Redefining America’s ‘Energy Communities’ Can Boost Clean Energy Investment Where It’s Needed Most

Millions of Americans live in communities heavily dependent on the fossil fuel industry, facing both risks and opportunities as the U.S. moves to a low-carbon future. These communities are expected to face economic risks including job loss, reduced tax revenues to fund services and depressed property values. However, these same communities could see large opportunities in clean energy investments if policymakers make decisions to ensure they are not left behind.

The Inflation Reduction Act, which was signed into law in August 2022, aims to accelerate the U.S. energy system’s transition to a low-carbon future by appropriating historic levels of investment to incentivize the deployment of clean energy technologies across the U.S. Though the beneficiaries of the Inflation Reduction Act are many, it includes specific provisions to encourage investment in “energy communities” with ties to the coal, oil and gas industries.  While the federal government had earlier identified priority energy communities by dependence on coal employment, the Inflation Reduction Act presents a broader definition.

Defining energy communities is a critical and laudable goal and a necessary step towards ensuring funding, support and clean energy resources are directed to fossil fuel-dependent communities. The Inflation Reduction Act provides an Energy Community Tax Credit Bonus, which offers clean energy projects sited in “energy communities” a 10% bonus credit on top of the base Production and Investment Tax Credits. However, while the legislative text of the Inflation Reduction Act specifies three categories that define energy communities, it fails to comprehensively identify or prioritize all the communities that will need these resources. 

The challenges energy communities face in this transition are multifaceted and require coordinated federal government support. The Energy Community Tax Credit Bonus should be seen as just one tool in the federal government’s toolkit to meet their needs.

An Overview of Inflation Reduction Act Energy Communities

The Inflation Reduction Act's definition of energy communities helps explain just how reliant many American towns' economies are on the fossil fuel industry.  

Almost one-fifth of Americans, or 64 million people, reside in coal closure and fossil fuel energy communities as defined by Inflation Reduction Act. These communities are found in 46 states as well as Puerto Rico and the Virgin Islands. California, Texas, Pennsylvania, Ohio and Louisiana are home to the largest number of people living in energy communities. In six states — West Virginia, Wyoming, Mississippi, Louisiana, Alaska and Kentucky — over half the population resides in an energy community, indicating significant opportunity to benefit from the Inflation Reduction Act Energy Community Tax Credit Bonus.

Coal closure communities are home to 14.9 million people, or about 5% of the U.S. population. Defined at the census tract level, they are found in 45 states and the District of Columbia — everywhere except Alaska, Idaho, Maine, New Hampshire and Vermont. West Virginia has the highest share of its population (59% or 1.1 million people) living in a coal closure community, followed by Wyoming (30% of the population or 172,000 people) and Kentucky (24% or 1.1 million people). Pennsylvania has the largest population size in coal closure energy communities, with nearly 2.3 million people totaling 18% of the state’s population.

Fossil fuel energy communities that meet both the fossil fuel employment threshold and the unemployment rate requirement are found in 23 states as well as Puerto Rico and the Virgin Islands. Defined on a larger geographic scale — metropolitan and non-metropolitan statistical areas that span multiple counties — they are home to over 55.7 million residents. About 17% of the U.S. population and 86% of the those living in energy communities reside in a fossil fuel energy community. Just five states — California, Texas, Pennsylvania, Ohio and Louisiana — are home to over 70% of fossil fuel energy community residents. The Inflation Reduction Act’s definition of fossil fuel energy communities also includes those reliant on fossil fuels for public revenues. However, data for applying this criterion has not yet been identified by the administration, so communities that may qualify under it have not yet been identified and are not included here.

Brownfields are found in every U.S. state and territory. Data from the Environmental Protection Agency (EPA) estimates there are over 450,000 brownfield sites. The EPA does not maintain a list of every brownfield site in the country, though it does track sites that have received federal funds for cleanup. Based on the data available, brownfield sites are disproportionately located near low-income populations, with one EPA study showing 22% of households within a half mile of tracked sites live below the poverty line. The energy communities mapping tool released by the government does not include brownfields even though the Inflation Reduction Act includes them in its definition. For that reason, they are not included in WRI’s analysis.

Racial Composition Varies by Geography and Type of Energy Community

The racial demographics of energy communities hew closely to the U.S. as a whole, with a slightly higher share of Latino residents and slightly lower shares of every other demographic group. However, this picture varies by the type and geography of the energy community considered. Coal closure communities are generally more white and the racial composition of fossil fuel communities varies significantly across different regions of the country. The traditional face of the economic transition away from fossil fuel production has been white, reflecting the decline of coal production. As the country shifts away from oil and gas, the face of the transition will also shift to mirror the diversity of the nation as a whole. Furthermore, the way certain states and regions navigate the transition away from oil and gas will have a disproportionate effect on how certain racial groups residing in energy communities experience it. For instance, fossil fuel energy communities in Alabama, Mississippi and Louisiana have higher shares of Black residents while these communities are predominantly Hispanic in California, New Mexico and Texas.

