Young scholars’ webinars: “The Distributional Costs of Net-Zero: A Heterogeneous Agent Perspective”

This paper investigates the distributional impacts of implementing the net-zero emissions target in the U.S. for the 2050 horizon. The paper models a heterogeneous household economy and shows that the 2050 net-zero policy is welfare-enhancing in the long run, but induces short/medium-run distributional costs. The paper quantifies this trade-off by a 0.54% consumption equivalent welfare gain (compared to the laissez-faire) in the long run and a 6-10 percent increase in financially constrained households by 2050. It also shows how distributing revenue from the carbon policy could partially offset consumption losses and smooth the net-zero transition. It extends the analysis to the cases: i) sticky prices, showing how net-zero emissions induce inflationary pressure over the long run, which could represent a challenge for monetary policy conduction in a world with high inflation, and ii) abatement learning, showing how green innovation decreases carbon prices and boosts consumption over the transition.