Romania’s residential building sector faces structural vulnerabilities. The housing stock is characterised by low-energy efficiency, a large share of pre-2000 buildings, a high share of owner-occupiers, and a large rural population compared to EU averages. In addition, Romania has the EU’s highest rates of severe housing deprivation and energy poverty. In many rural areas, low-carbon heating alternatives are limited, and households are constrained to rely on firewood.
Energy prices in Romania’s residential building sector are currently not aligned with carbon and air pollution content, weakening incentives for energy savings, energy efficiency improvements and energy source switching and thus Romania’s effort to reach GHG emission and air pollution reduction targets.
A national carbon tax could strengthen price signals as carbon price floor and support early action in view of reaching GHG emission reduction objectives in residential buildings in case the EU ETS2 introduction gets delayed. Introduced ahead of EU ETS2, it could provide greater investment certainty, encourage energy efficiency and energy source switching, and reduce the risk of distortionary behaviour, particularly the potential shift towards currently untaxed firewood use for heating purposes, which could exacerbate air pollution.
To address adverse impacts on households with limited access to low-carbon alternatives and to avoid unintended consequences such as burning of waste or garbage, tax reform should be embedded within a comprehensive strategy that enables households to switch more easily to low-carbon energy sources and to improve the energy performance of the building stock.
To tackle air pollution, given strong spatial variation, administrative complexity, and risks of avoidance behaviour of a locally differentiated air pollution tax, policy efforts could envisage a broader package with complementary non-tax measures. For example, introducing a national air pollution tax could be accompanied with restrictions on highly polluting heating technologies in severely affected areas, targeted support for stove replacement for vulnerable households, public investment in district heating and natural gas grids, improved data collection, and enhanced public awareness.
Property taxation should be simplified and is best anchored to a single policy objective. While property taxes are well suited for revenue raising, the environmental and equity considerations currently embedded in the system are unclear and risk diluting both revenue efficiency and policy coherence. If revenue raising is the primary goal, harmonising property taxation on the basis of property value would improve efficiency and equity. Distributional objectives and energy efficiency goals are better addressed through targeted transfers and dedicated policy instruments for vulnerable groups, rather than through the property tax system.
Reduced VAT rates on certain energy products applicable in Romania do not align with good tax policy practice and work against cost-increasing energy and carbon taxes. VAT should primarily serve its core objective of raising revenue. Gradual phase-out of VAT rate reductions could be complemented with targeted measures addressing distributional impacts and energy poverty.
Addressing energy poverty requires better targeting. Broad-based tax reductions, price caps and untargeted subsidies are costly and poorly targeted. Support would be more effective if based on multiple vulnerability criteria, such as energy burden, income, heating system, dwelling efficiency and household needs, building on and refining existing support that solely targets based on household income. If information on these dimensions is not available, a simplified approach could be pursued.
The previous reduced VAT rates for installing low-emission heating technologies and solar energy generation were costly and poorly targeted. They generated significant foregone revenues while disproportionately benefiting higher-income households. The alignment of VAT rates with the standard rate represents an opportunity to reallocate resources to directly support households facing barriers to energy efficiency and energy source switching investments.
Environmental Tax Policy Review of Romania
This chapter examines the role of tax policy within the broader policy framework aimed at reducing GHG and air pollution emissions from energy use in residential buildings in Romania. The chapter develops a framework for taxation of residential buildings along the housing lifecycle and energy use. It then presents the main barriers and market failures related to energy use in the building sector, that may help justify the introduction of new fiscal instruments or complementary policies. The section reviews different tax policy objectives, drawing on other country’s taxation practices and existing literature. The section concludes with a discussion on how Romania’s environmental tax framework could be aligned with tax policy objectives and principles.
This report offers insights into the challenges and opportunities associated with deploying tax policies aimed at reducing emissions from energy use in residential buildings beyond the Romania border. It also serves to underscore the complexities of reducing emission in a sector, where the building stock has been slow to undergo energy efficiency improvements, changing heating systems is challenging, and distributional impacts must be carefully considered.
2.1.1. GHG emissions
Energy use from the residential building sector is an important source of GHG emissions in Romania. In 2022, energy use in residential buildings was the largest energy consuming sector, accounting for 32.3% of total final energy use and 11.2% of energy-related carbon dioxide (CO2) emissions (IEA, 2025[1]).1 In Romania, CO2 emissions from energy use in the residential building sector are largely made up from space heating (61.2%), followed by electrical appliances and lighting (14.1%), water heating (13.9%), cooking (9.7%) and space cooling (0.3%) (Figure 2.1, Panel A).
Romanian households rely primarily on wood and natural gas as energy source within buildings. Wood accounts for 39.2% of household energy consumption, followed by natural gas at 34.2% (Figure 2.1, Panel B). Electricity contributes to 14.8%, while heat supply represents 7.8%. Additionally, liquefied petroleum gases (LPG) make up 3.4% of the household energy mix. Heat pumps are still very rare in Romania, accounting for only 0.01% of total household energy use in residential buildings.
