The COVID-19 disease caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) primarily affects the lung, particularly the proximal airway and distal alveolar cells. NKX2.1+ primordial lung progenitors of the foregut (anterior) endoderm are the developmental precursors to all adult lung epithelial lineages and are postulated to play an important role in viral tropism. Here, we show that SARS-CoV-2 readily infected and replicated in human-induced pluripotent stem cell-derived proximal airway cells, distal alveolar cells, and lung progenitors. In addition to the upregulation of antiviral defense and immune responses, transcriptomics data uncovered a robust epithelial cell-specific response, including perturbation of metabolic processes and disruption in the alveolar maturation program. We also identified spatiotemporal dysregulation of mitochondrial heme oxygenase 1 (HMOX1), which is associated with defense against antioxidant-induced lung injury. Cytokines, such as TNF-α, INF-γ, IL-6, and IL-13, were upregulated in infected cells sparking mitochondrial ROS production and change in electron transport chain complexes. Increased mitochondrial ROS then activated additional proinflammatory cytokines leading to an aberrant cell cycle resulting in apoptosis. Notably, we are the first to report a chemosensory response resulting from SARS-CoV-2 infection similar to that seen in COVID-19 patients. Some of our key findings were validated using COVID-19-affected postmortem lung tissue sections. These results suggest that our in vitro system could serve as a suitable model to investigate the pathogenetic mechanisms of SARS-CoV-2 infection and to discover and test therapeutic drugs against COVID-19 or its consequences.