Challenges with the Inflation Reduction Act’s Definition of Energy Communities

WRI analysis shows many of the energy communities defined by the Inflation Reduction Act are at risk of not receiving the necessary and timely clean energy investments and resources because of how the legislation treats issues of inclusion and prioritization. The definition and understanding of energy communities must also be expanded to go beyond the context of one program or policy (in this case, the Energy Community Tax Credit Bonus) so that it can be used across federal programs and by different levels of government for proactive and robust just transition planning.

1. Inclusion: The current definition does not include many communities that will be impacted by the transition away from fossil fuels.

Past federal efforts to support energy communities have focused on coal communities weathering the transition from coal to natural gas. Obama era efforts to diversify Appalachian economies engaged in mountaintop coal mining and initiatives like Partnerships for Opportunity and Workforce and Economic Revitalization are indicative examples. These efforts were reactive rather than proactive, responding to an existing decline in the coal industry. The second category in the Inflation Reduction Act’s definition of energy communities, fossil fuel energy communities, takes a timely step forward by including oil and gas producing regions — everything related to extraction, processing, transport and storage of oil and gas — in its definition of energy communities.

However, there are four challenges with how the Inflation Reduction Act defines energy communities. First, communities that rely on the production and manufacturing of high-carbon products for jobs and tax revenues are not considered in the current definition, including communities impacted by the automobile industry’s shift from internal combustion engine vehicles to electric vehicles. With changes in vehicle propulsion, certain jobs specific to internal combustion engine vehicle components like fuel transmission systems will be eliminated. Others will change, like construction of the powertrain systems that deliver power from motors and engines to wheels. Seventy percent of the 140,000 workers employed in the powertrain segment are in Michigan, Ohio and Indiana. A quarter of Monroe County, Michigan’s total employment is involved in internal combustion engine vehicle powertrains.

The second challenge pertains to the unemployment rate requirement for fossil fuel energy communities. As a result of this requirement, communities with heavy oil and gas activity paired with high employment rates do not qualify for the Inflation Reduction Act Energy Community Tax Credit Bonus. These communities, including parts of the Bakken oil field in North Dakota as well as areas in Oklahoma, Montana and Wyoming, are missing out on a key opportunity to proactively plan and prepare for a transition away from oil and gas. Unemployment rates are also likely to fluctuate from year to year, creating the possibility that communities will sometimes be in and out of designation. This could be especially challenging for oil and gas producing areas where the sector’s boom and bust cycles can expand the labor market some years followed by significant job losses in other years.

The third challenge relates to the lack of data on the public revenue metric for the fossil fuel energy community category. Research by Resources for the Future has described the complexity of identifying energy communities by their reliance on fossil fuel revenues given current data limitations, especially at the local level. No nationwide database provides information on the revenues generated in the metropolitan and non-metropolitan statistical areas or even county level from oil and gas production, pipelines, refineries and fuel storage facilities. One way around this challenge might be to use more readily available output data on coal, oil and gas production data as a proxy for tax revenue data.

The final challenge relates to the inclusion of brownfields in the energy community definition. To be clear, there are significant environmental and economic benefits by redeveloping brownfields. Additionally, their inclusion in the Energy Community Tax Credit Bonus does not detract from other energy communities’ ability to access the bonus. However, including brownfields in the definition of energy communities is confusing given that the rationale for brownfields development is very different from reasons to support true energy communities. Many brownfield sites, including those located in cities like Ann Arbor, Michigan and Boston, Massachusetts have no history of energy development or relevance as fossil fuel communities. If the energy community definition is to be more widely used in federal program implementation and by state and local policymakers as they plan for a just transition, then the focus needs to be on identifying fossil fuel-dependent communities.

2. Prioritization: The current definition does not assess which communities are high risk and where to prioritize resources.

The current approach to identifying energy communities is based on a “Yes/No” designation and includes no mechanism to prioritize energy communities that are at more risk than others. Being more at risk can be seen in a couple of ways. First, some energy communities will need support earlier than other communities, depending on several factors including the pace of change across different sectors or regions. Second, the transition challenges facing some energy communities could be much more complex. For instance, some communities that have already seen a coal plant or mine close will face additional closures this decade, exacerbating their economic hardships. All energy communities will need federal support, but some will need to be prioritized for focused federal investment and resources.

