2. The Distributional Costs of Net-Zero: A Heterogeneous Agent Perspective

Abstract: This paper investigates the distributional impacts of implementing the net-zero emissions target in the U.S. for the 2050 horizon. We model a heterogeneous household economy and show that 2050 net-zero policy is welfare enhancing in the long run, but induces short/medium-run distributional costs. We quantify 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 of financially constrained households by 2050. We then show how distributing revenue from the carbon policy could partially offset consumption losses and smooth the net-zero transition. We also extend our analysis to the cases of: i) sticky prices, showing how net-zero emissions induces 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.