Should energy efficiency subsidies be tied into housing prices?

Heat pumps are a key technology for improving energy efficiency as they can significantly reduce energy costs and emissions. Given the significant role of heat pumps in carbon neutrality pathways, and pressure for related national energy efficiency programs, it is important to examine economic profitability of heat pump investments and their relative environmental and social benefits. This paper aims to answer the following main research question: are areas with lower housing prices and income less likely to invest into energy efficiency? The paper finds that in Finland heat pumps are already very profitable and converting buildings' heating systems into heat pumps creates major environmental and economic benefits for the residents. The cost of heating and heat pump investment costs does not vary between locations whereas housing prices, rents and income do. Neighborhoods with lower housing prices have less motivation and capability to invest into heat pumps. Urban areas with positive housing price development, higher income and better financing options will likely invest into energy efficiency without subsidies. Potential subsidies should be allocated into areas with lower housing prices, because emissions are evenly distributed, and lower income areas pay relatively more for energy. Energy efficiency subsidies could be tied into housing prices or more specifically into property tax, which is universally collected in most countries. Property tax could be used to guide energy efficiency investments into locations where they would not be carried out otherwise. For areas that do not need subsidies, this paper recommends that awareness should be increased, because the economic and carbon emission reduction potential of energy efficiency measures is still not well understood. (letter)