BiGS Actionable Intelligence
In Wyoming, state tax revenues generated from coal, natural gas, and oil represent up to 65% of its budget, according to the nonprofit Wyoming Outdoor Council. These funds are essential for covering basic services like police salaries and public school education.
However, as the green energy transition progresses, the state’s heavy reliance on fossil fuels raises a critical question: How will states like Wyoming finance government services when these revenues start to decline?"
Wyoming — which is collaborating with Harvard Kennedy School’s Growth Lab to identify sustainable solutions — is hardly alone.
The U.S. has hundreds of similar “energy communities” with tax revenue streams derived mainly from fossil fuels, according to the Washington, D.C.-based independent, nonprofit research institution Resources for the Future (RFF).
The institute estimates that fossil fuels generated $138 billion annually in 2015-19 for all governments in the United States. That figure is likely conservative since it is difficult to obtain reliable data from local governments, Daniel Raimi, director of equity in RFF’s Energy Transition Initiative, told Harvard Business School’s The BiGS Fix.
Compounding this situation, many states don’t have an income tax, says Dustin Tingley, a Harvard University professor. Last year, Tingley authored a major study of stakeholders involved in the clean energy transition that revealed strong resistance to it in a range of local communities. Based on that research, Tingley co-authored with Princeton University political scientist Alexander Gazmararian a book, Uncertain Future: The Politics of Climate Change.
Combined, these factors make the transition to renewable energy not only complicated but also a hard sell, Tingley says.
In general, Americans view fossil fuels as a convenient and low-cost energy source supported by good infrastructure. This favorable perception is magnified in pockets of the country rich in fossil fuel resources. Besides local government revenue, jobs and cultural patterns in support of these industries have flourished over generations to become part of the bedrock of the communities.
The gap between old and new energy tax bases in Alaska, Colorado, and beyond
To understand the impact of fossil fuel-generated tax revenue, in early 2024, RFF looked closely at a subset of energy communities with reliable tax data. These included 79 counties in 10 states, such as North Slope Borough, Alaska; Kern County, California; Weld County, Colorado; and Midland County, Texas.
In energy communities with recent clean energy projects, the RFF estimates that fossil fuel industries continue to produce tax revenues in orders of magnitude higher than the clean energy projects. The study found that fossil fuels generated more than $10,000 per capita in government revenue in 5 of the 79 sample counties reviewed and more than $1,000 per capita in 28 counties. In contrast, solar and wind projects generated about $100 per capita in 11 counties, RFF found. The biggest tax revenue earner among these counties took in only about $1,000 per capita.
Furthermore, while policymakers are struggling to find ways to tap into new clean energy tax revenues, many areas of the U.S. are in the midst of a fossil fuel boom. In New Mexico alone, an increase in natural gas production has fueled a jump in tax revenues of almost 50% over three years.
Poorly targeted incentives
The centerpiece of the Biden Administration’s climate policy, the 2022 Inflation Reduction Act (IRA), makes a crude attempt to direct investments in new energy projects to energy communities. On top of new tax credits for clean energy projects, the legislation designates an additional 10% credit if projects are built in areas in which more than 25% of local tax revenues come from fossil fuels.
“It's just not a well-targeted policy,” Raimi told The BiGS Fix. “I don't think a 10% bonus tax credit is going to be a game changer for these places. And there's not really an opportunity to fix that legislation administratively. Congress would have to act [again]."
When renewable energy investments end up in energy communities, it is more by chance than by policy design.
The Internal Revenue Service is charged with interpreting which areas can be defined as an energy community under the IRA, and the IRS recently ruled that nearly half of the land mass in the U.S. qualifies.
On a positive note, RFF’s Raimi points out that the IRS definition of energy communities covers most of New Mexico, West Virginia, and Wyoming. However, inexplicably, large sections of oil- and gas-producing regions are excluded, such as portions of the Permian Basin (in western Texas and southeastern New Mexico), the state of Oklahoma, Bakken (in eastern Montana and western North Dakota), and other parts of North Dakota.
Supply chains for clean energy technologies one solution?
Developing new tax bases for these communities to maintain essential public services will require major economic diversification efforts and financial support from the federal government, according to RFF. Raimi views these shifts as a political strategy to build support for renewable energy projects among project beneficiaries.
One smooth long-term transition could involve building supply chains for clean energy technologies that embed support for those technologies, Raimi says. He cites a growing number of recent investments supporting links between clean energy/decarbonization and manufacturing or other growth initiatives in swing states that are important to both major political parties. Two examples:
North Carolina: Toyota is building a $13.9 billion battery manufacturing plant.
New Mexico: Pattern Energy Group began production this year on the $11 billion Sun Zia wind electricity and transmission project.
While the existing renewable energy investments spurred by the IRA are substantial, Raimi says that he considers efforts so far to be baby steps toward the goal of developing new tax bases for fossil fuel-reliant state and local governments.
“There are a couple of examples, but it's not a systematic trend,” Raimi told The BiGS Fix.