Conference Agenda

We use a theoretical framework, a regression discontinuity design and a discrete choice model to evaluate the efficiency and distributional consequences of an environmental subsidy under imperfect competition. Our empirical setting is the largest housing retrofit subsidy in France (Ma Prime Rénov’), amounting to €3bn of annual public spending. The scheme splits eligible households into income groups, with subsidy level declining with income. Leveraging discontinuities in the heat pump subsidy schedule at income thresholds, we find that heat pump prices differ across income groups by 1.3 times the subsidy differential. Our theoretical framework identifies two mechanisms for this result, with opposing effects on relative prices: first, means-testing enables price discrimination across income categories. This adds to the progressivity of the scheme, provided demand elasticity is higher among low-income households. Secondly, the effect on prices of the subsidy differential itself can be attenuated by incomplete pass-through within each sub-market. Estimating a structural model of demand for heat pumps, we find that a relatively high redistributive effect of price discrimination and complete pass-through of the subsidy combine into higher progressivity of the means-tested scheme when discrimination is allowed, at low efficiency cost: the share of low income households in take-up increases by 23%, while the number of heat pump by €m of public spending decreases by 2%. Accounting for this mechanism in policy design is however non trivial, as the sign and magnitude of the effects depend on several demand and supply primitives: conduct parameter, elasticity and curvature of the demand curves in each income group.