Firm-level supply chains to minimize unemployment and economic losses in rapid decarbonization scenarios

TL;DR

This paper demonstrates how analyzing firm-level supply chains can inform decarbonization strategies that significantly reduce emissions while minimizing unemployment and economic losses.

Contribution

It introduces a method to identify optimal emission reduction strategies using firm-level network analysis, improving economic outcomes compared to naive approaches.

Findings

Optimal strategies reduce job losses to about 2% for 20% emissions cuts.

Naive strategies cause up to 28% job losses for the same reduction.

Network-based approaches outperform simple emission-based targeting.

Abstract

Urgently needed carbon emissions reductions might lead to strict command-and-control decarbonization strategies with potentially negative economic consequences. Analysing the entire firm-level production network of a European economy, we have explored how the worst outcomes of such approaches can be avoided. We compared the systemic relevance of every firm in Hungary with its annual CO2 emissions to identify optimal emission-reducing strategies with a minimum of additional unemployment and economic losses. Setting specific reduction targets, we studied various decarbonization scenarios and quantified their economic consequences. We determined that for an emissions reduction of 20%, the most effective strategy leads to losses of about 2% of jobs and 2% of economic output. In contrast, a naive scenario targeting the largest emitters first results in 28% job losses and 33% output reduction for the same target. This demonstrates that it is possible to use firm-level production networks to design highly effective decarbonization strategies that practically preserve employment and economic output.