Falling heat pump sales in Europe threaten to stall building decarbonisation. The Social Climate Fund offers EU countries a unique window to turn things around.
This article is co-authored by Davide Sabbadin and was originally published in the Financial Times' Sustainable Views.
Decarbonising buildings is an urgent climate priority, yet the rollout of fossil-free heating systems continues to lag, despite their market readiness.
Heat pump sales surged in 2022 amid soaring gas prices but slumped in 2023 as energy prices fell. This stagnation highlights outdated policies that continue to favour fossil fuels.
In many countries, gas remains cheaper than electricity due to high levels of taxation, making efficient, electric-powered heat pumps a less attractive investment. And even when these systems offer long-term savings, their high upfront costs continue to pose a significant economic barrier for low-income households.
A carrot before the stick
The EU’s Emissions Trading System for heating and transport fuels, set to launch in 2027, could shift this dynamic.
Carbon pricing is a market-based instrument and functions as a carrot and stick. It signals that fossil fuels are a costly choice, encouraging consumers and industries to shift to non-emitting alternatives (the stick). Revenues collected can be redistributed to support decarbonisation efforts and cushion social impacts (the carrot).
While the carbon price level is uncertain, we know that the ETS2 will be accompanied by an up to €86bn Social Climate Fund, designed to support vulnerable groups such as households in energy or transport poverty.
To access this fund, EU countries must submit national social climate plans by mid-2025. Funding will flow from 2026 — a full year before carbon pricing begins — offering a rare carrot-only window to jump-start renewable heating adoption.
Breaking the deadlock
2026 will present a critical chance to break the deadlock in the heating transition. While the SCF primarily targets low-income households, its effects could catalyse broader, systemic change.
First, the funding opportunity is likely to push EU capitals to address long-standing gaps in heating policies. In countries such as Bulgaria and Romania — among the largest SCF beneficiaries — supportive frameworks for renewable heating are almost entirely absent.
Second, the SFC could also revitalise Europe’s renewable heating value chain, which is grappling with slow sales and excess inventory. Stable demand across the bloc would provide much-needed relief for this struggling sector, while also securing jobs, driving innovation and strengthening EU leadership in renewable heating technologies.
What could a wise use of that money look like?
In times of tight budgets, governments can maximise SCF impact through state-backed, low-interest loans. Spreading upfront costs over time, offset by energy savings, would make heat pumps accessible to more households. Partnerships between governments, banks and heating providers could establish zero-upfront-cost models.
In parallel, vulnerable households not eligible for loans should of course still receive help from grants and upfront rebates to make the investment possible.
Upfront costs are not the only barrier — bureaucracy and limited access to information often prevent public aid from reaching low-income groups. “One-stop shops” and trained energy advisers could guide households through grant applications, market options, and renovation logistics.
Lastly, community-led organisations can also play a crucial role in the expansion of renewable heating. Examples across Europe show that energy communities and non-commercial agencies build trust with vulnerable households and deepen social acceptance of carbon pricing.
In Ireland, a community-driven retrofitting organisation builds on the participants’ trust to act as a single service to secure grants, source contractors and oversee projects.
In the Netherlands, local energy co-operatives have carried out citizen-led district heating projects, showing that transparency, community involvement and democratic structures could be key levers for the heating transition.
The need for best-in-class solutions
Financial incentives are an effective tool to drive the transition forward, but they must come with stringent conditions.
SCF-backed technologies should be future-proof: highly efficient and based on climate-friendly refrigerants. Unlike fluorinated gases (f-gases) — potent greenhouse gases commonly used in heat pumps — natural refrigerants have minimal environmental impact and perform better in poorly insulated homes, precisely the type of households the SCF is designed to support.
Promoting f-gas-free heating solutions would align with climate goals and bolster EU manufacturers, who are global leaders in natural refrigerant technologies.
Preparing for carbon pricing impacts
Carbon pricing is not a magic bullet, but it will mobilise policymakers and consumers to prioritise decarbonisation.
However, it will raise prices and put additional pressure on low and middle-income households. The heating transition will not be fully realised by the time carbon pricing kicks in, leaving households vulnerable to volatile fossil fuel prices. This is why the SCF and ETS2 revenues from 2026 should mainly be channelled into robust support mechanisms.
Such mechanisms include direct payments to all citizens — which are crucial to provide immediate relief when prices spike — and structural investments to lower citizens’ fossil fuel dependency.
Beyond these, private capital investments, practical assistance measures and support for community-led schemes are essential to ensuring society-wide support for carbon pricing and mitigating potential backlash.
The litmus test
Now is the time to prepare solid blueprints to help every household transition away from fossil fuels. National social climate plans, due by June 2025, will be the litmus test that will show whether EU countries ready to ignite a renewable heating revolution.
