Beyond the Smokestack: Supply Chains and the Industrial Incidence of Net Zero

We study the industrial incidence of net zero in DICE-IO, a 33-sector climate-economy model calibrated to global input--output data. The standard smokestack principle suggests that the largest direct emitters should bear the largest transition burden. We show that this incidence logic breaks down in a production network: carbon costs propagate downstream and can weigh most heavily on industries that use carbon-intensive inputs. We summarize this mechanism with a sufficient statistic for first-order price incidence, the Leontief-based embodied-emissions multiplier, which we call Downstream Emission Centrality (DEC). DEC equals the sectoral price response to a marginal Scope-1 carbon tax and explains nearly all cross-sectional price variation along the nonlinear net-zero transition. Achieving the Paris Agreement target requires a carbon tax rising to about $1,300 per ton of CO2 by 2050. The Scope-1 transition has a consumption-equivalent welfare cost of 0.7% relative to laissez-faire, while a Scope-3-style tax on embodied carbon in purchases yields a welfare gain of 1.1%.