Carbon pricing and the affordability of residential heating: A theoretical model with endogenous technology choice

Milan Jakob Reda, Erik Gawel and Paul Lehmann

No 2/2025, UFZ Discussion Papers from Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS)

Abstract: This paper analyses the impact of carbon pricing on residential heating affordability using a theoretical household model with endogenous choice of a renewable heating technology. We compare two compensation policies: a renewable heating subsidy and a lump-sum transfer. The subsidy is the most effective policy to reduce the household's burden if the renewable heating technology is the optimal choice with carbon pricing alone. Otherwise, the relative effectiveness of the compensation policies depends on whether they shift the household's choice towards renewable heating. Overall, our study emphasizes the need of considering technological adjustment when analyzing how carbon pricing affects heating affordability.

Keywords: residential heating; affordability; climate policy; environmental taxes and subsidies (search for similar items in EconPapers)
JEL-codes: D63 H23 Q58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ufzdps:319624

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