US economy-wide decarbonization: Sectoral and distributional impacts

Abstract

This paper investigates the sectoral and distributional welfare impacts of reaching net-zero CO₂ emissions in the US by 2050. We simulate several net-zero projections using a CGE model linked with an electricity capacity expansion model to try to understand what a transition to net-zero might look like and the role played by different policies and technologies. Reaching net-zero leads to high carbon prices in 2045 and 2050, which drives deployment of direct air capture (DAC) technology. The electricity sector reaches negative emissions by 2050. Electrification is the predominant means for decarbonizing the buildings and transportation sectors, whereas industrial sectors are assumed to have limited electrification potential and prefer carbon management. The negative emissions in the power sector are primarily achieved through biomass-fired electricity generation with carbon capture and storage. In our scenarios, decarbonization is progressive (i.e., burden increases with income) due to our modeling assumption of lump-sum recycling of carbon permit revenues. In 2050, we find a break in the progressive trend when capital-intensive DAC technology enters, as permit revenue distributions that benefit the lowest income groups are directly substituted for returns to capital from DAC deployment that benefit the highest income groups. Our other non-CCS and non-DAC technology improvement cases in the buildings, transportation, and industrial sectors led to a more evenly distributed benefit across households as these mitigation channels are less capital intensive. When the Inflation Reduction Act (IRA) is included, the net-zero emissions limit does not bind as early, the need for DAC is reduced, and industrial CCS investment occurs earlier and in greater amounts. These effects highlight the importance of considering interactions between technologies, policies, and fiscal decisions when prescribing net-zero pathways around a distributional goal.