democrat wants to have.
“The criteria for the energy communities’ bonus are defined in statute and the Department of Energy has been working with our colleagues at Treasury and the IRS to implement the legislation based on these definitions,” the DOE said in a statement to NOTUS.
Place-based policies have become increasingly popular federal policy as more and more Americans move less and less, even when it makes economic sense for them to relocate, according to Kaufman.
“For a long time, economists had this attitude that we don’t care about places, we care about people,” Kaufman said. That logic changed as the decline in manufacturing hollowed out economic opportunities in the United States — and yet people stayed, defying economists’ expectations.
Democrats and Biden are not the first to try place-based policies. Former President Donald Trump’s administration pushed for “opportunity zones,” which created tax incentives intended to spur investment in low-income areas.
While it succeeded in some locations, the flaws in its structure left large swathes of targeted communities without investment — and, in some cases, worse off than before.
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Anna Kramer is a reporter at NOTUS.