Distributional implications of selection into heating-system retrofit subsidies

Abstract

As the shift away from fossil fuel-based heating systems has become a political priority in many countries, subsidies for energy renovation measures have emerged as popular policy tools to support an equitable energy transition. In this paper, we use high-quality administrative data to study the distributional implications of self-selection into three heating-system retrofit subsidies aimed at phasing out oil heating in Finnish residential buildings during 2020–2022. By comparing subsidy applicants with households that carried out similar renovations before the subsidies were introduced and with those that have yet to renovate, we show that subsidy uptake is concentrated among better-off households — mirroring the pattern observed for earlier, unsubsidised renovations. Consequently, the studied subsidy programmes have not substantially altered the types of households replacing oil heating. We subsequently compare the applicants across the three distinct subsidy programmes and find that a tax-credit appears a particularly regressive form of subsidy while a simpler lump-sum instrument attracts a broader range of applicants. Our setting provides a valuable opportunity to isolate how subsidy design shapes distributional outcomes, offering insights for the design of future energy renovation policies.