After approaching the core question of the case study with three introductory questions on the heating business and the relevant factors to tackle such a question, the candidate will find out that there is currently no incentive in the heating business to switch to climate-friendly heating systems. Specifically, the candidate will realize that the CO₂ tax is not helpful in this case. 

The candidate should elaborate what the underlying factors are and find alternatives how the government can motivate people to switch to climate-friendly alternatives from a financial perspective.

Solution for a) & b):

Expected answer:

Conventional heating systems

• Oil
• Gas
• Pellets
• Coal
• …

Climate-friendly

• District heating
• Heat pump
• Geothermal heating
• Combined heat and power plant
• …

Expectation: Name at least three options, min. 1 conventional, min. 1 climate-friendly

Additional Information for c): 

“After brainstorming and clustering different heating systems, we will now evaluate what criteria are relevant for the investment decision of B2C customers.”

Solution for c):

Expected answer:

• Costs (initial investment and running cost)
• Future proofness
• Price volatility / stability
• Technological innovation
• Environmental friendliness / sustainability
• Regulation / laws
• Subsidies

Expectation: Name at least three options

Additional Information for a):

“Following your analysis concerning criteria of B2C customers when evaluating a new heating system, we will now assess required variables for an investment decision concerning heating systems from a financial perspective.”

Solution for a):

Expected answer: 

• Fixed cost (heating system and installation cost)
• Variable cost (price for gas and electricity and consumption)
• Lifetime
• Interest rate (can be ignored for the calculation later)

Additional Information for b):

"As a next step, imagine that you are the owner of a newly built single-family house in Germany. Therefore, we will analyze which heating system you would choose by comparing a traditional gas heating and an electric heat pump. In this case, we only consider the financial perspective." 

Additional information that can be shared if the candidate asks: A heat pump is a device that can heat a building by transferring thermal energy from the outside using a refrigeration cycle.

Solution for b):

Important:

• The variable “# of households” is not required for this exercise, the candidate must recognize it by him/herself
• On top, the candidate must understand, that lifetime of the heating systems is a relevant factor that is not given

The solution of the calculations is also attached (see Solution 1.1 & 1.2).

Solution for a) & b):

Expected answer:

• CO₂ tax does not incentivize the climate-friendly option as the investment decision for the electric heat pump is not made
• Both solutions have a similar price, mainly driven by higher installation cost for heat pumps
• Hence, the current form of the CO₂ tax is not the right tool to incentivize climate-friendly options

Additional Information for c):

Solution for c):

Expected answer:

• Possible: Subsidies on installation for heat pump from government
• Possible: 0% value-added tax on heat pumps (all purchases are subject to VAT, in some cases the rate is 0% (e.g., for Photovoltaic (PV) sets since January 2023))
• Possible: Income tax deductibility of heat pump
• Difficult to implement: No CO₂ tax on energy for heat pump

Expectation: name 2-3 possibilities, make sure that candidate evaluates ease of implementation

Please make sure that the candidate evaluates ease of implementation (if the answer is super unlikely, please ask candidate to assess feasibility)

Expected answer (key messages):

• I conducted an analysis to show whether the CO₂ tax incentivizes consumers to switch to more climate friendly alternatives, thereby stabilizing or even reducing carbon dioxide emissions.
• However, since customers are not incentivized by the current form of the CO₂ tax, it is difficult to achieve the EU climate targets
• Therefore, the government must introduce incentives to switch to climate friendly alternatives (financial benefit), examples would be subsidies, no value-added tax, an adjusted CO₂ tax, etc.