Reshuffling the Cards

Rishi Sunak, the Prime Minister of the United Kingdom has created a new Department for Energy Security and Net Zero (DESNZ) after breaking up the Department for Business, Energy, and Industrial Strategy (BEIS). It remains to be seen whether this reform represents a pointless reshuffle of departmental responsibilities or a serious attempt to tackle the current energy crisis while delivering the government’s net zero commitments. Grant Schnapps MP is the Secretary of State for the DESNZ, while there is also a new Department of Business and Trade, headed by Kemi Badenoch, which has taken over the business policy responsibilities of the BEIS and merged them with the Department for International Trade. In 2016, then-Prime Minister Theresa May disbanded a previous incarnation of the new department, the Department for Energy and Climate Change (DECC) to allow businesses to have more of a say in low-carbon transition planning and encourage the private sector to play its part in policy formation. Critics of the BEIS had argued that having a separate place at the Cabinet Office for climate and energy would give the issues of climate change more resources and a higher profile.

The DESNZ has inherited the significant progress that the United Kingdom has made in increasing the share of electricity generated by renewable sources, but British political leadership on climate change issues has been weak since COP26 with no real initiatives at COP27 and no plans so far for COP28. Amid the political turmoil at the Prime Ministerial level, the BEIS has been led by four ministers from February 2020 until its disbandment on 7 February this year:  Alok Sharma, Kwasi Kwarteng, Jacob Rees-Mogg, and Grant Schapps. During this period while the European Union and the United States have been pushing forward with plans for green growth, despite the opportunities provided by the energy crisis of 2022, the United Kingdom has floundered. This lack of progress is particularly relevant to net-zero commitments in relation to the decarbonization of the household sector which is a serious problem since buildings account for around 19% of all UK greenhouse gas emissions (GHG). To reduce emissions from homes the government wants consumers to use less energy, make greater use of green heating systems (alternatives to gas and fossil fuels), and for home heating to be more efficient through better insulation. One answer to household heating decarbonization proposed by the International Energy Agency (IEA) and the European Union is a major roll-out of heat pumps, a tried and tested technology. The need for rapid adoption of heat pumps was also spelled out in a Net Zero roadmap published by the BEIS in January of this year by former Energy Minister Chris Skidmore, [1] but whether the DESNZ will capitalize on the 129 recommendations in this plan looks unlikely given the short-term focus of the current administration and the litany of recent government failures in encouraging heat pump installations.

The Household Heating Problem

The UK government’s plans to decarbonize the economy require a major restructuring of the household sector which accounts for around a fifth of all GHG which according to Official of National Statistics data for the country was around 100 million tonnes of CO2 equivalent in 2021. The carbon emissions produced by homes that have the collective impact of producing unwanted climate impacts is an extreme example of what economists call negative externalities, by-products of day-to-day economic activities that harm third parties who are not a party to the initial transaction. For example, a chemical factory producing fertilizer, although essential for agricultural productivity and creating economic value added in the food sector, also emits waste that is dumped into a river and/or the atmosphere creating negative externalities which impose higher social costs on other firms and consumers, for example, in terms of clean-up costs or health care costs.

Negative externalities are a case of so-called market failures in that the free market left to its own devices will produce too much of a product driving a wedge between private and social costs and reducing social welfare. The market failures caused by externalities that justify some form of public intervention to correct them have been explored by economists since the 1920s [2] following the work of Professor Pigou in Cambridge. For example, in Figure 1, it is assumed that without regulation a free market will produce Q1 of fertilizer, where the private marginal cost of production in the industry – labour, energy, nitrates used, etc. - is equal to the marginal revenue earned by producers from selling the fertilizer to agriculture. [3] Unfortunately, at this level of output, the social marginal cost in terms of pollution or bad health borne by the population, shown by the curve above the private marginal cost, is higher than the private marginal cost of producing the fertilizer at all levels of production and consequently, the free market has failed.  This means that there will be a potential welfare gain to society if the output of fertilizer is reduced to Q2 which can be defined as a socially optimum level of pollution. At that point, the social marginal cost is equal to the private marginal revenue earned by fertilizer producers. The problem is that this social optimum cannot be reached if producers are allowed to produce at a level that is most profitable for them. Market failures need to be corrected on the grounds of public policy by some form of public intervention. Correcting the externality, in this case, requires making estimates of the social costs and imposing subsequent restrictions on output needed to move to Q2. This can be reached either through some form of direct control, by using the price mechanism through taxes, or by legal redress through a system of court-imposed damages. Of course, recognizing the existence of a negative externality is one thing, and designing corrective policies is another. Public intervention assumes that the state has all the information needed about the wedge between social and private costs and acts impartially and competently to correct the problem. Unfortunately, in the absence of an omniscient, all-efficient, incorruptible state in most political systems governments can and do fail as badly as markets.

