Promote consumer incentives for heat pumps and efficiency measures, alongside penalties for fossil heating

Heat pumps are a mature, efficient heating technology with the potential to play a significant role in decarbonization of heating in buildings. In BNEF’s Net Zero Scenario, global heat-pump installations reach a cumulative 507 million by 2050. However, in most of the world, they struggle to compete economically with gas-fired boilers and furnaces or coal-based heating on an unsubsidized basis. While they are often more competitive than oil boilers on a lifetime cost basis, high upfront costs can still lead to long payback periods.

As such, promoting consumer incentives for heat pumps and efficiency while implementing penalties for fossil-fuel heating are priorities to decarbonize buildings. Such policies can include grants, low-interest loans and tax breaks in combination with carbon pricing on fossil heating. These interventions can help lower the upfront cost of heat pumps while improving the fossil-fuel-to-electricity price ratio. Policymakers should also be cautious when levying additional taxes on clean electricity, as they may distort the retail price or mute the impact of heat pump subsidies