Romania’s legal framework and targets for decarbonising the building sector is largely built on EU Directives (see Chapter 1, Section 2 for an in-depth discussion). The Final Updated Integrated National Energy and Climate Plan (NECP) provides the overarching framework of Romania’s climate action, required by Regulation (EU) 2018/1999. Romania’s Long-Term Renovation Strategy (LTRS), developed in line with Directive 2010/31/EU on the Energy Performance of Buildings (EPBD), sets out a roadmap for decarbonising the building sector (LTRS, 2020[3]). The EPBD Recast (Directive (EU) 2024/1275) requires the submission of a more binding National Building Renovation Plan (NBRP). Romania’s Energy Strategy complements the NECP on the energy transition. Table 2.1 provides an overview for the main frameworks related to decarbonising the building sector.
Source: Author’s elaboration.
To be in line with strategic objectives, reducing GHG emissions from the residential building sector in Romania requires strengthened policy efforts. Romania’s LTRS outlines CO2 emission reduction targets from 2021 of 24% by 2030, 40% by 2040, and a 65% reduction in final energy consumption by 2050 (LTRS, 2020[3]). The implementation of these targets is subject to ongoing monitoring and evaluation to track progress. Table 2.2 presents the key milestones for residential buildings as laid out in the Romanian LTRS. Even though CO2 emissions from the residential building sector declined since 2021, reaching these targets will require significantly strengthened policy action. Shifting to energy-efficient, clean heating solutions is essential to achieving the required emission reductions. This includes the greening and expansion of district heating systems and scaling up the deployment of heat pumps and solar thermal technologies (w 2.1).
Source: Romanian Long Term Renovation Strategy
Decarbonising energy use in the residential building sector will require a transition to clean and energy-efficient heating systems. Heating systems can be classified into two broad categories, centralised heating (i.e. central heating and district heating), and individual heating. There are significant differences in their respective deployment across cities and rural areas. While central and district heating are more common in cities and towns, individual heating is most common in rural areas (Eurostat, 2024[4]). Romania has a comparatively large rural population (45% in 2024), well above the EU average of 24% (World Bank, 2025[5]), which has important implications for households’ access to different energy sources and the feasibility of switching to cleaner energy sources. The different heating systems and their relevance for emission reduction in Romania are discussed below.
Romania, 2023
Source: Author’s elaboration based on Eurostat (2024[4]).
District heating. Romania has one of the largest shares of district heating in the EU, serving almost 10.9% of the population, primarily in major cities. These centralised systems distribute heat via underground networks. However, many are outdated, underinvested, and suffer from frequent service disruptions, such as heat and hot water shortages. Most systems rely on fossil fuels, including coal, gas, and oil, and remain inefficient, resulting in high heat losses, low environmental performance, and rising operating costs (Doroftei, 2023[6]). To support modernisation, the European Commission approved a support scheme in 2022 for high-efficiency cogeneration projects linked to district heating networks in Romania (European Commission, 2022[7]).
Central heating. In Romania, central heating serves 23.1% of the population, with a majority in urban areas. Central heating produces heat by a boiler located in multi-apartment buildings, usually serving all apartments in a block. Central heating can use different energy sources, which in Romania are primarily natural gas, heating oil or biomass. Increasing the share of central energy systems with the integration of renewable resources will be crucial to energy efficiency (Ministry of Energy, 2024[8]).
Individual heating serves 65.2% of the population and is the primary heating system for the large majority of rural households. Individual heating can consist of different technologies:
1.1. Individual firewood stoves. Firewood stoves remain a dominant space heating technology in Romania, particularly in rural areas, where it can reach up to 90% of dwellings. Firewood is often used in low-efficiency stoves (Ministry of Energy, 2024[8]).
1.2. Gas boilers. In Romania, approximately 13% of the population relies on gas boilers for residential heating (JRC, 2024[9]). Under the revised EPBD, EU member states are required to plan for a phase-out of fossil fuel boilers by 2040.
1.3. Electric radiators. In Romania, electric heating systems represent only a minor share of heating systems. Romania’s reliance on coal and natural gas for electricity production will require additional decarbonising efforts to reduce GHG emissions from electricity (IEA, 2025[1]). In addition, the deployment of individual solar photovoltaic panels or solar thermal heaters will help to decarbonise electricity used for heating.
1.4. Heat pumps. Heat pumps extract heat from the outside air to provide space heating or hot water. Scaling up heat pump deployment within centralised and individual heating systems offers significant potential to reduce energy use per dwelling. Replacing a gas boiler with an electric heat pump can cut carbon emissions by approximately 65% for a typical single-family home, based on Romania’s current electricity mix (JRC, 2024[9]). This reduction stems largely from the lower carbon intensity of electricity relative to natural gas.
2.1.2. Air pollution
Energy use in buildings is also responsible for air pollution, specifically particulate matter. The sector accounts for 85% of total particulate matter (PM2.5) emissions, along with 9% of total nitrogen oxides (NOX) and 8% of total sulfur oxides (SOX) (see Chapter 1, Section 1.2). Over the past two decades, PM2.5 emissions from the building sector have remained largely unchanged.