Figure 1: Market Failure

A contemporary example of dramatic state intervention to reduce an externality is currently happening in the Netherlands with government plans to reduce agricultural output by buying and closing 3,000 farms to reduce nitrous oxide and ammonia emissions by 50% by 2030 to comply with EU regulations. The Netherlands is one the most intensively farmed countries within the union with 1.1% of total farmland producing 6% of food, but it produces 10 tonnes of greenhouse gas emissions per hectare, four times the EU average. The Dutch government’s move to restrict output in farming is causing widespread disruption following a court case that has led the government to produce a thirteen-year €25 billion plan to make farmers exit the industry and reduce livestock production significantly.[4]

The existence of CO2 and other GHG emissions linked to climate change are effectively negative externalities on steroids generated by all economies in proportion to population, GDP, and the use of fossil fuels in energy production and consumption. Carbon emissions are, therefore, a by-product of the sum of the net value of all transactions, or GDP, with localized benefits in terms of rising living standards, or GDP per capita but with widespread costs affecting third parties spread across the world although exacerbated in some regions because of flooding, drought, rising sea levels, crop failures, forest fires, etc. The important issue from the perspective of economic policy is that the solution lies in either a reduction in the output of the products causing the problem (Figure 1) or more efficiently (since it allows output to remain unchanged) - a switch in the methods of production to a less damaging technology. The issue is more complex with GHG emissions since the output line for GHG is not fertilizer production, but GDP and ultimately living standards. In the case of carbon emissions, governments can use the price mechanism to tackle an externality through a ‘Pigovian’ tax to attempt to bring the private cost of emissions in line with social cost (measured by the length of the green line in Figure (1) – a carbon tax for example – or encourage a move to cleaner production techniques – cap and trade mechanisms for example. These are preferable to direct controls to reduce output which as the Dutch livestock farming case shows can involve civil unrest and violence.

Heating homes and businesses, which obviously provides economic benefits to users, but results in carbon emissions is another example of a negative externality that requires some form of public intervention to reduce them to an optimal level. Only a few extreme hillbilly free market economists, and/or climate deniers would refute that the decarbonization of the household sector to meet net-zero targets requires either direct state control because of a market failure, with all the social problems this entails, or more nuanced solutions that exploit market forces in a publicly guided direction. Unfortunately, a carbon tax on households to tackle emissions given that the generators of the externality are not just consumers, but also voters and taxpayers at a time of rising energy costs is not just infeasible but would be political suicide in polities where governments are elected.  To reduce the output of carbon-emitting home heating systems, therefore, governments are faced with adopting policies such as restricting the use of fossil fuel methods such as gas or oil heaters while encouraging the use of carbon-efficient technologies through subsidies.

The most efficient means of decarbonizing the heating sector of economies with existing technology is through a major investment in heat pumps powered by renewable electricity. Inevitably, increased use of heat pumps replacing alternative heating methods such as gas boilers will raise global electricity demand with the International Energy Agency (IEA) estimating that the share of electricity in heating for buildings and industry will double between 2021 and 2030 to 16% if country climate pledges are met. However, the relative efficiency of heat pumps means that they will contribute less than a tenth of the 25% expected rise in global electricity demand. The importance of heat pumps in transforming the global heating sector was emphasized by the International Energy Agency (IEA) in its Net Zero Roadmap report of May 2021 [5] which encourages a dramatic rise in their use while encouraging governments to end the sale of stand-alone boilers powered by fossil fuels such as gas, coal, and oil by 2025. The IEA backed up its recommendations on this technology in the Future of Heat Pumps[6] published last year and predicted that heat pumps could meet 50% of global heat demand by 2045 and two-thirds of heat in the developed OECD countries by 2050. To achieve these targets, the total number of installed heat pumps globally needs to rise from 180 million units in 2020 to 600 million units in 2030 (almost quadrupling), and 10-fold to 1.8 billion units in 2050.

