but this seems like something a federated system could handle without banning an instance. Am I confused about how this works?

No- it can be easily handled multiple other ways too.

1. If users don't subscribe to the community, the community doesn't federate elsewhere.
2. Users can individually block the community and/or user responsible.
3. Admins, at an instance level, can block the community and/or user.

At THIS instance level (sh.itjust.works) 4. The community can be removed/blocked. This removes it globally.

Defederation is the complete nuke-from-orbit option, which should only be reserved when you have an instance that is unwilling to work with you to resolve issues.

Aka- you have an instance, owned by spammers, producing spam bots causing negative user experience.

I joined this instance because of the renewable energy commitment.

I keep hearing this. Maybe. I should update my instance and let everyone know my server runs on pure sunlight too. lol