Climate Policies in the Housing Market?

Mitigating CO2 emissions in housing through retrofits has emerged as a crucial political issue. In this paper, we assess the macroeconomic and distributional impacts of key climate policies in the residential housing market. We build a quantitative heterogeneous agent model featuring high (green) and low (brown) energy efficient houses. Brown houses are associated with an additional cost of energy and can be retrofitted to a green house. We compare the effects of three policies: a tax on energy, a tax on brown rental income and a retrofit subsidy. The taxes widen the green to brown price ratio by penalizing brown houses, whereas the subsidy reduces it by lowering the substitution cost. The energy tax raises the user cost of brown housing, tightening affordability and increasing the renter share. The tax on brown rental income generates a "brown reallocation": by decreasing brown house prices while leaving the user cost unchanged, it induces lowincome renters to transition into brown homeownership. Finally, the subsidy improves affordability, enabling low-income households to enter green homeownership.