Installing a heat pump, which can also double as an air-conditioner by cooling a home in summer reduces the negative externalities due to GHG emissions, but also conveys a private advantage to a household because reduced energy costs produce annual savings in terms of lower bills. There are also potential private benefits in raised property values and for the economy greater disposable income and commercial profits which produces positive income multiplier effects. In terms of planned decarbonization, there are other social benefits known as positive externalities, as opposed to negative externalities. A positive consumption externality is when an individual or firm consumes a good or service, and this action provides a benefit to an unrelated third party or to the rest of society. The purchase and use of heat pumps reduce the risk of and social costs of climate damage and fortunately the value of this social benefit can be estimated thanks to carbon pricing. For example, it is estimated that the number of heat pumps sold in Europe in 2022 replaced roughly 4 billion cubic meters of natural gas avoiding about 8 million tonnes of CO2 emissions which is worth nearly €0.8 billion at current carbon market prices a social benefit which is not factored into heat pump industry sales turnover, but which nevertheless can be realised because of public policy.

A positive externality is also an example of a market failure but in this case, a free market will underproduce a good that will promote social welfare if output had been higher. This creates another argument for government intervention to encourage more output either through direct production or through a subsidy – the opposite of a Pigovian tax. This is the same basic case that was used for subsidizing renewable energy production to help recoup upfront capital costs until generating costs fall below fossil fuel costs.  With heat pumps, high upfront costs can deter consumers of heat pumps since in the UK the cost of purchasing and installing an air‐to‐air heat pump is typically between £10,000 and £15,000 before any subsidy, a lot more expensive than natural gas boilers in most major markets. [7] There is also another potential market failure in the case of heat pumps and most big-ticket consumer purchases - asymmetric information – when there are quality differences between products and one party to a transaction has more information than the other. Nobel prize-winning economist George Akerlof in a study of the second-hand car market demonstrated that under certain conditions a market can collapse[8] which again requires some form of government intervention if the product is seen as desirable.
Surveys by companies including Samsung and Centrica identify several barriers to the use of heat pumps ranging from consumer concern about the initial upfront costs to a lack of information about potential disruption during installation, if changes to radiators, pipe works, or insulation are needed, and how to find skilled and competent installers[9]. Unfortunately, time is running out to decarbonize the household sector and while heat pumps appear to be low-hanging fruit, to achieve the expansion needed by the IEA, household heating markets will need intervention by governments to discourage the use of fossil fuel-based heating systems that have lower upfront costs for consumers than heat pumps while providing financial incentives and information to encourage the use of heat pumps. According to the IEA, incentives currently exist in over 30 countries, accounting for greater than 70% of world heating demand. 

Unfortunately, the richer OECD countries generating GHG emissions and designing climate change policies are political systems based on representative systems where households are also voters and taxpayers. In these political systems, self-interested and/or incompetent politicians, bureaucrats, and regulatory agencies along with rent-seeking pressure groups are particularly likely to create what have been called government failures that make the mitigation of market failures more problematical. Energy economist Dieter Helm has explored in some detail with reference to emissions trading and renewables policies using the findings of the branch of economics known as public choice theory [10] how taking account of government failures can help to improve policy design and limit the impact of the climate change 'pork barrel' consequences.[11] While countries like China or the UAE, the host of COP28, can play design longer-term policies to decarbonize their economies, as we will see in this article in representative systems there is a temptation for quick or inconsistent solutions. While the United States and the European Union are using industrial and trade policies to back up their green transformations, as we will argue the UK has been particularly inept at solving the problem of decarbonizing its household sector.

Heat Pumps and European Decarbonisation

Encouraging the installation of heat pumps in homes and businesses will, therefore, have a significant effect on reducing carbon emissions across the OECD countries in Europe. The European Union has already identified heat pumps as the main decarbonization solution for heating buildings as part of the European Green Deal [12]and according to a report by analysts Wood Mackenzie[13] the demand for the energy supplied by heat pumps, a vital part of Europe’s energy equation, is expected to rise from 77 TWh in 2022 to 611 TWh by 2050, the year of net zero. There are currently large differences between countries in the use of heat pumps which has held back the total number of installations in Europe which stood at around 17 million by 2021, but Wood Mackenzie predicts this figure will need to more than double to 45 million in the residential sector alone by 2030. This is attainable at an annual average rate of growth of 15% per annum, lower than recent rates of growth, but this expansion in heat pump installations would significantly reduce Europe’s reliance on gas, coal, and oil while providing a boost to employment and reducing households’ heating costs.

