US economy-wide decarbonization: Sectoral and distributional impacts

Highlights

• Our model shows that reaching net-zero by 2050 via an emissions limit results in a carbon price near 800 US dollars per ton where direct air capture technology is widely deployed.
• The electricity sector reaches negative emissions by 2050 which are achieved partly through biomass-fired electricity generation with car- bon capture and storage.
• Electrification is the predominant means for decarbonizing the build- ings and transportation sectors, whereas industrial sectors with limited electrification potential prefer carbon management.
• Decarbonization is progressive (i.e., burden increases with income) due to our emissions limit and modeling assumption of lump-sum recycling of carbon permit revenues.
• When carbon capture technology improvement is accelerated the ef- fects are regressive, whereas technology improvement in other channels leads to more evenly distributed benefits.
• When the Inflation Reduction Act is included our net-zero emissions limit does not bind as early, the need for direct air capture is reduced, and industrial carbon capture and storage investment occurs earlier and in greater amounts.

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.