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The US Needs a Playbook for Place-Based Investments in Fossil Fuel Communities

Actions to address climate change will have profound effects on communities across the United States that heavily depend on fossil fuels for jobs, economic competitiveness, and public services. The federal government has historically invested little in diversifying fossil-fuel-dependent local economies, following the traditional advice of economists to direct public investments toward struggling people rather than places. However, this conventional wisdom among economists and the meager funding levels for such “place-based” investments are both changing, in part due to the risks posed by a rapid energy transition.

A host of new laws provide hundreds of billions of dollars from the US federal government for local economic development. Fossil-fuel-dependent communities will have unprecedented opportunities to build more robust economies. However, policymakers have no playbook for designing and implementing place-based policies, and successful case studies are few and far between.

The stakes are high, and not only for the targeted communities. In a major fossil fuel producing country like the United States, the pace of the energy transition may hinge on the credibility of promises of “just transitions” for fossil-fuel-dependent communities.

Why the Conventional Wisdom on Place-Based Policies Has Changed

Opposition to place-based policies is largely due to skepticism that governments can successfully reshape local economies, similar to the opposition to industrial policies at the national level.[1]

Economists also used to argue[2] that place-based policies are largely unnecessary because differences in regional prosperity will shrink over time if capital and labor are sufficiently mobile. Empirical evidence has been unkind to such predictions. Firms have not flocked[3] to economically distressed regions to take advantage of lower labor costs. And while economic models may predict that humans will act like optimizing agents who move to more productive parts of the country, in reality humans have instead acted like humans,[4] who are attached to their struggling communities.

These findings are a cause for concern for fossil-fuel-dependent communities in a country that is transitioning to cleaner energy sources. Shrinking demand for industries that contribute a sizable portion of jobs and tax revenue may present existential risks[5] to a local economy. Nobody wants a repeat of the “China shock” of the early 2000s that led to prolonged economic distress[6] for manufacturing-dependent communities across the country.

The stark risks of failing to support distressed local economies has led to increased scholarship on the justifications for place-based policies, which include not only the barriers to economic mobility but also distributional goals,[7] insurance against regional economic shocks,[8] and the benefits of clustering related businesses in a given region.[9] Even Larry Summers, an outspoken skeptic[10] of industrial policy at the national level, has asked (along with co-authors[11]) economists to reconsider local-level variants.

Still, skepticism remains. The literature does not provide[12] a “how-to” guide for successfully diversifying fossil-fuel-dependent economies: for example, how can incentives be structured so that communities can take advantage of their unique strengths, and what infrastructure and public services can help communities to take advantage of the incentives? If anything, real-world examples provide a “how-not-to” guide for place-based policies, including with localized incentives[13] to steal investments away from other municipalities or with one-size-fits-all[14] federal tax incentives that aim to attract investments to distressed communities.

Success stories do exist. Consider the Ruhr region of Germany, with an economy diversified away from the dominant coal and steel industries with the assistance of[15] billions in federal investments in projects focused on infrastructure, education, and environmental protection. Whether such successes can be replicated systematically is unclear.

Unprecedented Funding for Fossil Fuel Communities

The need for “just transitions” for fossil-fuel-dependent communities has long been recognized, but federal funding to achieve this goal has been sparse. In 2015, the Obama administration announced[16] a coordinated federal government strategy (called the POWER Initiative) with the goal of easing the economic effects of the energy transition in coal-dependent communities. Congress did not fully fund the initiative, but three programs received sustained funding,[17] rising to a total of over $200 million per year by the early 2020s (Table 1).

The Biden administration has put place-based investments at the center of its economic agenda for a host of reasons, including to recover from the pandemic, to revitalize manufacturing regions, and to help avoid[18] shocks to fossil-fuel-dependent communities caused by the transition to clean energy.

Congress has passed numerous large spending bills, each with place-based policy elements, including funding directed to fossil-fuel-dependent communities. As shown in Table 2, the American Rescue Plan is providing over half a billion dollars to the Economic Development Administration to assist coal communities; the Bipartisan Infrastructure Bill (BIL) invests tens of billions of dollars in major energy projects and remediation efforts; and the Inflation Reduction Act (IRA) carves out a portion of its clean energy tax credits for “energy communities.”[19]

The funding that specifically targets fossil fuel communities only scratches the surface of the new funding available to these communities. For example, the BIL invests over $1 trillion in infrastructure projects that may be prerequisites for revitalizing any local economy; the CHIPS and Science Act includes over $100 billion in funding for new facilities and technology hubs, including an emphasis on alleviating regional economic distress; the IRA includes nearly $10 billion for the Department of Agriculture’s Empowering Rural America program, nearly $20 billion for the Environmental Protection Agency’s Greenhouse Gas Reduction Fund, and $250 billion in new lending authority for the Department of Energy’s loan program office.

The bottom line is that the available funding opportunities for a given fossil-fuel-dependent community may have risen by an order of magnitude in the last few years. The Biden administration’s interagency taskforce on revitalizing fossil fuel communities has a clearinghouse[20] that lists more than $500 billion of federal funding opportunities and 22 tax credits relevant for meeting the needs of these communities.

Learning from Successes and Failures

Given the sharp rise in funding for programs that aim to diversify fossil-fuel-dependent economies and the limited understanding of how to spend those funds effectively, both successes and failures are inevitable. This range of outcomes is also invaluable, because it will provide evidence about how to better develop and implement place-based policies going forward—but only if we are intentional about learning these lessons.

While the government focuses on the immense challenges of building public support and capacity at all levels of government to implement its new place-based policies, the academic community should rigorously study these programs. That includes identifying relevant metrics of success, collecting and analyzing data, and learning from the implementers, the workers, the firms, and the agencies that interact with the programs.

The energy transition is in its infancy. “Just transition” efforts today are largely focused on communities dependent on the coal industry, which is dwarfed in size[21] by the oil and gas industries. The pathway to net zero emissions will be long and difficult, and the pace of the transition may depend on credible commitments for just transitions.

Learning how to better design and implement place-based policies may create a virtuous cycle whereby successful efforts to diversify fossil-fuel-dependent economies make policymakers more open to an accelerating energy transition.

In contrast, if decarbonization efforts prove consistent with an increasing rash of communities sinking into economic distress, net zero may be a pipe dream for major fossil-fuel-producing countries like the United States.

Source : Energypolicy