Sectoral Transition Risk in an Environmentally Extended Production Network Model

Abstract

This paper analyzes sectoral transition risk in the US using a general equilibrium production network that captures the entire supply chain. Unlike prior approaches, this model contains sufficient granularity to separate key green and fossil fuel sectors through calibration on environmentally extended input-output tables from EXIOBASE. This allows for explicitly modeling the transition from non-green to green intermediates, as well as studying green subsidies. Carbon taxes cause substantial declines in fossil fuel-linked sectors and nonlinear increases in green-linked substitutes. Green subsidies are less effective than carbon taxes at shrinking high-emitting sectors due to incomplete pass-through. In both cases, magnitudes depend highly on the green vs. non-green elasticity of substitution. Finally, I examine to what extent emissions-based metrics such as scope 1, 2, and 3 can linearly approximate the economic impacts of a carbon tax.

Keywords: Production network, value chain, transition risk, climate risk, carbon tax, green subsidy, industry dynamics

JEL Classification: C67, D57, H23, Q58