Beyond the Smokestack: Supply Chains and the Industrial Incidence of Net Zero

Eric Jondeau, Côme Poirier and Gauthier Vermandel

No 21881, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the industrial incidence of net zero in DICE-IO, a 33-sector climate-economy model calibrated to global input--output data. The standard smokestack principle suggests that the largest direct emitters should bear the largest transition burden. We show that this incidence logic breaks down in a production network: carbon costs propagate downstream and can weigh most heavily on industries that use carbon-intensive inputs. We summarize this mechanism with a sufficient statistic for first-order price incidence, the Leontief-based embodied-emissions multiplier, which we call Downstream Emission Centrality (DEC). DEC equals the sectoral price response to a marginal Scope-1 carbon tax and explains nearly all cross-sectional price variation along the nonlinear net-zero transition. Achieving the Paris Agreement target requires a carbon tax rising to about $1,300 per ton of CO2 by 2050. The Scope-1 transition has a consumption-equivalent welfare cost of 0.7% relative to laissez-faire, while a Scope-3-style tax on embodied carbon in purchases yields a welfare gain of 1.1%.

Keywords: Carbon tax incidence; Production networks; Input-output linkages; Integrated assessment; net-zero transition (search for similar items in EconPapers)
JEL-codes: D57 H23 Q54 Q58 (search for similar items in EconPapers)
Date: 2026-08
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