It takes about 45 minutes to circumnavigate Odessa, Texas. There’s a highway — 338, known locally as “The Loop” — that encircles the city of 113,000 people in West Texas. Drive along it and you’ll be treated to a nearly unending parade of oil derricks jabbing their way into the underlying Permian Basin, just as they have for roughly the past century. You’d be forgiven for calling Odessa an “energy community.”
You’d also be wrong, according to the Federal Government. On June 7, the Department of the Treasury published an updated list of energy communities. Included in that list were San Francisco, Barnstable County (which covers all of Cape Cod), and, in total, about 50% of the land area of the United States. Conspicuously absent were famously oily localities such as Odessa, Midland, and Oklahoma City.
So how did San Francisco — where sea lions outnumber oil wells — become an energy community instead of Odessa?
To understand the new guidance, it’s worth exploring why the federal government is concerned about energy communities in the first place. Scattered across the U.S. are hundreds of towns that depend on coal, oil, and gas production for their livelihoods. Towns like these — often located next to coal mines or on top of oil reserves — stand to lose vital jobs and tax revenues should the country transition from fossil fuels to clean energy. In the eyes of lawmakers, this presents an unacceptable risk to both local economies and to any hope of durable support for climate action.
The Inflation Reduction Act sought to remedy that by making any clean energy project located in one of these communities eligible for a 10% tax credit, on top of whatever other tax credits it was already collecting. This bonus, it was hoped, could allow clean energy to replace some of the economic activity lost to the eventual decline of fossil fuels.
What followed, however, is a case study in the importance of defining terms.
The IRA defined an energy community as any one of the following:
- A brownfield site, meaning any location where redevelopment is made more difficult by the presence of a hazardous substance;
- A coal community, meaning any census tract where a coal mine or generator has closed in the past 15 years (as well as all adjacent census tracts); or
- A high fossil fuel employment area—specifically, any metropolitan or non-metropolitan statistical area (“MSA” or “NMSA,” respectively) that has (i) 0.17% or more of its workforce in the fossil fuels industry and (ii) an unemployment rate at or above the national average.
It’s this third category where things get sticky. Treasury was charged with interpreting these rules, and by its methodology, fossil fuel employment in the United States represents 0.41% of the workforce, or more than double the level specified in the IRA. That means that a city could have a fossil fuel workforce far smaller, proportionally, than the national average and still qualify as an energy community.
But the issues don’t stop there, according to Daniel Raimi. Raimi directs the Equity in the Energy Transition Initiative at Resources for the Future, a DC-based think tank. He’s been warning about the flaws in the energy communities framework since 2022. He told me there are two main problems with how the government defines an energy community.
First, MSAs and NMSAs are a crude tool for capturing geographic variation. In some parts of the country, their boundaries roughly track city limits. But in other parts — Alaska, for example — they can be the size of Germany. That means that two towns 700 miles apart with little in common economically could nevertheless count themselves as part of the same basic geographic unit.
Second, hitching the definition of an energy community to the national unemployment rate exposes it to wild fluctuations. Areas where the local unemployment is close to the national rate could gain and lose their status as an energy community from year to year, depending on which side of the threshold they find themselves. Moreover, said Raimi, “Since so many places exceed 0.17% fossil fuel employment, a relatively small change in national unemployment has a big effect on the map.”
That dynamic was on display this year. As national unemployment fell by 0.01% in 2023 compared to 2022, large swaths of the country — such as western Wyoming and eastern Mississippi — lost their status, while other regions — such as northern Idaho and northern Arkansas — suddenly qualified. On net, an area the size of New Mexico got added to the map of energy communities this year. Meanwhile, much of the nation’s oil country — including Texas and Oklahoma’s Permian Basin, Colorado’s Denver-Julesburg Basin, and large part of North Dakota’s Bakken Formation — was excluded.
I spoke with a Treasury official, who agreed to speak only on background and acknowledged Raimi’s concerns but stressed that the Department was merely executing the letter of the law. Given the specificity of the statute, they pointed out, there was little Treasury could do to more accurately target the benefits. The Department did issue a rule last year clarifying that any clean energy project that qualified for the tax credit when it began construction would retain that tax credit even if the location subsequently lost its status as an energy community, insulating it from year-to-year changes.
Still, Raimi worries that the current approach will prevent government support from reaching the communities that need it most. “Because they’re not carefully targeted, they are unlikely to receive lots of new investment from this tax credit,” Raimi told me.
And it could get expensive. With roughly half of the country qualifying for the bonus, said Raimi, “I think we’re going to be spending tens of billions of dollars in places where we don’t need to spend that money.” (The Treasury official downplayed concerns over the program’s costliness.)
What would a more precise approach look like? For starters, abandon the MSAs and NMSAs. “County level makes a lot of sense,” Raimi said. “Everybody knows what a county is, and developers and government officials can easily understand whether or not they’re going to be eligible for the credit.”
Beyond that, Raimi wishes public policy would focus more on future impacts. “We know that to get to a net-zero emissions future, we need to use less of all the fossil fuels,” he said. “The places that heavily rely on them — like the Bakken, like the Permian, like parts of Oklahoma — they’re going to need a long time to build new economic sectors. Now is the time to start trying to do that.”