Under the EU National Emission Reduction Commitment (NEC) Directive, Romania has to achieve 28% reductions of PM2.5 emissions by 2030, compared to 2005 levels (European Commission, 2016[10]). Within the National Air Pollution Control Programme (NAPCP) Romania has to propose different policies and measures covering amongst others energy supply and the residential sector (Table 2.3) to meet the binding EU level targets. At the current trajectory, achieving Romania’s 2030 emission reduction objectives for NOx and PM2.5 appears ambitious, necessitating substantial policy adjustments and intensified efforts (Ricardo, 2023[11]). Complementary policy measures aimed at reducing the emission of these air pollutants is necessary, particularly in the sectors that have the largest share in total national emissions, namely the transport sector for NOx and the energy use in residential buildings for PM2.5.
An important source of both indoor and outdoor air pollution is wood-based heating, which remains widespread in Romania, particularly in rural and remote areas where natural gas networks are absent. Firewood is the primary source of residential heating, covering over half of home heating needs, with nearly 90% of rural households relying on it (OECD, 2022[12]). A large share of firewood is procured informally and burned in inefficient domestic wood stoves, leading to indoor air pollution and significant health impacts (OECD, 2022[12]).
The widespread burning of woody biomass contributes not only to air pollution but might also weaken the capacity of forests to reabsorb CO2. Unsustainable harvesting practices and the widespread use of burning biomass can lead to net carbon emissions, reducing the effectiveness of forests as carbon sinks and undermining climate mitigation efforts (Flammini, 2023[13]).
Source: Author’s elaboration based on selected policies from the National Air Pollution Control Programme.
2.1.3. Common considerations and co-benefits of emission reductions in the building sector
Reducing GHG emissions and air pollution in Romania is linked to common considerations, such as increasing the share of renewable energy sources through clean-energy solutions and on-site renewable energy production (IPCC, 2022[14]). Romania’s Integrated National Energy and Climate Plan sets a target for renewable energy to meet 36% of heating and cooling demand by 2030 (NECP, 2024[15]). However, progress has been slow and a large share of renewable heating energy in Romania comes from woody biomass, underscoring the urgent need for more sustainable and modern renewable heating solutions (OECD, 2024[16]). Clean-energy solutions can involve the deployment of heat pumps and the greening and expansion of district-heating networks, which are centralised systems that distribute heating and hot water to buildings, while examples for on-site renewable energy production can be PV panels.
Reducing emissions from Romania’s building sector will not only be determined by switching to cleaner energy sources, but also by energy efficiency improvements of the building stock. Enhancing energy efficiency ensures that the same level of ‘energy service’ (e.g. such as lighting duration or indoor temperature) is maintained while using less energy (Ekins, 2024[17]). To increase energy efficiency in buildings, both insulation and the use of more energy efficiency appliances is key. Romania exhibits a high energy use per surface in space heating compared to the EU average (Figure 2.3, Panel A). The average energy use for space heating in Romania is 13.90 kilogram of oil equivalent (koe) per m², significantly above the EU average of 8.88 koe per m², even after adjusting for climate differences. Among EU member states, only Estonia and Czechia demonstrate lower average energy efficiency levels, highlighting the considerable scope for improvement in Romania’s residential heating performance.
Note: In Panel A, the consumption with climate corrections provides a measure of consumption that is independent of annual climate variations across the country sample. These climate corrections are based on the ratio of actual to normal degree days, i.e. reference degree days.
Source: Author’s elaboration based on the Odysee-Mure database (2025[18]) and the Romanian Long Term Renovation Strategy (2020[3]).
The overall cost of improving energy efficiency in the residential sector is linked to the characteristics and composition of the Romanian building stock. The type of buildings as well as the year of construction significantly influence residential emissions and renovation strategies. Residential buildings account for approximately 90% of the surface of the total building stock (LTRS, 2020[3]). Single family houses make up 58% of the total area of the building stock, while multi-family houses make up 33% of the total area. This has important implications for renovation strategies, as single-family homes tend to be more energy-intensive per square metre and often require individualised and costlier renovation approaches compared to higher-density multi-family dwellings. Multi-apartment blocks can have an advantage compared to single-family houses on energy efficiency, due to their higher density, smaller unit size, and reduced exposure of outer walls (Gerőházi, Katona and Kollár, 2023[19]). Advances in construction techniques and the tightening of energy efficiency regulations have led to substantial improvements in the performance of newly built homes. As a result, the age of a building is a key determinant of its emission intensity, as well as of the type and cost of retrofit technologies required to reduce emissions. In Romania, a substantial share of the housing stock was built before 2000 (Figure 2.3, Panel B).
Reducing emissions of the building sector can generate co-benefits, such as enhanced energy security. Energy security is the ability of households, businesses, and government to accommodate disruptions in supply in energy markets (Metcalf, 2013[20]). Although Romania is the second-largest natural gas producer in the EU, it still relies on imports during peak winter demand (OECD, 2024[16]). In 2023, energy imports accounted for 28.1% of Romania’s total energy supply (IEA, 2025[1]). This increases the country’s vulnerability to external shocks, such as global supply chain disruptions during the COVID-19 pandemic and the energy price volatility triggered by Russia's war of aggression against Ukraine. Strengthening energy security through diversification of supply, increased energy efficiency, and reducing the role of imported fossil fuels through accelerated deployment of domestic renewable sources is therefore essential.2
A co-benefit of energy efficiency improvements is the potential to enhance housing quality, which remains a major challenge in Romania. The country has the highest share of population living in severe housing deprivation in the EU, affecting 14.3% of residents (Eurostat, 2024[21]). This means that roughly one in seven individuals lives in an overcrowded dwelling with at least one serious deficiency, such as a leaking roof, inadequate sanitation, or poor lighting. Energy efficiency measures can help address some of these deficiencies by improving insulation, repairing structural damage, and contributing to minimum living standards.
