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Greenhouse Gas Abatement Cost Curves of the Residential Heating Market: A Microeconomic Approach

Caroline Löffler () and Harald Hecking ()
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Caroline Löffler: University of Cologne (EWI)
Harald Hecking: University of Cologne (EWI)

Environmental & Resource Economics, 2017, vol. 68, issue 4, 915-947

Abstract: Abstract In this paper, we develop a microeconomic approach to deduce greenhouse gas abatement cost curves of the residential heating sector. Our research is based on a system dynamics microsimulation of private households’ investment decisions for heating systems to the year 2030. By accounting for household-specific characteristics, we investigate the welfare costs of different abatement policies in terms of the compensating variation and the excess burden. We investigate two policies: (i) a carbon tax and (ii) subsidies on heating system investments. We deduce abatement cost curves for both policies by simulating welfare costs and greenhouse gas emissions to the year 2030. We find that (i) welfare-based abatement costs are generally higher than pure technical equipment costs; (ii) given utility maximizing households a carbon tax is the most welfare-efficient policy and; (iii) if households are not utility maximizing, a subsidy on investments may have lower marginal greenhouse gas abatement costs than a carbon tax.

Keywords: Greenhouse gas abatement costs; Heat market; Household behavior; Pigou tax (search for similar items in EconPapers)
JEL-codes: C35 C61 Q47 Q53 R21 (search for similar items in EconPapers)
Date: 2017
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