Limited economic feasibility due to high investment costs and relatively small energy cost savings are seen as a major reason for low energetic refurbishment rates of the building stock in many countries. Improving economic feasibility can therefore be essential to increase refurbishment rates. Carbon tax or subsidies are possible ways to achieve this. To assess the impact and potential of these instruments, typically life cycle costing (LCC) methods are used.

In this research, a typical single-family house in Germany is taken as an example that can also apply to other countries. Traditional and innovative refurbishment concepts in line with national climate goals are examined regarding their economic feasibility when accounting for the full costs of the refurbishment. The LCC of refurbishment concepts are analyzed with and without the impact of carbon tax.

It is found that carbon tax reduces the amortization time of the full refurbishment costs from 55 years (w/o carbon tax) to 38-56 years for gas heating systems and 32-51 years for heat pumps (strongly depending on carbon tax after 2025). This can be improved further by earmarking carbon tax revenues from the building sector as funding grants for energetic refurbishments.

Without earmarking the tax revenues, substantially shorter amortization periods can only be achieved through initially higher or steadily increasing carbon tax rates. A steady increase of the carbon tax rate, which translates into an annual growth of 3-4% in energy costs of fossil fuels, can lead to the desired steering effect. Furthermore, it allows for rather low initial carbon tax rates in 2021-2025. An increase in funding grants further shortens payback periods. While carbon taxes should be used preferably to improve economic efficiency, funding grants can reduce investment hurdles. By concentrating grants on low-income building owners, the impact on barriers to investment should be maximized.

Earmarking the carbon tax revenues as funding grants can mitigate the yearly increase of carbon taxes and at the same time decrease investment hurdles. Depending on the carbon tax levels and the development of the building stock (greenhouse gas emissions, refurbishment rate), the funding grants can improve the feasibility significantly. Initial estimations have shown that already through the reinvestment of the initial carbon tax revenues of 2021 in Germany the investment costs for the full energetic refurbishment of single-family houses can be decreased by roughly 10%.