While generating co-benefits, policies aimed at reducing emissions from the residential building sector have to consider potential effects on energy poverty. Energy poverty is a condition characterised by difficulties in meeting basic energy needs. As such, energy poverty often forces affected households to reduce energy use below essential levels or rely on less efficient and more polluting technologies, exacerbating both environmental and health risks. Empirical studies have shown that among Central Eastern European countries energy poverty is higher than elsewhere in the EU (Bouzarovski and Petrova, 2015[22]; Thomson and Snell, 2013[23]; Halkos and Gkampoura, 2021[24]). In 2022, 15.2% of Romanian households were unable to maintain adequate warmth, one of the highest rates in the EU, reflecting a persistent structural vulnerability (Eurostat, 2025[25]). Under-heating are linked to increased cardiovascular illnesses and broader public health burdens (Janssen et al., 2023[26]). Structural barriers such as limited access to financing and information further constrain the capacity of vulnerable populations to adopt cleaner, more efficient technologies (World Bank, 2024[27]). In Romania, decreasing energy poverty is a declared objective in Romania’s Integrated National Energy and Climate Plan (NECP, 2024[15]). Energy poverty should be a central consideration when designing an effective and fair policy package.
In the context of residential housing, taxation or fees may apply to several tax bases along the housing lifecycle. The following section outlines the main taxes on housing assets and energy use in residential buildings, with specific focus on Romania’s tax system. Figure 2.4 provides an overview of these taxes along the housing asset lifecycle. The tax bases relate to buildings and land, energy use and equipment installed and used within the building. While the stocktake in Chapter 1 (Section 4) focuses on environmentally related taxes applying to energy use and equipment, this section expands to general taxes that apply on residential buildings. Different taxes apply over the different stages of the asset lifecycle, from the acquisition of the property, its holding, to its disposal. Energy and technological equipment are related to the property holding stage.
Source: Author’s elaboration based on the taxation of housing assets over the asset lifecycle framework (OECD, 2018[28]; OECD, 2022[29]).
2.2.1. Building acquisition
Transaction taxes on housing acquisition are commonly used across OECD countries, with 30 out of 38 member countries applying such taxes (OECD, 2022[29]). These taxes are generally levied at a flat rate on the purchase price of residential property. Newly built residential housing is frequently exempt from transaction taxes, but is typically subject to VAT, often at a reduced rate. To improve affordability and support homeownership, many countries offer transaction tax exemptions or concessions for first-time buyers (e.g. Australia, Canada, Italy, and the United Kingdom), with eligibility commonly linked to property value thresholds (OECD, 2022[29]).
At acquisition, Romania does not levy a transfer tax on direct real estate asset purchases but a VAT rate (Fiscal Code, Title VII, Chapter VIII, Art. 291). A reduced rate of 9% was available until the 31 July 2025 for purchases by an individual or family of newly built residential property until a value of RON 600 000 (EUR 120 724.3). This reduced rate expired on 31 July 2025 under Law no. 141/2025.
2.2.2. Building holding
Property taxes on buildings and land can occur at different stages of the asset lifecycle. Generally, they take the form of one-off taxes on transactions (acquisition or disposal) and recurrent ownership taxes on immovable property or net wealth taxes. It is common that the ownership tax is based on the buildings value, while in a small number of countries, the tax base is based on characteristics of the property, such as size of property or location, rather than value (Millar-Powell et al., 2022[30]; OECD, 2022[29]).
A property tax is levied on residential buildings, with an effective tax rate that varies across municipalities. In Romania, the property tax is calculated based on the building size, adjusted for the building type (Table 2.4), the tax rate (defined at the municipality level) and a locality correction factor defined in the fiscal code (Table 2.5), while the exact attribution of zones is done at the municipality level. The municipalities set the property tax rate, which can range from 0.1% to 0.2%. In 2021 only Bucharest taxed partly at 0.2%, while most other municipalities had a lower tax rate.
Note: Basis for the taxable value of the property tax on buildings. Values are multiplied with the constructed area (m2) to derive the taxable value. Values are defined in the Fiscal Code and inflation adjusted as published in Municipal Tax Codes.
Source: Author’s elaboration based on the Romanian Fiscal Code and the Municipal Tax Codes for inflation adjustments.
Note: Matrix forming the “coefficient corresponding correction factor”, that is applied to the absolute tax. Values are based on the locality rating and building zone within that locality and published in the Fiscal Code.
Source: Adapted from IMF (2022[31]).
From 1 January 2024 onwards, a special property tax is levied on high-value immovable and movable assets. A tax of 0.3% is applied to the property value and calculated as the positive difference between the taxable value and a RON 2 500 000 (EUR 503 018.1) non-taxable ceiling. This tax is administered by local authorities (ANAF order No. 3 738, published in the Official Gazette No. 689, with regard to Law no. 227/2015 on the Fiscal Code).
