The landlord-tenant dilemma: Distributional effects of carbon prices, redistribution and building modernisation policies in the German heating transition

A carbon price on heating fuels aims to reduce the use of fossil energy in the heating sector. However, it has a greater effect on tenants than on landlords. The heating transition requires adequate building insulation for efficientuse of low-temperature technologies. To encourage this particular kind of investment, German landlords are given the option to apply a modernisation levy of up to 8% on top of rents. Similar to carbon pricing, rent increases cause distributional effects. The net effect of these measures on tenants has not been analysed so far. Using a micro-simulation integrating representative empirical data on tenant households in Germany from KOSMA and the detailed building database TABULA, we analyse direct distributional effects of a carbon price (€55/t and €250/t), a per-capita redistribution of carbon price revenues and the modernisation levy (8% and 2% rent increases). The analysis shows that carbon prices and modernisation levies have strong regressive effects. These can be mitigated by the per-capita redistribution. However, the effect on tenants within a given income decile varies largely due to the diversity of buildings. Thus, when designing and evaluating policies, looking at average effects is not sufficientto assess economic impacts for individual households.