According to published data from the European Heat Pump Association (EHPA) before last year’s energy crisis, [14] heat pump sales grew by 34% in Europe, including non-EU members, in 2021 with 2.18 million units sold across its 21 member countries. The energy crisis caused by Russian military operations in Ukraine has given a further boost to the installation of heat pumps throughout a beleaguered Europe in 2022. In response, to the Russian invasion and the threat to oil and gas supplies the European Union published a policy document in May 2022 REPowerEU [15]with the aim of accelerating the green revolution and diversifying the source of energy. The package is aimed at changing eco-design regulations for heating appliances by 2029, but without waiting for these adaptations more than a dozen EU countries have already announced bans on the use of fossil fuel boilers in new or existing residential buildings in the coming years. Although fully comparative European data for last year is not yet available some published country figures and estimates are demonstrative. Early data by the EHPA from 16 European markets estimates around 2.6 million units sold in 2022, a growth rate of 41% bringing the total number of connected heating heat pumps (both air-to-air and ‘hydronic’ or water-based) and hot water heat pumps to around 20 million. The number of heat pumps sold in 2022 replace roughly 4 billion cubic meters of natural gas, generating positive externalities by avoiding about 8 million tonnes of CO2 emissions. However, as Figure 2 illustrates the annual rates of growth across European countries varied significantly from 102% in Poland to 17% in Portugal.

Figure 2: Heat Pump Sales Annual % Growth by Country 2022

Source: EHPA

The progress of each European country, both EU, and non-EU towards decarbonizing heating has been extremely mixed. In 2022, five countries contributed 62% of all heat pump unit sales in Europe - Italy, France, Germany, Sweden, and Finland –three of them with large populations, but this expansion is not solely attributable to relative size since these five countries accounted for just over half, 51.6% of all Europe’s households, an outperformance ratio of 1.2 times. In Germany, the largest country with 41 million households, heat pump sales underperformed with a sales/household performance ratio of only 0.45. Nevertheless, the country still experienced a 53% increase in the market in 2022 with 236,000 heat pumps sold for heating buildings. The German government has assumed that in 2024 sales of heat pumps are expected to double to reach more than 500,000 since as of January 1 of that year all newly installed heating systems will have to be powered by at least 65% renewable energy systems. According to current government plans, up to 5-6 million electric heat pumps are expected to be installed in buildings in Germany by 2030. The most significantly impressive relative national performances in terms of heat pump sales were in Sweden and Finland with sales of 215,373 and 196,359 showing high ratios of 3.1 and 5.5 greater than Italy’s 1.5 and France’s ratio of 1.2.   Denmark with sales of 88,883 units, an increase of 20%, and Norway, the country with the coldest climate in Europe, with sales growing by 25%, produced identical ratios of 2.3. Heat pump sales in Poland increased strongly by 102% in 2022 with 195,480 units sold, but this is proportionate to the number of households with a ratio of 1.1. The information on unit sales and performance ratios by country is shown in Figure 3. It shows that heat pump sales in most countries are performing broadly in line with population size (1.2 to 0.8) apart from some strong outperformers discussed above and a small number of underperformers, such as Belgium, 0.51, and Germany, 0.45. The real outlier in Europe is the United Kingdom with the lowest performance ratio of 0.17 which will be discussed in the next section.

Figure 3: Heat Pump Unit Sales by Country and Performance Ratios 2022

Source: EHPA

Potential market failures due to the significant differences in the initial investment costs for heat pumps as compared with fossil fuel-based heating devices exacerbated by information asymmetries means that financial support schemes are necessary to overcome initial consumer resistance. A range of EU legislative initiatives [16] has encouraged EU Member States to establish direct subsidy and other support schemes for heat pumps which cover measures such as low-interest rate loans, grant programs, and tax rebates which often vary between lower and higher income households for equity reasons. The REPowerEU plan passed in 2022 in response to the energy crisis focuses on doubling the rate of deployment of heat pumps through dedicated financing and fiscal incentives and in March of this year the European Commission announced changes to existing state aid guidelines to help national governments further boost green technologies. The relaxation of state aid support is a trade policy response to the USA’s Inflation Reduction Act and allows support for heat pumps, wind turbines, and electric battery manufacturing to equalize competition with US manufacturers. According to the EHPA the European domestic industry is still relatively strong with over 60% of heat pumps sold manufactured in Europe.

