Who pays for decarbonizing homes?

The decarbonization of the residential building sector requires large upfront investments in heating system replacement and thermal renovation that fall disproportionately on lower-income households. Faced with political constraints on carbon pricing and technology mandates, investment subsidies have become the main policy instrument. This paper analyzes the distributional effects and fiscal costs of this policy approach for Austria. We develop a static microsimulation model that links household-level investment needs to landlord wealth distributions, assigning the incidence of subsidies and financial burden across homeowners and landlords within a unified empirical setting. We find total investment needs amount to 95–109 billion euros over the transition period to 2040 (1.1%–1.3% of GDP annually), implying fiscal costs of 41–48 billion euros under the 2023 subsidy scheme. Despite a targeted low-income component, approximately 45% of subsidy outlays accrue to the top three income deciles. Net investment burdens remain strongly regressive when thermal renovation is required, reaching four annual incomes for average low-income single-family homeowners. We further document substantial horizontal disparities within income groups and argue that Austria’s fragmented housing law is a first-order determinant of investment feasibility in the multi-apartment (rental) sector. Addressing distributional and feasibility concerns under fiscal constraints may require a policy mix combining mandates, income-contingent transfers, liquidity-support instruments and housing law reform.