Property taxes can include specific provisions aiming at incentivising investments in energy efficiency or renewable energy. Incorporating the building energy class in the evaluation of property tax can give an incentive to property owners to invest in energy saving measures in order to reduce their tax burden. However, applying reduced rates risks undermining revenue generation and may generate other distortions. Direct higher property taxes for poor energy efficiency are still rare. Indirect penalties through rental prohibitions or transaction taxes are more common. For example, France put in place a rental prohibition below a certain energy performance criteria.3
In Romania property tax rates based on energy efficiency criteria are in place in few municipalities. According to Article 456 of the Romanian Fiscal Code, municipalities can decide to reduce the property tax if buildings meet certain energy efficiency criteria. So far, a 50% reduction of the property tax rate for energy efficient buildings is available in Cluj Napoca and Zalau, Iasi implemented the reduction temporarily. In Cluj Napoca, for example, owners of buildings rated as category A under the mandatory Energy Efficiency Certificates and certified under either of three Standards, LEED, BREEAM, and DGNB, can since 2013 apply for this 50% tax break, reducing the property tax substantially.
In contrast, a building’s construction year of a building affects its taxable value and may result in higher tax rates following major energy efficiency improvements are implemented. Older buildings are taxed at a reduced rate, -50% for >100-year-old buildings, -30% for 50–100-year-old and -10% for 30–50-year-old buildings. The year of construction, however, is renewed if major improvements like energy efficiency measures were undertaken, that increase the value of the building by at least 50%.
A property tax on land can be levied by the Romanian Local Council (Law no. 227/2015 on the Fiscal Code Title IX, Chapter 2, Art. 463 et seq). While the tax base is determined by a fixed amount per m2, each Council has the authority to select this value from a minimum and a maximum value bracket provided in the Fiscal Code, depending on rating of the locality and the zone within the locality.
Rental income taxation relates to the share of buildings that is rented to tenants within the country. Income from rental property is taxed in the vast majority of OECD countries, with 34 countries levying personal income taxes on rental income (Millar-Powell et al., 2022[30]). Romania raises a rental income tax (Law no. 227/2015 on the Fiscal Code, Title IV, Chapter IV, Art. 84 et seq). The local tax authority is administering this tax, of which revenues contribute to the local budget. Owners, usufructuaries, or other legal holders of the goods being rented are due to pay 10% of the rental income. A 20% lump-sum can be deducted from the tax base as a non-specific expense allowance. While the deduction can include expenses for energy efficiency retrofits it is a general deduction that covers a broader range of expenses related to the rented property.
Personal income tax credits or deductions to enhance building’s energy performance are commonly used across EU member states. Tax incentives targeted at retrofitting are commonly delivered through the personal income tax system, as seen in Denmark, Germany, Greece, Italy, and Poland (OECD, 2022[29]). These measures are typically capped as a percentage of project costs, up to a specified maximum, and take the form of either deductions or credits. Romania does currently not provide targeted tax incentives for retrofitting. Similar to property tax expenditures, these come with certain drawbacks discussed below.4
Several countries offer lower VAT rates for the purchase or installation of various energy efficiency or energy source switching interventions, ranging from thermal insulation materials to heat pumps and biomass boilers. Lower VAT rates can apply for example to specific low-carbon or energy-efficient technologies, such as insulation materials, heat pumps, or efficient appliances with the policy objective to incentivise their adoption by improving affordability. However, these are often poorly targeted and can result in significant foregone revenue while delivering limited environmental benefits if not well designed. This reflects the low pass-through of VAT reductions regularly observed, which sellers may absorb rather than pass on in the form of lower final prices. VAT reduction should be carefully assessed against alternative instruments in terms of efficiency, equity, and effectiveness in yielding a certain environmental outcome (discussed in section 4).
Romania previously provided reduced VAT rates on low-emission heating systems. A reduced rate of 11% applied to the supply and installation of PV panels, solar thermal panels, heat pumps and other high-efficiency, low-emission heating systems until August 2025.
Romania levies an excise duty rate on energy products used in residential building. The excise duty is levied on heavy fuel oil (RON 108.5 per tonne; EUR 21.83 per tonne) and electricity (RON 7.24 per MWh; EUR 1.46 per MWh).5 The energy products natural gas, LPG, coal and solid fuels used for household heating, as well as firewood, are exempt from the excise duty (Fiscal Code, Art. 399). The main objective of excise duties on energy products is to generate revenues to the state budget and revenues are not earmarked.
A broad energy tax base would include all energy types, such as wood, natural gas, and electricity, used in residential buildings. Countries tax energy in residential buildings generally via excise duties per litre of fuel or specific taxes on the carbon content of the fuel. Sometimes emissions from residential buildings and electricity production are instead, or additionally, covered by a carbon tax or an emissions trading system (ETS) (see discussion in section 4). The efficiency of these taxes in internalising energy and carbon-emissions related external costs and raising revenues will depend on the tax rate and the base, i.e. whether deductions and exemptions apply or specific energy sources are not covers. The tax collection mechanism within the country matters as well. For example, excise taxes will be less effective in internalising environmental costs if tax evasion is high, or in the case of firewood, if it is privately illegally sources such as firewood.