The market failure problem arising from the high upfront cost of heat pumps relative to gas boilers which necessitates state encouragement of heat pumps is serious and the report by Wood Mackenzie suggests that the relative success of the heat pump sector across European markets is closely related to the amount of financial support provided by the state. The existence and size of support impact directly on the expected pay-back time for households installing heat pumps compared with oil or gas burners. Comparing the data in Figure 3 with the expected pay-back time in years for households across Europe Figure 4 shows that in general, except for Finland, reducing the pay-back time in years to less than 8 years had a positive impact on the performance of heat pump sales in terms of the number of households in a country.  

Figure 4: Heat Pump Investment Payback Time

Source: Wood Mackenzie, EHPA

Unfortunately, identifying a market failure and sculpting an appropriate policy response by a government to correct it is not always easy. The EHPA has called for policymakers to outline a long-term ambition for heat pumps which should be reinforced through consistent policies which will require subsidies and other support while heat pumps are more financially expensive than fossil fuel heating systems. The predictions of the public choice literature indicate that the electoral cycle often dictates short-term solutions in defiance of the famous advice of Rabbi Yehosua that “there is a short path that is long and a long path that is short.”[17] Elected governments, prone to popular pressure and uniformed voters too often take the “short path that is long”. At the EU level where voting pressure is less than at the national level, the REPowerEU plan recommends that the Member States should refrain from incentivizing fossil fuel boilers and direct these subsidies to heat pumps instead and pay more attention to supporting training and R&D. The European heat pump sector has a large employment potential, but there are not enough trained workers to fill them. The International Energy Agency estimates that the REPowerEU’s plans need 7 million more heat pumps connected every year by 2030, up from around 2 million in 2021. This will require more installers and other trained staff and the EHPA has calculated that a minimum of 500,000 skilled full-time equivalent employees by 2030 in Europe is needed. Fixing these problems, however, requires national solutions where electoral cycles, pressure group activity, and fiscal conservatism dictate the agenda.

What did the Romans do for us?

An interesting case study of government failure in the decarbonization of the household sector is provided by the almost opposite examples of Italy and the United Kingdom. In the latter country, support schemes could be called too little too late, while in Italy the motto might be too much too soon. In both countries, governments have failed to engage in long-term planning with negative consequences which will set back the decarbonization of the household sector.

In the United Kingdom whose politics have been blighted by continual infighting within the governing party, only a paltry amount of 43,000 heat pump units were sold in 2021, up by 37% on 2020 sales, but less than 2% of European sales total despite the relatively large size of the UK market. This low sales figure occurred despite the existence of a subsidy scheme in place between July 2020 and March 2021 which allowed grants for heat pumps and other renewable energy home investments, but this flawed scheme had little impact on the market. The Green Homes Grant Voucher Scheme was introduced in July 2020 as a ‘green recovery’ policy from the pandemic with an estimated £2 billion budget. The scheme allowed households to apply for vouchers that could cover two-thirds of the cost of home improvements to cut energy bills and carbon emissions up to a value of £5,000. Lower-income households receiving income-based, or disability benefits could receive 100% of their home improvement costs covered, up to £10,000. The aim was to provide grants to 600,000 households, or 2.7% of the UK’s total households with £500 million set aside for less well-off homes. This means that at least 50,000 of these households were set to benefit. The home improvements covered by the vouchers also included primary investment in solar thermal panels, ground or air source heat pumps, biomass boilers, and various forms of insulation spending. Unfortunately, after a year and a half of operation, in March 2021 the government announced it would close the scheme to new applicants and end it a year later. By March 2022, 39,000 vouchers had been issued only 6.5% of the originally planned total. The scheme is a classic case of government failure and has been criticized as such by the National Audit Office[18]Parliament’s public expenditure value for money watchdog. One major problem was that the government did not consider the lack of consumer information among households in the market and the problems arising from a lack of trained and experienced installers.

