Heat Pumps: ‘Green Tech’ That Cuts across the Income Distribution

Green technologies tend to be adopted disproportionately by high-income households. For example, the top 20 percent of the income distribution in the United States receives 60 percent of the tax credits for rooftop solar power and 90 percent of the tax credits for electric vehicles. In contrast, heat pump adoption is broadly dispersed across the income distribution, according to a new study, The Economic Determinants of Heat Pump Adoption (NBER Working Paper 31344), by Lucas W. Davis.

Nationwide, 14 percent of US households identify heat pumps as their primary home heating source. While households with annual incomes above $150,000 are twice as likely to have solar panels and six times more likely to have an electric vehicle than households with income between $50,000 and $60,000, heat pump adoption is very similar at all income levels.

Heat pump adoption is sensitive to electricity prices, geography, and climate, but is nearly identical at all income levels.

Davis estimates the determinants of heat pump adoption using household-level microdata from the 2020 US Department of Energy’s (DOE’s) Residential Energy Consumption Survey (RECS). These data include information on household income, demographics, and energy-related durable goods and behaviors for 18,496 households.

The paper shows that heat pump adoption is instead strongly correlated with geography and climate. In South Carolina, Alabama, North Carolina, Tennessee, and Florida, where winters are relatively mild, over 30 percent of households have heat pumps. By contrast, heat pump adoption rates are below 10 percent throughout the Midwest and the Northeast where winters are cold.

Heat pump adoption is also shown to be strongly correlated with energy prices. In 2020, US electricity prices varied from less than 10 cents per kilowatt hour in Louisiana, Washington, and Idaho to more than 20 cents per kilowatt hour in California, Massachusetts, Rhode Island, Alaska, Connecticut, and Hawaii. Davis estimates that a 10 percent increase in electricity prices decreases heat pump adoption by 2 percentage points, a relatively large effect.

Cost estimates from the DOE indicate that purchase and installation costs for an air source heat pump were typically between $6,900 and $8,600 in 2022. Central air conditioner costs ranged from $5,300 to $6,000, while natural gas furnaces were between $4,100 and $4,300. Because heat pumps move heat from outside to inside a home, they are most efficient at relatively high outdoor temperatures, such as 60 degrees Fahrenheit. At lower temperatures, heat pump efficiency decreases, and homeowners may need to use supplemental heating sources.

These results have implications for a large and growing number of government subsidies aimed at heat pumps. Before the Inflation Reduction Act (IRA) of 2022 took effect, heat pumps were subsidized under the Energy Policy Act of 2005 and could qualify for a maximum tax credit of $300. After the IRA took effect, the maximum credit became $2,000.

— Linda Gorman