Are Heat Pump Subsidies Regressive?

New research finds little relationship between heat pump adoption and household income.

One concern with subsidies for low-carbon technologies is that they tend to go predominantly to high-income households. Previous research has shown, for example, that the 20% of households with the highest income receive 60% of U.S. federal tax credits for rooftop solar and 90% of U.S. federal tax credits for electric vehicles.

My new Energy Institute working paper finds that heat pumps are an important exception. Using newly available U.S. nationally representative data, the paper shows that there is remarkably little correlation between heat pump adoption and household income.

This lack of correlation has important implications for a growing number of federal, state, and local subsidies aimed at heat pumps, including the new $2,000 federal tax credit. Most importantly, the results suggest that the distributional impacts of heat pump subsidies are likely to be quite different from previous low-carbon technology subsidies.

Near Zero Correlation

The figure below shows how the percent of U.S. households with a heat pump varies by annual household income. Nationwide, 15% of U.S. households have a heat pump as their primary heating equipment, and this is essentially the same for all levels of household income, ranging from the bottom of the income distribution (less than $30,000 annually) to the top ($150,000+).

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This figure was constructed using household-level microdata from the latest wave of the Residential Energy Consumption Survey (RECS). Conducted approximately every five years by the U.S. Department of Energy, RECS collects rich data about household energy-related durable goods and behaviors. The total sample for the 2020 RECS is 18,496 households, including more than 2,600 households with heat pumps.

Is this Surprising?

Yes! I informally polled a number of my colleagues prior to sharing this figure and all expected there to be a positive correlation between heat pump adoption and income. High-income households tend to have more of almost everything, and a new heat pump can cost more than $8,000, so I definitely was not expecting this.

My expectations were also driven by the evidence I’ve seen in the past from other low-carbon technologies. Building on previous related research, the figure below uses these same RECS data to plot U.S. adoption rates by income for electric vehicles, solar panels, LED light bulbs, and energy-efficient clothes washers.

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There is a strong (and statistically significant) positive correlation in all four cases. Households in the highest income category are, for example, ten times more likely to have an electric vehicle, and five times more likely to have solar panels, relative to the lowest income category.

Previous research (here and here) has argued that signaling to others is a key driver of these types of decisions, but these results suggest that "conspicuous conservation" is not the only factor. Notably you see this positive correlation for technologies that are highly visible to other households (e.g. EVs), as well as for less visible technologies like clothes washers.

Other Determinants

Instead, the paper shows that heat pump adoption is strongly correlated with geography, climate, and electricity prices. The figure below maps heat pump adoption by state.

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Heat pumps are most common in southern states. South Carolina (47%), North Carolina (43%), Alabama (42%), Tennessee (40%), Mississippi (33%), Florida (33%), Virginia (32%), and Georgia (30%), all have adoption rates twice the national average.

Heat pumps are relatively rare throughout most of the rest of the country. Arizona (30%), Washington (13%), and Oregon (15%), are notable exceptions, but otherwise low single-digit levels of heat pump adoption are typical throughout the West, the Midwest, and the Northeast, as well as Hawaii and Alaska.

The paper shows that climate and electricity prices matter too. Regression evidence shows, for example, that a one standard deviation increase in heating degree days decreases heat pump adoption by one-fifth, while a one standard deviation increase in electricity prices decreases heat pump adoption by one-third. The latter finding underscores Jim Sallee's recent post arguing that high electricity prices are a barrier to building electrification.

Interestingly, the lack of correlation between heat pump adoption and income persists even in richer analyses which control for geography, climate, and other factors. For example, when you restrict the sample to only homes in southern states, the basic pattern is very similar, albeit at a higher overall adoption level. See figure below.

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Policy Implications

These patterns have important implications for a growing number of subsidies aimed at heat pumps. The Inflation Reduction Act provides two different types of subsidies: (1) income tax credits and (2) direct point-of-sale rebates.

The tax credit has been available since January 1, and is equal to 30% of the upfront cost of a heat pump, up to a maximum of $2,000. Thus if a household spends $6,000 purchasing and installing a heat pump, it can receive a tax credit of $1,800. This tax credit has long been available for heat pumps, but at much lower subsidy levels, e.g., only $300 during 2022.

The rebates are being implemented via a grant program to states. States will have some discretion with regard to implementation details, but the rebates will be generous (up to $8,000 per household), and only available for households with annual income below 150% of median local income. Funding for these rebates will likely be distributed to state agencies in 2023, with rebates available to consumers by late-2023 or 2024.

Conclusion

The main takeaway is that, at least in the United States, there is very little correlation between heat pump adoption and household income.

Of course, this does not guarantee that heat pump subsidies will be equally adopted by all income groups. There are important issues of salience, tax refundability, credit constraints, landlord-tenant asymmetries, and other issues which mean that it will be important to revisit this question in the future once these subsidies have been in place and data becomes available.

Still, the results suggest that heat pump subsidies have the potential to be much less regressive than previous experiences with solar panels, electric vehicles, and other low-carbon technology subsidies which have tended overwhelmingly to go to households at the top of the income distribution.

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Suggested citation: Davis, Lucas "Are Heat Pump Subsidies Regressive?", Energy Institute Blog, UC Berkeley, June 5, 2023, https://energyathaas.wordpress.com/2023/06/05/are-heat-pump-subsidies-regressive/

Keep up with Energy Institute blog posts, research, and events on Twitter @energyathaas.

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Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is a Faculty Affiliate at the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Research Associate at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.