Worst First: Thermal Retrofits, Carbon Prices, and Inequality

Abstract

The energy price crisis following Russia’s invasion of Ukraine exposed the heightened vulnerability of low-income households to rising heating costs, particularly those in energy-inefficient buildings. Using data from the German Socio-Economic Panel (SOEP), this study examines the distributional impact of heating costs across income deciles and evaluates the effectiveness of policy interventions. We find that low-income tenants are the most vulnerable segment of the population, with elevated risks of energy poverty. While tenant-landlord carbon cost-splitting can partially shield low-income households from carbon costs, they remain exposed to energy price risks. In contrast, a “Worst-First” retrofit strategy, prioritizing upgrades in the least efficient buildings, substantially reduces heating costs and mitigates energy poverty. Our findings highlight the need for targeted retrofit policies to ensure both equitable decarbonization and economic relief for vulnerable households.