What would such a prioritization approach look like? Using proposed coal plant retirements tracked by the Sierra Club, we identified 83 census tracts where a coal power plant unit is set to retire by 2030 and an additional 606 adjacent census tracts that will be economically impacted because of their proximity.

Two key results emerged from this analysis. First, 2.1 million of the 2.7 million people living in these tracts are not identified in current fossil fuel energy communities despite having ongoing coal-related activity. Therefore, there is no way to prioritize resources to these communities. Second, about 1.4 million individuals in census tracts with impending coal power plant retirement or adjacent tracts reside in current coal closure energy communities. In other words, these are communities are likely to face even more economic hardships this decade.

We also identified 85 census tracts with coal mines that supply these power plants and 432 adjacent communities. Eighty-six percent of this population (1.7 million people) resides in coal closure energy communities. Yet, there’s nothing in the Inflation Reduction Act’s definition of energy communities and the government’s mapping tool to signify that these communities will be more vulnerable to risks in the next few years.

Given that a significant share of current coal closure energy communities is likely to face more closures in the future, these energy communities need to be prioritized for policy support and targeting of resources. While the Inflation Reduction Act’s definition of energy communities is unlikely to change unless amended by Congress, going beyond the “Yes/No” designation would allow policymakers to identify more vulnerable energy communities and target resources so that these communities can proactively plan for challenges ahead of disruptions.

Similar prioritization analyses need to be done for other types of fossil fuel-dependent communities. Research shows that decreased future demand for oil and natural gas may affect some oil and gas-producing communities across the United States sooner than others and places like the San Juan basin in New Mexico and Colorado and the Green River basin in Wyoming may experience declining oil and gas production, employment and government revenue before places like the Bakken region in North Dakota or the Permian basin in New Mexico.

How Federal Policies Can Better Support Energy Communities

The Inflation Reduction Act’s Energy Community Tax Credit Bonus is an important policy tool but not a silver bullet. While it helps direct investment to fossil fuel producing communities, a full toolkit of inter-connected policy solutions by the federal government is needed to aid a broader range of fossil fuel-dependent workers and communities that will be affected by the transition away from fossil fuels. This should include near-term aid to workers and communities that lose jobs and revenue due to a facility closure, long-term investment to promote economic diversification and economic resilience, and remediation and reclamation of fossil fuel sites to prevent pollution and create short- and medium-term economic activity and employment.

The recently established Interagency Working Group on Coal and Power Plant Communities and Economic Revitalization has focused much of its attention on coal communities, though its remit more broadly includes “[facilitating] economic revitalization in coal, oil and gas, and power plant communities and … [supporting] workers.”

Since its inception from a climate-centered executive order signed by President Joe Biden in January 2021, the Interagency Working Group has identified 25 coal communities to be prioritized for focused federal investment. It has conducted outreach to increase their awareness of federal funding opportunities included in the Bipartisan Infrastructure Law and Inflation Reduction Act, with the aim of reducing barriers to accessing those opportunities. The Interagency Working Group has created a clearinghouse of over 160 federal funding opportunities — searchable by agency, funding type, applicant type and activity — to provide a one-stop shop for applicants seeking to identify and navigate federal funding opportunities. These are welcome, much-needed steps; however, expanding the scope of support beyond coal communities will become increasingly crucial as the energy transition advances.

In the current political climate, it is hard to imagine that Congress would either create a new office or agency or codify the Interagency Working Group and its activities to enable a coordinated federal response to the challenges posed by the energy transition that is stable across administrations. The present Interagency Working Group, however, can still expand its focus to improve our understanding of the nature and scope of different energy communities beyond coal and provide a better way to identify “at risk” communities that should be the target of focused federal investment and support.  

Expanding Energy Communities for a Clean Energy Future

Policies to support vulnerable workers and communities are needed to smooth the transition to a clean energy economy. But to target these policies to the places that need them the most, we first need a better understanding of how the energy transition will impact workers and communities across various fossil fuel-related industries, how the pace of the transition will impact which workers and communities are most at risk, and finally, ways to provide coordinated federal support to address the myriad of challenges these workers and communities face.

The Inflation Reduction Act’s definition of energy communities was designed simply to direct investment through the Energy Community Tax Credit Bonus and its legislative text is unlikely to change. However, the federal government still has significant opportunities — for instance, through the Interagency Working Group — to design a comprehensive federal definition of energy communities that could help mobilize an all-of-government effort that prepares the country for the energy transition.