| In 2023, domestic space heating accounted for 18% of the UK’s total greenhouse gas emissions, with 85% of households relying on natural gas boilers. The burning of fossil fuels for heating imposes massive external costs, notably accelerating global climate change and exacerbating localized respiratory illnesses due to combustion byproducts. | 1 |
| Some argue the optimal solution is to incentivize consumers to transition from gas boilers to low-carbon air-source heat pumps (ASHPs). This could be achieved by introducing a carbon levy on natural gas. However, penalizing gas usage will have very low effectiveness if the cross elasticity of demand (XEDXEDXED) between natural gas and heat pumps is highly inelastic due to high capital installation costs. | 5 |
| An alternative policy is to directly subsidize clean heating installations. Under a renewed clean heat scheme, the government allocated £1.5 billion in grants to provide £7,500 toward individual heat pump installations. Cheap finance options and energy efficiency advice help lower barriers to switching. | 10 |
Despite economic challenges, the installation of heat pumps grew by 20% in 2023. A proposed £15 billion national retrofit program aims to double domestic insulation rates. However, relying purely on voluntary heat pump adoption has limits: absorbing even 25% of the current gas boiler market would completely overwhelm existing electrical grid capacity and the domestic installer workforce. Source: Industry and environmental policy reports, 2023
Decarbonization policies must be financed, raising critical questions about who bears the burden. As households transition to electric heating, electricity demand is projected to soar, while revenue from gas taxes falls. An independent energy think-tank estimates that upgrading the distribution grid to handle this load would require a 40% increase in local infrastructure investment. They suggest regional funding mechanisms instead of national flat-rate levies.
One option is a Developer Clean Heat Obligation (DCHO), which penalizes property developers who fail to install low-carbon heating systems in new builds, encouraging clean installations at the point of construction. Another solution is a Fossil Fuel Surcharge (FFS) on domestic gas bills, directly internalizing the external environmental costs of carbon emissions.
However, administration and execution costs vary significantly. The Developer Obligation is cheap to administer (under 2% of regulatory costs) as developers must seek building planning approval anyway. In contrast, retrospectively auditing and enforcing emissions compliance on older, existing housing stock requires extensive on-site energy performance assessments, costing up to 15% of total administrative budgets. Furthermore, equity remains a major obstacle. A flat-rate carbon levy on domestic gas acts as a regressive tax, disproportionately hitting low-income households living in poorly insulated homes who cannot afford the high capital cost of transitioning to heat pumps.
Source: Energy Research Council briefing, 2023
Extract B (lines 5 and 6) states that 'the solution is to incentivize consumers to transition from gas boilers to low-carbon air-source heat pumps'.
Using the data and your economic knowledge, assess which is the best policy that the government or local authorities could adopt to reduce carbon emissions from domestic heating.
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.