Prioritize to Decarbonize: Thermal Retrofits, Carbon Prices, and Energy Inequality

Sophie M. Behr, Merve Kucuk, Maximilian Longmuir and Karsten Neuhoff

No 2119, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: The energy crisis following Russia’s invasion of Ukraine exposed the heightened vulnerability of low-income households to rising heating costs, particularly those in energy inefficient buildings. Using data from the German Socio-Economic Panel (SOEP), this study examines the distributional impact of heating costs across income deciles and evaluates the effectiveness of policy interventions. We find that low-income tenants are the most vulnerable segment of the population, with elevated risks of energy poverty. While carbon pricing with landlordtenant cost splitting shields low-income households from carbon costs, it fails to offset overall energy price increases. In contrast, a "Worst-First" retrofit strategy, prioritizing upgrades in the least efficient buildings, substantially reduces heating costs and mitigates energy poverty. Our findings highlight the need for targeted retrofit policies to ensure both equitable decarbonization and economic relief for vulnerable households.

Keywords: Distributional effects; energy efficiency; retrofit; carbon prices; energy price crisis (search for similar items in EconPapers)
JEL-codes: D31 D63 Q41 Q48 (search for similar items in EconPapers)
Pages: 34 p.
Date: 2025
New Economics Papers: this item is included in nep-eur and nep-reg
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