Unfortunately, in the political turmoil of the United Kingdom that has continued to reign no lessons have been learned. In May 2022, the UK government launched the Boiler Upgrade Scheme (BUS) with a £450 million budget intended to issue vouchers to persuade households to upgrade gas-fired boilers to heat pumps or other low-carbon alternatives. The impact of this scheme has been equally disappointing. In February of this year, the House of Lords Environment and Climate Change Committee concluded that the BUS is failing to deliver.[19] Despite a budget of £150 million a year, the committee found that by the end of January 2023, only £49.7m in vouchers had been issued, equating to 7,641 installations, according to Ofgem figures, a third of the total possible. The government has failed to address the information market failure and the Upper House committee said that public awareness of low-carbon heating systems was “very limited” and promotion of the scheme had been “inadequate”. It also blamed a shortage of heat pump installers and “insufficient independent advice for homeowners” for the lack of take-up. Furthermore, the government has made things worse because of rent-seeking pressure from the hydrogen lobby group and the Committee stated that: “Hydrogen is not a serious option for home heating for the short to medium-term and misleading messages, including from the government, are negatively affecting take-up of established low-carbon home heating technologies like heat pumps.”  Therefore, despite the existence of subsidies, there are still no signs of a heat-pump revolution in Britain and the country’s isolation from the EU and the Chancellors’ budget constraints make one less and less likely.

Preliminary estimates for 2022 from the EHPA indicate unit sales of just under 60,000 heat pumps which although a year-on-year rise of nearly 40% is still far below the government’s targets. To put this in context Boris Johnson’s Ten Point Plan to a Green Industrial Revolution[20] published in November 2020 envisaged a policy target of installing 600,000 heat pumps every year until 2028 while the Committee on Climate Change (CCC) has suggested that a stock of 3.3 million heat pumps is needed to be installed in existing homes by 2030 rising to 8 million by 2035 to meet net-zero targets. [21] If sales continued to grow at a cumulative annual growth rate of 40% the 2030 target would be met by 2033, but this is unlikely given the lack of trained installers and the current squeeze on living standards caused by inflation and rising interest rates. Currently, as Figure 5 shows, the UK’s disappointing progress places the country at the bottom of the league of all other European nations in terms of sales per 1,000 households while as shown in Figure 3, the UK generated a very low figure of 0.17 for heat pump sales to household share performance ratio. To give an example of the UK’s relative international decarbonization failure, heat pump sales in the Netherlands, a country with a similar climate, were 2.6 times higher than in Britain despite a size advantage of having roughly 6 times the population.

Figure 5: Heat Pump Sales per 1,000 households in 2022

Source: EHPA

In contrast, the generous financial support for heat pumps in Italy shows that government failure can also occur because of over-enthusiastic subsidy schemes. Figure 4 based on Wood-Mackenzie estimates showed that while the pay-back time for installing a heat pump was around 8 to 12 years in the United Kingdom- in Italy it was zero. In May 2020 a ‘Super Bonus’ was announced, and later extended until the end of 2022, to pay homeowners 110% of costs to eco-proof their homes. The initiative had a maximum cap of €100,000 per home and was offset against taxes for the next five years. Homeowners could claim the subsidy by subtracting the costs of works, such as installing insulation systems, heat pumps, and solar panels or replacing an old boiler, from their tax returns over a five-year period, or pass the onus on to the building contractor, who subtracted it from their taxes or sold the credit to a bank, which in turn was refunded by the government. The scheme attracted a high take-up as witnessed in the sales of 1.1 million heat pump units between 2020 and 2022, but by then it had cost the Italian government more than €110bn in lost tax revenue, had increased building labour and material costs and has been subject to an estimated €4.4bn of fraudulent claims. The scheme was a policy of the populist Five Star Movement, but the new Prime Minister Giorgia Meloni’s cabinet approved an urgent law ending the scheme this year. The result of the uncertainty could set back heat pump sales for years as construction work has stopped as contractors faced a lack of liquidity after banks stopped buying the tax credits. ANCE, the national building association, has estimated that 25,000 firms could go bankrupt.

