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Abstract
By 2030, the EU needs to reduce emissions from heating and cooling buildings, which account for 13% of the EU's emissions, by approximately 30 million tons of CO2 annually. EU countries must accelerate building retrofits and the adoption of clean heating systems to avoid missing climate targets. To achieve this, the EU has introduced a policy toolkit, including stronger price signals against fossil-fuel heating in Emission Trading System II (ETS II) and energy-consumption reduction targets in the Energy Performance Building Directive (EPBD). This paper proposes an empirical methodology for quantifying the investment gap to meet the EPBD energy performance targets. Our estimation suggests a gap of approximately €150 billion per year to meet EPBD targets until 2030. By leveraging energy savings from electrification and retrofitting, the investment gap could be more than halved. The ETS II will provide a significant stream of public finance that could contribute to closing the gap. This paper concludes that to bridge the investment gap, governments need to employ policies that leverage future savings, use public funding to mobilise private finance to fund renovations and further fix pricing incentives by phasing out fossil fuel subsidies and taxes to encourage the switch to clean heat.