In Romania, a VAT applies on top of excise duties, but at different rates across energy products. Until 31 July 2025, a standard rate of 19% VAT applied to the consumption of energy products, with certain reductions and exemptions. Firewood for heating were taxed at the reduced rate of 5%. District heating was subject to the reduced rate of 9%. From 1 August 2025 the Romanian Government introduced a fiscal reform that includes VAT rate increases. Under this reform, the standard rate rises to 21% while the reduced rates rise to 11%. Similarly to the excise duties on energy products, revenues are administered by the Ministry of Finance and are not earmarked.
2.2.3. Building disposal
A property transfer tax is levied by local authorities in Romania at the last stage of the housing asset lifecycle. The tax is levied on the property value declared in the deed (with few exceptions determined in the fiscal code) with a rate of 3% if the property was held for a period of up to 3 years inclusive, and a rate of 1% if the properties was held for a period of more than 3 years (Fiscal Code, Title IV, Chapter IX, Art. 111).
2.2.4. Interactions among tax bases and rates in the building sector
The tax bases in residential buildings are interconnected, so that environmental incentives included in one tax can have an impact on other taxes. Pricing energy use can provide incentives for investments in retrofitting or in energy efficient technologies. Improving a property's energy performance can indirectly affect its market value. For instance, retrofitting a home to enhance its energy rating may increase its market value, potentially leading to a higher property tax liability due to the value-based nature of the tax. This dynamic has been highlighted as a potential disincentive for homeowners considering energy efficiency upgrades.
Energy efficiency improvements and technology shifts towards renewable energies or electrified heating will affect the energy tax base. For example, increasing energy excise taxes will have the immediate effect of increasing tax revenues. However, households may reduce energy use as a consequence of higher energy taxes, by using alternative fuel types or investing in energy efficiency of their housing. This will in the longer term reduce the energy tax base, and energy related tax revenues.
There is not only an interaction between tax bases but also between tax rates, altering incentives to invest in energy efficient retrofits or technologies. One example are split-rate property taxes, an increasingly discussed tool to promote more compact urban development and fight urban sprawl (OECD, 2022[29]). Under split-rate systems, land and the buildings market value are both taxed, but with a higher rate applied to land. Given the inelastic supply of land, taxing its unimproved value is considered economically efficient and less distortive compared to taxing buildings, which can discourage investment. By increasing the relative cost of holding under-utilised land, split-rate taxes encourage property owners to intensify land use, for instance by constructing additional units or redeveloping single-unit sites into multi-unit dwellings. Over time, such incentives can contribute to higher residential densities, particularly in high land-value urban cores. However, if the tax advantage on buildings leads primarily to increases in dwelling size rather than unit numbers, the impact on density could be attenuated. The effectiveness of split-rate taxation in limiting sprawl thus hinges on the relative growth of housing unit density compared to growth in dwelling size (Banzhaf and Lavery, 2010[32]).
Despite their potential benefits, split-rate property taxes remain relatively uncommon. Their application has been largely limited to the United States, Hawaii, and Finland (OECD, 2022[29]). Empirical works suggests that split-rate taxes may help increase residential densities (Banzhaf and Lavery, 2010[32]). Moreover, as high tax rates on land are thought to disproportionately affect wealthier households, whose property holdings tend to feature higher land-to-building-value ratios on average, these measures tend to be progressive (Bowman and Bell, 2004[33]).
Investment barriers, externalities and other market failures can hinder energy efficiency and energy source switching in buildings and should be considered in policy recommendations. The following section discusses the main externalities, market failures and investment barriers related to energy use in residential buildings, and their implications for policy design and implementation (Figure 2.5). Energy use is related to at least two environmental externalities, climate change and air pollution. The full societal costs of climate change and air pollution are not reflected in market prices so that business and households do not take them into consideration in their consumption and production decisions. Actors will therefore consume carbon-intensive or pollutant-intensive energy above the socially optimal level. Taxation can help to reflect these external costs in prices (see discussion in section 4.1).
Source: Author’s elaboration.
In addition, other market failures and investment barriers prevent energy efficiency improvements and energy source switching. While economic theory suggests that actors will invest as much as is privately optimal, energy efficiency improvements do not yield optimal levels in practice. This phenomenon refers to the “energy paradox”, which describes the under-adoption of privately cost-effective energy efficiency measures including investment (Jaffe and Stavins, 1994[34]; Gerarden, Newell and Stavins, 2015[35]). These additional barriers are important to take into account in policy design, as they risk limiting the effectiveness of price signals and reduce the responsiveness of market participants to policy interventions.
2.3.1. Externalities related to energy use
Energy use in buildings generates emissions both directly, through the combustion of fossil fuels for heating, hot water, cooking, and cooling, and indirectly via electricity or heat consumption. These rise external costs through their impact on climate, human health, ecosystems, infrastructure resilience, and biodiversity that are not included in market prices for using energy. The calculation of these external costs is a highly complex process, involving detailed economic and climate models that project the potential expected present and future damages from rising global temperatures. An illustration of the external cost estimation is the cost estimate by Rennert et al. (2022[36]) of USD 185 per tonne of CO2.
