How can we expect people to invest in heat pumps if we deliberately make electricity more expensive than fossil gas, oil and coal? That’s like taxing water and subsidising sugary drinks, argues Samuel Thomas.
Many governments recognise the link between sugar consumption, obesity and diabetes. As a result, sugar taxes are now in place in more than 50 jurisdictions, including nine European countries. The UK and Ireland introduced modest sugary drinks taxes in 2018. One year later, sugar consumption from soft drinks in the UK had fallen by 10%.
If only reducing carbon emissions from space heating were so straight forward: Stick a carbon price on the fuels used in buildings and emissions will fall. The problem is that carbon emissions and sugar are different beasts.
Sugar-sweetened beverage demand is price elastic — an increase in price leads to a bigger proportionate fall in consumption. Consumers can easily switch to low-sugar alternatives and suppliers can reduce the amount of sugar in their drinks.
Demand for fossil fuels used in buildings is very price inelastic — an increase in price leads to only a small decrease in consumption. Switching heating fuels is not as easy as reducing sugar intake. Building owners need access to finance to invest in new technology and often fabric improvements too.
Driving decarbonisation demand and supply of equipment
Organising and coordinating a building retrofit can be complex. When considering new heating systems, we tend to stick with the technology we already have and are familiar with.
People also tend to value costs today over savings tomorrow, meaning that they are disinclined to invest in more expensive heating systems even when they will be cheaper to run. Installers are often geared up to replace gas and oil boilers, but just with newer models burning the same fossil fuels. The list of market failures and barriers is too long for carbon pricing to overcome on its own.
Regulation, reinforced by a raft of financial and supporting measures, is needed to drive both the demand for decarbonisation and the supply of equipment. Minimum efficiency standards on heating equipment can effectively drive out the market availability of new fossil fuel boilers, as evidence from Norway and Denmark clearly show.
Minimum energy performance standards on existing buildings can bring forward building renovations and heating system replacements by setting dates by which buildings must comply with energy or carbon performance criteria, as already effectively implemented in the Netherlands and Scotland.
Clean heat standards, regulating heating fuel suppliers to make emissions reductions, could step up the rate of progress on buildings decarbonisation.
Does that mean that we don’t need to put a carbon price on emissions from the buildings sector? Quite the opposite. We need an all-of-the-above strategy, including carbon pricing, to deliver on more ambitious climate targets.
By 2030, according to the Commission’s analysis, the buildings sector will be expected to decrease its direct carbon emissions by 60% from 2015 levels, driven by a combination of building renovations and switching from fossil fuel heating to electrically powered heat pumps.
This is a massive task. Currently, the combined impact of taxes and levies on electricity prices reinforces electrical energy efficiency efforts but does nothing to support fuel switching. In fact, it positively acts against the electrification of heat, the main option available for low carbon heating in buildings to 2030.
Across the EU, electricity is more expensive than gas, in large part owing to taxes and levies. In Germany and Belgium, electricity is more than five times the price of fossil gas. Rebalancing taxes and levies, to lower the price of electricity and increase the price of fossil fuel alternatives, is essential if we are going to be asking people to switch to electrically powered heat pumps.
Some EU member states have recognised the need for carbon pricing. Sweden and Finland have had carbon taxes on heating fuels for decades and have very little fossil fuel use left in the buildings sector. Denmark, France, Germany, Ireland and Luxembourg are amongst the countries to have recently introduced or ramped up carbon pricing measures.
What these member states have in common are Effort Sharing Regulation (ESR) targets that require additional policy effort to meet. The ESR provides member states with legally binding targets for emission reductions, including in the buildings and transport sectors.
Increasing ESR targets across member states, in line with the EU’s new 55% emission reduction goal, would maintain the environmental integrity of the EU’s climate target architecture. It would also allow member states to introduce carbon pricing and other policy measures in a managed way, as part of a broader policy framework.
Managing a carbon price introduction
What would a managed introduction of carbon pricing look like?
First, carbon prices should rise gradually and predictably, to better promote investment and shield vulnerable consumers from the risk of substantially higher fuel prices. This can be achieved through either a carbon tax or an emissions trading system (ETS) with a price corridor where price movements are limited.
With Fit for 55-proof ESR targets in place, this approach to carbon pricing could be introduced either by member states or at the EU level.
Second, carbon revenues should be allocated to buildings emissions reduction policies and targeted to support low income, vulnerable and energy poor households. To achieve a rapid and just transition, using carbon revenues as they are collected to fund targeted renovation projects will be insufficient.
We will need to bring forward future revenues — for example through climate bonds — and supplement these with other public and private sources of finance, providing a huge wave of support for those on low incomes to renovate their homes and decarbonise their fuel supply. Carbon pricing, regulation and supporting measures must work together.
The buildings sector needs to decarbonise at a rapid rate over the coming decade, using technologies that are cost-effective from a societal perspective. Regulation and supporting measures will be vital, but so too will carbon pricing.
Right now, we are making the political choice to make electricity more expensive than other heating fuels. At the same time, we need to switch from fossil fuels to renewable alternatives. How can we expect people to invest in heat pumps if we deliberately make electricity more expensive than fossil gas, oil and coal?
That’s like taxing water and subsidising sugary drinks. It’s time to act on pricing and sweeten the deal for buildings decarbonisation.