The smokestack illusion: Who really pays for net zero

Reaching net-zero CO2 emissions by 2050, as prescribed by the Paris Agreement, is hard to imagine without a carbon tax. This column estimates that reaching the goal by carbon taxation will require a tax path that peaks at around $1,300 per tonne of CO2, ten times current prices anywhere, and highlights how industries will bear very unequal transition costs. The intuitive smokestack principle, that the biggest direct emitters should pay the most, turns out to be false: costs are instead predicted by a simple statistic capturing how exposed an industry is through its supply chain.

Which industries deserve protection as carbon pricing tightens? In the EU, sectors at risk of carbon leakage receive free emissions allowances shielding them from the EU Emissions Trading System, a status assigned mainly on how emissions-intensive a sector is directly, counting its own smokestack emissions and the electricity it consumes, not the carbon embedded in the other inputs it buys. This protection is set to be phased out between 2026 and 2034. The logic feels intuitive: the sectors polluting most directly should also bear the largest share of the transition’s cost.

Economists have long questioned whether this logic holds. Devulder and Lisack (2020), using a network model of the French and European economies, show that the sectoral burden of a carbon tax depends on input-output linkages between industries, not direct emissions alone. Coster et al. (2025) find that firms respond to a carbon tax partly by shifting their sourcing towards dirtier, untaxed suppliers abroad, and Konradt and Mangiante (2025) show that carbon pricing already falls very unevenly across European regions. A carbon tax, in other words, is not a single price tag handed uniformly to the economy: firms differ enormously in how much they emit and what they buy, so the same tax can be negligible for one industry and a much heavier burden for another. Which industries should we then expect to come out ahead, and which ones are set to be squeezed hardest?

In a recent paper (Jondeau et al. 2026), we build a macro-climate model, extending the DICE framework of Nordhaus (1992) with a disaggregated sectoral structure, to trace both the aggregate and industry-level consequences of reaching the Paris Agreement through a carbon tax: how high the carbon price needs to climb, and which industries stand to lose the most from the green transition.

The Paris Agreement and net zero by 2050

The Paris Agreement’s central goal is to bring global CO2 emissions to net zero by 2050. Since carbon-removal technologies remain immature, this requires cutting emissions drastically rather than offsetting them later. World emissions currently stand at around 35 GtCO2 a year, so reaching net zero within three decades means cutting this figure by more than a factor of ten.

We compare two scenarios. Under laissez-faire, governments take no further climate action. Under a Paris Agreement scenario, a carbon tax cuts global emissions by 8.37% a year from 2022, down to a residual 3 GtCO2 by 2050, an amount we assume could be offset by removal technologies outside the model. In both scenarios we track the full trajectory of the world economy, including outcomes for each industry. The tax takes the form of a Scope-1 tax on firms’ direct emissions.

Short-run costs, long-run gains

The two paths generate markedly different aggregate outcomes. Figure 1 plots the transition of four key variables: world emissions, the temperature anomaly, GDP, and the underlying carbon tax.

Two lessons emerge. First, keeping the temperature rise below 2°C requires a steep, rising carbon price, climbing to an eye-watering $1,300 per tonne of CO2 by 2050 — in the same range as recent revisions to the social cost of carbon, based on global rather than local temperature damages, by Bilal and Känzig (2026), obtained through an entirely different method. The tax works mainly by pushing firms to invest in cleaner abatement technologies, and can ease off once the peak is reached, as the model also allows for steady technological improvement.

Second, both paths carry substantial economic costs, but on different timelines. Under laissez-faire, the recession starts out mild and worsens steadily as damages accumulate. The Paris Agreement path front-loads the pain instead, shaving up to 8% off GDP by 2050, but pays off later: by 2100 its recession is roughly half the size of laissez-faire’s.

Winners and losers of the net-zero transition

The macroeconomic story is only half the picture: economies are woven together by a dense network of relationships between industries, so ranking by direct emissions alone misses much of who bears the transition’s cost.

Figure 1 Transition pathway of macroeconomic variables under laissez-faire and Paris Agreement scenarios (8.37% global emissions reduction per year)

Notes: GDP is expressed in percent deviation from its initial (2022) value.

The intuitive benchmark, what we call the ‘smokestack principle’, says that the sectors emitting the most directly should also bear the largest cost of the transition. Reality tells a different story. Take Transportation: despite high direct emissions, it buys relatively few carbon-intensive inputs, so once its position in the supply chain is taken into account, it is only moderately exposed. Other Utilities is the mirror image: only moderately polluting on its own, it sits at a pivotal point in the network, buying heavily from carbon-intensive suppliers, and ends up among the most exposed industries in the economy. Direct emissions alone would rank these two sectors in exactly the wrong order.

The reason is that carbon costs do not stop at the factory gate. A tax first raises costs for direct emitters, who owe a bill on their own emissions, but they pass part of that increase on to whoever buys their output, who pass part of it on again to their own customers, and so on down the supply chain. A sector’s true exposure therefore depends as much on what it buys as on what it emits.

We show that this whole chain of effects can be captured by a single statistic: downstream emission centrality (DEC). DEC weighs how much a sector pollutes directly against how much it depends on inputs that are themselves carbon-intensive, capturing both direct and indirect exposure. The sectors facing the largest price increases and sharpest output declines, both theoretically and in the data, are precisely those with the highest DEC.

Figure 2 splits DEC for each industry into a direct component, the sector’s own emission intensity, and a network component, the carbon embedded in what it buys from other sectors. For most industries, it is the network component that accounts for the bulk of total exposure. Fossil Utilities is the one exception, standing out both for its direct emissions and its central position in the network.

Figure 2 Sectoral downstream emission centrality: Direct versus network exposure

Notes: Each bar shows the Downstream Emission Centrality of an industry, decomposed into its direct component (the sector’s own emission intensity, dark red) and its network component (carbon embodied in purchased inputs, light red). Industries are sorted in descending order of total DEC.

Figure 3 confirms this quantitatively: DEC explains over 99% of the cross-sectoral variation in price responses, versus 88% for direct intensity alone. The gap is largest for sectors like Primary Metals, only moderately polluting themselves, whose exposure a direct-emissions ranking would seriously understate.

Figure 3 Scatterplot of relative price changes: downstream emission centrality versus direct carbon intensity

Notes: Each panel plots an industry’s relative price change from 2022 to 2025 against DEC (left) and against direct carbon intensity (right).

Conclusion

Climate change ranks among the biggest challenges facing the world economy, and our results suggest the policy response is more demanding than commonly assumed: reaching net zero by 2050 requires a globally coordinated carbon tax rising to about $1,300 per tonne of CO2, ten times current prices anywhere. Beneath that aggregate figure, the transition reshuffles industries in ways the smokestack principle misses: exposure runs through supply chains as much as through smokestacks. As carbon taxation moves from proposal to practice, targeting support toward the sectors this statistic flags, rather than only the largest direct emitters, such as those shielded today by the EU’s carbon leakage rules, may prove essential to a fair and efficient transition.

Source : VOXeu