Policy pressure to retrofit Germany's residential buildings to higher energy efficiency standards: A cost-effective way to reduce CO2 emissions?

Abstract

Germany's climate goals require over 75% of its housing stock to be retrofitted for energy efficiency. An important question for Germany and other countries is, what minimum energy efficiency standard should be mandated for housing retrofits so as to reduce CO2 emissions economically efficiently? It has long been known that the marginal costs of energy efficiency increase as standards are pushed higher, and therefore the marginal costs of CO2 abatement increase, but at the same time energy consumption reduces, thereby reducing CO2 emissions. This paper investigates where the social optimum lies between these two effects. In addition to a large database of house sale advertisements containing price and energy efficiency data, it uses two semi-official data sources of modelled and actual energy efficiency upgrades in Germany. It finds that retrofitting to a modestly high standard of about 70 kWh/m2/y entails marginal costs of CO2 abatement comparable to current CO2 prices. However, each step to a higher standard increases these by up to an order of magnitude, with absurdly high marginal costs of CO2 abatement for the highest standards. German policymakers are currently pushing for higher minimum standards, but money could better be spent retrofitting more houses to less stringent standards.