The Short Path that is Long

This article has shown that despite the aim of decarbonizing the household sector the path has been bumpy across Europe. In some countries, market failures have been compounded by government failures, particularly in the United Kingdom and Italy and there has been a conspicuous absence of long-term planning. In the United Kingdom, where the rollout of heat pumps is the worst in Europe, the market failure problem is caused by higher capital costs daunting buyers despite the long-term social benefits The capital cost is a lot higher than gas boilers and while the government grants can reduce this gap, there also needs to be favourable financial deals from innovative mortgage lenders which account for the value added to the property. This comes from improving energy ratings, cheaper running costs (when there is a peripheral investment in insulation, solar panels, and battery storage) and possibly from a future plan for the securitization and trading of the value of carbon emissions avoided.

The capital cost issues for households are compounded by technical and informational problems. Heat pumps provide less heat than gas boilers and work most efficiently in well-insulated homes. They often require water-storage tanks, too, which have over the past few decades been replaced by combination boilers so installing a heat pump can require expensive refitting and since they run almost continuously in winter and in summer if used as an air-conditioning unit, their lifespans are relatively short. In January the BEIS published a Net Zero Review for green growth and [22] the new Department for Energy Security and Net Zero must start work on planning for a heat pump revolution. One of the recommendations of the so-called Skidmore report is that the government must urgently adopt a 10-year mission to make heat pumps a widespread technology in the UK and regulate now for the end of new and replacement gas boilers by 2033 at the latest. Another recommendation is to consider a Net Zero Homes Standard for the future, “as homes that have taken the appropriate steps to be as efficient as possible through a mixture of fabric and low carbon heating measures will be more financially desirable to live in, buy, and sell.” If Britain does not act on these recommendations this year it will fall further behind other European countries and miss its own net-zero deadlines.

[1] https://www.gov.uk/government/news/net-zero-review-uk-could-do-more-to-reap-economic-benefits-of-green-growth

[2] Welfare Economics

[4] https://www.theguardian.com/environment/2021/dec/15/netherlands-announces-25bn-plan-to-radically-reduce-livestock-numbers

[5] https://www.iea.org/reports/net-zero-by-2050

(6) https://www.iea.org/reports/the-future-of-heat-pumps 

[7] https://www.evergreenenergy.co.uk/heat-pump-guides/much-heat-pump-cost/

[8] https://www.jstor.org/stable/1879431

[9] https://www.ft.com/content/5de1a278-9d49-441d-ab67-fe6aa0f3ec9b

[10] https://www.econlib.org/library/Enc1/PublicChoiceTheory.html

[11] https://www.jstor.org/stable/43664559

[12] https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en

[13] Europe to install 45 million heat pumps in the residential sector by 2030 | Wood Mackenzie

[14] https://www.ehpa.org/market-data/

[15] https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/repowereu-affordable-secure-and-sustainable-energy-europe_en

[16] These include the Renewable Energy Directive, the Energy Efficiency Directive, and the Energy Performance of Buildings Directive.

[17] “Once a young child got the better of me. I was traveling, and I met with a child at a crossroads. I asked him, ‘which way to the city?’ and he answered: ‘This way is short and long, and this way is long and short.’ I said, “I’ll take the ‘short-long’ way. He directed me off the road and down a path and I soon reached the walls of the city but found my approach obstructed by thorns and brambles. I could hear the bustle of the marketplace and smell the warm bread from the bakeries, but I could not enter. So I retraced my steps and found the child again and said, ‘My dear boy, did you not tell me that this is the short way?’ The child answered, ‘Did I not tell you that it is also long?'” https://noahfarkas.com/2020/02/05/beshalach-the-long-short-path/

[18] https://www.nao.org.uk/wp-content/uploads/2021/09/Green-Homes-Grant-Voucher-Scheme.pdf

[19] https://committees.parliament.uk/committee/515/environment-and-climate-change-committee/news/186300/the-boiler-upgrade-scheme-is-failing-to-deliver-says-lords-committee/

[20] https://www.gov.uk/government/publications/the-ten-point-plan-for-a-green-industrial-revolution

[21] https://energysavingtrust.org.uk/the-future-of-heating-in-the-uk-heat-pumps-or-hydrogen/

[22] https://www.gov.uk/government/news/net-zero-review-uk-could-do-more-to-reap-economic-benefits-of-green-growth