Scrap bonus for heating systems? This idea misses the real problem

With his plans to ban the installation of new gas or oil heating systems, Federal Economics Minister Robert Habeck has provoked strong opposition, which from his perspective was probably unexpectedly strong opposition. On the other hand, the volume of the debate is not really surprising, because the possible burdens for homeowners are enormous.

If you replace a defective gas boiler with a new one, the investment costs are manageable because the rest of the heating system can remain as it is.

When changing the system to a heat pump, on the other hand, you not only need the new device, but often also new radiators, ideally even large-area underfloor or wall heating. And if things get really bad, the walls and roof also have to be re-insulated.

Where the replacement of the gas boiler causes costs in the high four-digit range, the total investment sum when changing the system can quickly overwhelm even otherwise solvent owners. At the latest when they read about new EU clean-up obligations, they get nervous.

Habeck would like to take the wind out of the sails of this well-founded nervousness, which is now breaking out in loud political contradiction. The latest instrument that is being discussed in political Berlin is a scrapping premium for old heating systems. We remember: That happened before, when in 2009 the second economic stimulus package promised a bonus of 2,500 euros for scrapping old cars.

In retrospect, economists assess this old scrapping premium overall negatively. There may have been a small economic effect from bringing forward car purchases, but this was accompanied by the destruction of capital, because cars that still worked were scrapped. The distribution effects were also not unproblematic, because even wealthy households were subsidized to switch cars.

In an interview with WELT, Lower Saxony's Prime Minister Stephan Weil (SPD) criticizes the plans of Federal Minister of Economics Robert Habeck to ban oil and gas heating: "With such an important and difficult project, the state must vote, otherwise the project will suffer."

Source: WORLD

At first glance, one could argue that the first point of criticism does not apply to a heating scrapping bonus. After all, the political goal is to replace fossil fuel heating systems with heat pumps powered by electricity for ecological reasons. And with regard to the second objection, the plan is circulating in Berlin not to pay a uniform premium, but rather a premium that is graded according to income.

So is everything good? Habeck seems to want to work with carrot and stick, with an arrangement of incentives and coercion. There is a compulsion to replace defective heating systems with heat pumps. And there is an incentive to replace old heaters that are still working and subsidized with the scrapping premium.

We're talking about devices that are at least thirty years old. And maybe there is also an intersection between compulsion and incentives when very old heating systems break down and have to be replaced by a heat pump, but the premium is also paid because of their age.

So it's complicated, but if that happens, only the owners of very old heaters will actually benefit from the premium. If the deadline is thirty years, but my twenty-year-old gas heater breaks down, then I'll probably have to install the heat pump without a scrappage bonus.

The other funding instruments remain, i.e. above all a proportionate direct state funding of the costs and inexpensive KfW loans. The scrappage premium alone will therefore not be enough to actually let many homeowners sleep peacefully. She's just another piece in the funding puzzle.

That was the distribution side. The other side is that of efficiency. Politically desired influence on private investment decisions can also have undesirable side effects. Habeck's overall arrangement of compulsion and premium will lead to a strong accumulation of investment demand for heat pumps over time, as well as for the craftsmen services that are necessary to prepare a house for a heat pump.

At the same time, it is questionable whether capacity expansion on the supply side can keep up. After all, it's not just about importing heat pumps from all over the world if necessary, but also about craftsmen's hours, the supply of which locally reacts more sluggishly, especially in times of a shortage of skilled workers.

The accumulation over time therefore leads to an increase in prices and to the fact that everything becomes very, very much more expensive than it would be without coercion and premiums and the accumulation of demand caused by them.

In the end, the real problem is again the completely irrational sector goal fetish of German climate policy. In the heating sector, people absolutely want to save as much CO2 as possible as quickly as possible, although there are many indications that savings would be easier and cheaper to implement elsewhere. And does the BMWK seriously expect that there will be no more cost-cutting innovations in heat pump technology by 2045?

If one simply allowed a uniform CO₂ price to take effect in comprehensive emissions trading, this would prompt companies and households to make efficient decisions to save CO₂ where it is cheaply possible. Habeck's heating planning counteracts this, making the path to CO₂ neutrality much more expensive and difficult than it needs to be.

The installation of new gas and oil heating systems is to be banned from 2024. At least that's what Economics Minister Habeck is planning. There is strong resistance to this. "To say overnight that there will be a ban is also a question of economics," said FDP General Secretary Bijan Djir-Sarai.

Source: WORLD

In addition, there is the astonishing levity with which political headwinds are simply responded to with one multi-billion dollar subsidy program after the other. We all bear the costs of the combination of completely inefficient, quasi-planned regulatory hubris and compensatory enthusiasm for subsidies as taxpayers, but also as citizens who will suffer from the fact that scarce resources are used incorrectly.

Habeck's ministry seems to give little thought to the opportunity costs of using scarce resources. The money then does not flow into efficient infrastructure, education or digitization, it does not enable growth spurts, it does not create the conditions for increasing general prosperity.

And all this only because the Federal Ministry of Economics does not want to let the market-based control instrument of cross-sectoral emissions trading work.

Jan Schnellenbach is Professor of Economics at the Brandenburg Technical University of Cottbus-Senftenberg

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