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Using Tax Incentives to Support Thermal Retrofits in Germany

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This paper explored national and international experiences with tax incentives and other financial support schemes in order to draw lessons for the current debate about introducing tax incentives to support thermal retrofits in Germany. We looked at the experience with tax benefits for thermal retrofit in Italy, the Netherlands, and the US in terms of design and levels of support provided, procedural steps, and the outcomes of these policies. The study found that, as a part of the existing policy mix, tax credits have high pick-up rates and can provide the additional financing needed to trigger retrofit investment. They can be implemented with relatively simple procedures and enable households to capture possible tax benefits. There are several lessons that emerge from our analysis. First, policy design and support levels impact households’ preferences for either single measures or comprehensive retrofits. Second, the problem of free-ridership, which is to some extent present in all subsidized schemes, should be considered when designing tax incentives. Finally, the existing procedures of German financial support programs (KfW) and other international policies can provide useful insights and practices for the design of future tax incentive processes. The alignment of standard requirements and procedures between different instruments, e.g. KfW programs and tax incentives, could simplify access to financing support schemes, create a common knowledge about retrofit financing options, and add to possible synergies between these instruments.