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Carbon pricing will have a limited impact in decarbonising the existing building stock

At the end of 2020 European Union leaders agreed to increase the bloc's emission-reduction target to at least 55% by 2030, confirming the EU’s commitment to becoming the first climate-neutral continent by 2050. If the EU wants to achieve this ambitious goal, it needs to increase its action to decarbonise one of its most energy-intensive and polluting sectors: buildings. As an example, the CO2 emissions from space and water heating in residential buildings represent 12% of the total EU emissions, as much as all cars in Europe combined. This is the case because more than 75% of the energy produced for heating homes currently comes from fossil fuels. Switching from fossil to low or zero-carbon fuels has an enormous potential in terms of CO2 savings—an estimated 291 tonnes of CO2 by 2050. In this context, the European Union is discussing the opportunity to establish a carbon price in the building sector. However, that is far from being simple. Before implementing carbon pricing, lawmakers must carefully assess its different modalities (from a tax to market-based instruments, such as an emissions trading system) and impact on the building sector, in light of its specificities. These include the low-price elasticity of energy demand, which shows that energy prices are inelastic in both the short and long term: energy consumption will fall by less than 1% in response to a 1% increase in energy prices. Such low elasticity could only be overcome with a significantly higher CO2 price. Moreover, carbon pricing for buildings may be ineffective due to the peculiar management or ownership structure of the sector. This generates split incentives which tend to blur the responsibilities and the related costs for fuel switch. Even if a fuel switch is achieved, a carbon price alone is expected to have a limited impact in terms of buildings’ energy efficiency gains, which are crucial for achieving decarbonisation quicker and with fewer resources through renovations—especially deep ones—of the existing building stock. Another issue with carbon pricing for buildings is it could lead to an increase in energy poverty —the inability to keep home adequately warm or cold—unless appropriate flanking measures are taken to protect vulnerable groups such as low-income households. These do not have the financial means to carry out renovation works, including the uptake of low-carbon technologies, and would therefore be more exposed to carbon pricing. While investing in renovations brings several benefits to both the tenant and the landlord, including cheaper energy bills, increased value of the building, higher flexibility and faster integration of renewables, a (high) carbon price would put the decarbonisation burden fully on the tenants by heavily increasing their energy bill. At the same time, it would not necessarily deliver the multiple benefits of renovations in terms of comfort and improved living conditions. For these reasons, if carbon pricing is to be introduced, its significant revenues should be reinvested in comprehensive building renovations, perhaps via the establishment of an EU renovation fund, and direct support for the most vulnerable consumers. Carbon pricing is therefore not an effective tool to decarbonise buildings as it could only provide limited incentive for fuel switching and for energy efficiency investments. Indeed, clear regulatory measures, adequate financial and technical assistance to overcome the existing administrative and regulatory barriers, as well as a systematic implementation of the Energy Efficiency First principle, are a more direct way to boost building renovations, which should triple if we want to reach the necessary energy savings to reach climate neutrality. In this respect, the ongoing revisions of the EU Energy Efficiency Directive, Renewables Directive, and Energy Performance of Buildings Directive will be very significant. Carbon pricing is not a silver bullet to decarbonise buildings across Europe. If implemented, carbon pricing should be considered just as a complementary policy that needs to be accompanied by clear targets and legislative measures to boost energy efficiency. This would allow the fair and efficient decarbonisation of our buildings, paving the way to meet the EU climate goals.

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