How Regions Can Pivot From Carbon- to Tech-based Economies

Federal initiatives for decarbonization are disrupting the economies of regions that have historically relied on fossil fuels. As a result, they’re looking to shift their focus to another industry. For many, it’s technology.

Transitioning to another economy base, regardless of what it is, requires teamwork among all levels of government and other strategies that states and localities must explore, such as changing the workforce composition, according to “Place-based federal investment can chart a new future for regions dependent on fossil fuel,” an April Brookings Metro report.

It outlines four steps for transitioning economies. First, “what you can’t do is have magical thinking, in terms of your economic strengths and potential,” said Joseph Parilla, director of applied research at Brookings Metro and coauthor of the report. 

Instead, use data. “Look at all sorts of public and private datasets to understand how the economy is performing, what types of industries and technologies are actually finding advantage in a particular place,” Parilla said. “That’s often based on the kind of workforce capabilities of the region, so the types of skills and degrees and competencies that the talent pool has. You can use data to assess all those things and triangulate where advantages may occur.”

Second, these economic-shifting strategies require significant investments from the public sector. In the case of the regions moving away from fossil fuels, the federal Economic Development Administration (EDA) has a $1 billion American Rescue Plan program called the Build Back Better Regional Challenge (BBBRC) that is helping carbon-specialized economies transition to new bases. But state and local governments can also help, Parilla said.

One way is through tax incentives—an approach that has helped Loudoun County, Virginia, become the data center capital of the world. “Researchers estimate that localities and states spend about $50 billion a year on those,” he said, but “tax incentives are only getting at one factor for the businesses, which is essentially the cost of doing business there.”

Ultimately, what advanced industry employers want is talent, Parilla said, and tax incentives could drain public coffers for the education system or infrastructure. “Then you’re eroding the competitiveness of the region long-term to perhaps subsidize an employer short-term,” he said.

That education focus can be seen with the strategy Arlington County, Virgina, used to woo Amazon HQ2 and Boeing.

“A big part of their strategy was just saying, ‘We need to invest in our tech talent pipeline, and so we’re going to structure our support for Amazon as an investment, rather than an incentive,’” Parilla said. “The bulk of the approach was basically investing in K-12 [and] in higher education. That’s really the right way to do it.”

The third step is about making economic and racial inclusion central to an economic strategy as opposed to hoping that with the new industry, those benefits will eventually accrue to everyone. According to the report, investing in historically excluded people is critical to scaling and strengthening regional innovation.

“The competitiveness of an economy derives from the quality of its talent and its entrepreneurial base, and if you have mechanisms in place that are excluding people from getting a good education or getting access to capital to start and grow a business, that undermines the competitiveness of the economy—in additionally being morally problematic,” Parilla added.

The last step is multisector delivery, which means no single entity can make this change alone. It takes research universities, economic development groups, chambers of commerce, community-based organizations as well as local, state and federal agencies. “It’s a team sport,” Parilla said.

The report points to several successful transition stories. One is Austin, Texas, which used cluster development—or “geographic concentrations of interconnected businesses, suppliers, and associated institutions”—to diversify its oil extraction-reliant economy and pivot to a high-tech sector.  

“Even as recently as 2015—decades after the tech cluster’s initial incubation—53% (or $346 million) of the University of Texas at Austin’s research and development was funded by a handful of federal agencies, including the Departments of Defense, Energy, Health and Human Services, and the National Science Foundation. The state of Texas has also played a significant role in the move away from fossil fuel-based economy, providing funding to build a research-to-commercialization pipeline and collaborating with industry across the region,” the report states.

The Tulsa Regional Advanced Mobility Corridor in Oklahoma will use about $39 million in BBBRC funding on automation and unmanned aerial system development, and southern Louisiana’s H2theFuture coalition will use $50 million of the funding to produce zero-carbon hydrogen, a potential energy source.

Brookings Metro has partnered with EDA on its BBBRC work. “We are trying to codify in real time how that is going, why it matters [and] how the federal government can interact with these regional coalitions that are trying to advance economic and technology strategies,” Parilla said.