Sectoral Transition Risk in an Environmentally Augmented Production Network Model

This paper analyzes sectoral transition risk in the US using a general equilibrium production network that captures the full supply chain. Unlike prior approaches, this model contains sufficient granularity to separate out key green and fossil-fuel sectors through its calibration on environmentally augmented input-output tables from EXIOBASE. I find up to a 30% decline in real value added from a modest $25 to CO2 tax in certain fossil-fuel or closely linked sectors. However, aggregate output decline is mostly driven by indirect effects from large, low-emissions sectors. Losses would depend on the elasticity of substitution between energy sources, with higher substitutability softening the impact to the aggregate economy but sharpening the impact to ``dirty'' sectors. This identifies a key unknown parameter in understanding the impact of the green transition