Energy use also contributes to air pollution emissions, which has a direct impact on health and economic outcomes. The current residential energy mix in Romania, particularly the widespread use of wood-based heating, contributes significantly to fine particulate matter (PM₂.₅ and PM₁₀) emissions (Figure 1.5.), which are among the most harmful air pollutants for human health. The external cost related to air pollution varies substantially depending on location. For example, one kilogram emitted in a densely populated, highly polluted urban area generates significantly higher health and economic damages than the same amount emitted in a rural area with low background concentrations and low population density. For Romania, De Bruyn and De Vries (2020[37]) estimate annual air pollution damage by municipality and show that per capita damages vary significantly across cities from EUR 615 per capita damage in Galati and EUR 3 004 per capita damage in Bucharest recording by far the highest level.
2.3.2. Market failures from land use
Environmental externalities from buildings arise not only through energy use, but also from impacts on land use. New construction result in a loss of open space. Soil sealing impairs the land’s ability to perform critical environmental functions, such as rainwater absorption, flood regulation, groundwater recharge, and habitat provision. In addition, the expansion of the built environment can contribute to urban sprawl, which increases car dependency, commuting times, and leads to higher GHG emissions and air pollution. The change in land use is of particular concern in the Bucharest Metropolitan Area, where agricultural and forested areas are decreasing in surface, while residential areas are expanding in an uncoordinated manner (Pătroescu et al., 2011[38]).
2.3.3. Barriers to energy efficiency and energy switching investments
Beyond market failures linked to energy and land use, the building sector faces barriers that limit the individuals’ willingness or ability to invest in energy efficiency and sustainable technologies and practices (Croci, Molteni and Palma, 2016[39]). These barriers can be economic, institutional, or behavioural. Addressing these barriers is essential for enhancing market responsiveness to environmental policies.
Economic barriers
A key economic barrier to energy-related renovations in residential buildings is high upfront costs combined with limited access to affordable financing, exacerbated by information asymmetries in credit markets. Investment to improve energy efficiency or generate energy source switching requires high upfront costs and sufficient household liquidity. However, financial institutions often do not correctly assess the risk associated with specific investments and grant credits relying on household income as a proxy, imposing strict debt-to-income limits, which can result in credit rationing. While income is correlated with credit risk, it is not a perfect indicator, resulting in the exclusion of modest but financially stable households from access to credit (Stiglitz and Weiss, 1981[40]). This barrier is particularly problematic for households seeking to invest in energy efficiency measures with high returns and low default risk, but who may still be considered high-risk borrowers due to limited credit histories or lower income levels (Palmer, Walls and Gerarden, 2012[41]).
Another barrier relates to information asymmetries due to the ownership structure of buildings (Castellazzi, Bertoldi and Economidou, 2017[42]). The complexity of the housing market stems from the diverse range of stakeholders, including homeowners, landlords, tenants, housing associations, and the non-market social housing sector. Tenure structures vary across countries, influencing policy priorities, regulatory approaches, and the effectiveness of different policy instruments (Hoeller et al., 2023[43]).
A key challenge is the split incentive problem6, where landlords and tenants have misaligned financial interests in energy efficiency improvements (Franke and Nadler, 2019[44]; Charlier, 2015[45]). Tenants typically have limited control over structural energy efficiency upgrades but bear the burden of higher energy costs. Conversely, landlords who invest in energy efficiency improvements may not directly benefit from lower utility bills, as these savings accrue to tenants in the form of reduced energy expenses or improved living comfort. In addition, landlords may be unable to recoup their investments through higher rents due to rent regulation or market constraints, or because tenants do not fully observe or value the energy performance of a dwelling and its associated benefits (Cornago and Dressler, 2020[46]). Ultimately, this results in under-investment in energy efficiency in private rental housing (Petrov and Ryan, 2021[47]; Myers, 2020[48]; Melvin, 2018[49]).
Owner-occupiers and landlords also differ in their investment incentives. Tenants tend to focus on short-term benefits of home upgrades, while homeowners typically have a longer investment horizon, making them more likely to invest in home upgrades compared to tenants. Empirical evidence confirms that owner-occupiers are more responsive to energy-saving opportunities than renters, illustrating the split incentives problem (Allcott and Greenstone, 2012[50]; Melvin, 2018[49]). Similar challenges exist in multi-apartment buildings, particularly those owned or managed by non-profit housing associations, where the distribution of costs and benefits further complicates investment decisions.
A distinctive feature of Romania is the high rate of homeownership in the residential sector. Romania has the highest share of owner-occupiers with over 95% of dwellings being privately owned and predominantly occupied by their owners (Eurostat, 2024[21]). This phenomenon can be largely attributed to the political transition of 1989, when the state, previously the primary owner of residential housing, implemented widespread privatisation policies (BPIE, 2012[51]). As a result, split incentives between landlords and tenants are likely less pronounced in Romania than in countries with lower homeownership rates. Owner-occupiers typically have direct control over their energy use and potential energy efficiency investments when living in single-family homes, although such control remains more limited in multi-family apartment buildings.
Institutional barriers
Institutional barriers can prevent investments in energy efficiency and energy source switching. Institutional barriers refer to the complexity of legislative procedures and regulatory provisions, non-integrated and conflicting policies and targets. The channels through which institutional barriers operate are many and include: lack of normative schemes; lack of institutional coordination between national, supra-national and local levels which implies redundancy legislation, delays in adopting policy schemes, uncertainty as well as coordination failures; lack of transparency and long times for authorizations (Croci, Molteni and Palma, 2016[39]). Institutional barriers often constitute significant limitations to the promotion and diffusion of energy efficiency technologies, undermining the success of government regulation (Langlois-Bertrand et al., 2015[52]).
