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

Author

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  • Reda, Milan Jakob
  • Gawel, Erik
  • Lehmann, Paul

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.

Suggested Citation

  • Reda, Milan Jakob & Gawel, Erik & Lehmann, Paul, 2025. "Carbon pricing and the affordability of residential heating: A theoretical model with endogenous technology choice," UFZ Discussion Papers 2/2025, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
    • Handle: RePEc:zbw:ufzdps:319624
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    5. Hänsel, Martin C. & Franks, Max & Kalkuhl, Matthias & Edenhofer, Ottmar, 2022. "Optimal carbon taxation and horizontal equity: A welfare-theoretic approach with application to German household data," Journal of Environmental Economics and Management, Elsevier, vol. 116(C).
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    Keywords

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    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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