Co-optimizing demand-and supply-side decarbonization efforts under political constraints: an integrated assessment for the French building sector

Reducing CO 2 emissions in residential buildings requires a comprehensive approach combining energy efficiency improvements, a switch to low-carbon heating systems (heat pump, wood furnace) and the decarbonization of heating fuels (electricity, natural gas, district-heating). The allocation of efforts between these three options in turn results from an interplay between centralized decisions from the government and decentralized decisions from households, each possibly distorted by market and political failures. In this paper, we examine optimal effort allocations to meet a certain emission reduction target with different energy efficiency subsidy designs. To do so, we use an innovative framework coupling Res-IRF, a technically-and behaviorally-rich model of household energy demand in France and EOLES, a technology-explicit model of the French energy system. We find that, in a first-best scenario with optimal energy efficiency subsidies, 10 million heat pumps are installed by 2050 and energy consumption for heating is reduced by 38%. In second-best scenarios comparing a uniform subsidy and a subsidy restricted to deep retrofits, we find that the latter entails 12% more energy savings and a e1.25 billion reduction, with a subsidy rate as high as covering 80% of upfront cost. The results are robust to alternative assumptions regarding the availability of low-carbon heating fuels. Finally, the total system cost is significantly higher when the demand and supply models are run separately, thus highlighting the added value of integrated planning