Distributional Effects of Climate Policies on German Households: Incorporating Behavioural Frictions into a Microsimulation

Carbon pricing is widely regarded as an efficient instrument for reducing emissions. However, concerns remain about its distributional effects on low-income households. Current assessments largely assume that households will respond rationally to carbon price signals, potentially overlooking behavioural barriers that influence investment decisions and energy consumption patterns. This thesis investigates how behavioural frictions affect the distributional impacts of the German national emissions trading system (nEHS) in the residential heating sector. To this end, a household-level microsimulation model is extended to incorporate behavioural factors, such as bounded rationality, liquidity constraints, and social- class-related barriers to adopting low-carbon heating technologies. The model evaluates how households respond to rising carbon prices in various policy and behavioural scenarios, including subsidy schemes, credit support measures, and per-capita climate payments. The results indicate that behavioural frictions significantly slow the adoption of low-carbon heating technologies and increase the policy burden on low-income households relative to conventional rational-choice assumptions. Consequently, the regressive effects of carbon pricing are amplified when behavioural barriers are considered. Subsidies and credit support partially mitigate these effects. These findings demonstrate that behavioural frictions are a critical determinant of carbon pricing outcomes and should be incorporated into distributional policy assessments. Failing to consider such factors could result in a systematic underestimation of the social impacts of climate policy and the difficulties experienced by vulnerable households during the transition to a low-carbon economy.