The distribution of financial burdens from heat pump investments: An empirical analysis for owner-occupiers in Germany

Albeit heat pumps are viewed as a key technology to decarbonize buildings, their upfront costs exceed investment costs for fossil boilers. These excess investment costs for heat pumps over fossil boilers are heterogeneously distributed across and within income groups, depending on building characteristics and local climate conditions. This paper investigates vertical and horizontal inequalities associated with investments in heat pumps as opposed to fossil heating systems, assessing them in absolute and income-relative terms. Using German survey data on building type, age, insulation condition, living area, and local climate, we estimate household-specific excess investment costs and analyze their relationship with income. In absolute terms, investment costs are equally distributed across income groups. However, when measured relative to income, distributional effects are regressive. Regarding the drivers of these effects, we show that lower-income households tend to live in smaller, older, and less well-insulated buildings than higher-income households. In contrast, for higher-income households, excess costs are largely driven by their comparatively larger living areas. Consequently, households across income groups face, on average, similar excess costs, albeit for different reasons. We also observe substantial horizontal inequalities in both absolute terms and relative to household income, reflecting considerable cost variations within income groups, depending on the combination of building type, building age, insulation condition and living area. Again, the drivers of these horizontal inequalities vary across income groups. We find that mitigating both vertical and horizontal inequalities requires targeted subsidies that take into account not only income differences but also substantial heterogeneity in building characteristics.