Institutional barriers to energy-related renovation can also arise through coordination challenges in multi-family buildings. Energy retrofits in condominiums typically require the approval of homeowners’ associations, yet such decisions are subject to a public goods dilemma: individual owners may not perceive benefits proportional to their financial contributions, reducing incentives to invest. Measures like roof insulation, for example, are usually financed based on ownership shares, which may disadvantage residents on intermediate floors who benefit less directly.
Coordination challenges in multi-family buildings also relate to heat externalities. Heat transfer between units creates externalities, both positive and negative, that diminish the individual benefits of efficiency investments and reduce incentives for collective action (Giraudet, 2020[53]). The type of billing in multi-family buildings plays an important role when considering incentives to reduce energy use. While individual billing allows for financial incentives to reduce the energy bill, it is unfair due to heating spillovers. Limited control over shared building infrastructure, such as radiators located on common walls, further complicates renovation decisions.
Source: Romania National Long Term Renovation Strategy.
Romania’s residential sector faces a range of economic and institutional barriers that hinder progress on energy renovation, with distinct challenges across single-family and multi-family housing (Table 2.6). As of 2024, 62% of Romania’s population resides in detached houses, while 34% live in flats within multi-apartment buildings comprising ten or more dwellings (Eurostat, 2024[21]). The National Long-Term Strategy summarises the barriers to energy efficiency improvements in residential buildings. In single-family dwellings, low household incomes, high upfront investment costs, limited access to public support schemes, and the absence of clear renovation mechanisms significantly constrain energy efficiency improvements. In multi-family housing, additional challenges arise from collective decision-making processes within owners' associations, which often struggle with limited creditworthiness, debt management, and dependence on public grants. Billing practices that do not reflect individual apartment consumption reduce incentives for energy-saving investments.
Behavioural barriers
Behavioural barriers affect the decision-making processes for investments in energy efficiency. Many individuals are unaware of how poorly insulated their homes are or struggle to assess the energy efficiency of properties they consider purchasing (Al-Addous and Albatayneh, 2020[54]). Additionally, demand-side behavioural biases, such as myopia, bounded rationality, hyperbolic discounting, and dynamic inconsistencies, can prevent even cost-effective or zero-cost investments in energy efficiency (Gerarden, Newell and Stavins, 2015[35]; Fowlie, Greenstone and Wolfram, 2015[55]). Inertia, combined with a lack of awareness about potential energy savings and limited access to reliable information, knowledge, and expertise, further discourages proactive energy-saving measures. Information provision through energy performance certificates might address some of these barriers, but good design and implementation is crucial for their effectiveness.
The rebound effect captures the phenomenon that improving energy efficiency may save less energy than expected due to an increase of energy use. The rebound effect refers to the increase in energy use that can occur when efficiency improvements reduce the effective cost of an energy service, leading households or firms to eventually consume more of that service. It has often referred to as potential concern to energy efficiency related policies. Existing empirical literature does not support claims that energy efficiency gains will be reversed by the rebound effect (Chan and Gillingham, 2015[56]; Gillingham, Rapson and Wagner, 2016[57]).
Tax policy objectives in the residential building sector may be multiple. They can relate to raising revenues, increase tax system efficiency including through a better management of external costs, manage distributional consequences and energy affordability, or contribute to specific policy goals such as driving a transition to net-zero emissions, improve energy security, achieving a certain share of zero emission buildings, incentivising energy efficiency, or reaching a certain air pollution target.
The present analysis explores the different tax policy objectives relevant for Romania, including environmental outcomes, revenue raising, and distributional effects from the reform. Countries face the challenge of balancing multiple, interrelated policy objectives when designing taxes on energy use or pricing carbon emissions (OECD, 2025[58]). The simultaneous pursuit of these objectives, together with the inherent complexity of each, underscores the importance of carefully designing tax instruments while embedding them in a broader policy package.
While some of these policy objectives may reinforce each other, others may be less well aligned with each other. For example, when tax policy is used to create incentives to accelerate the transition to net zero, it comes with budgetary impacts in the short and long run, either because the instrument results in forgone revenue (e.g. tax incentives to acquire heat pumps) or because they explicitly aim to erode the tax base by reducing carbon-based fuel use (e.g. carbon tax on energy use). At the same time, when tax policy is used to manage external costs, it may also lead to distributional consequences that have to be taken into account.
2.4.1. Tax policy to internalise the external cost of emissions from buildings
The economics textbook policy response to an environmental externality is to impose a price equal to its external cost (also known as `Pigouvian Taxation’). Economic theory underscores the environmental effectiveness and economic efficiency of such instruments (Pigou, 1920[59]; Nordhaus, 1991[60]; Pearce, 1991[61]). At the same time, the design and implementation of such policy should consider amongst others, distributional impacts and political feasibility (discussed in Section 4.2.), as well as potential administrative constraints.
Environmental taxes allow to internalise the cost of externalities following the polluter pays principle and provide incentives for emission reductions. This can be achieved through taxation or emissions trading systems, which create financial incentives for reducing emissions and accelerating the transition to low-carbon building technologies (Mottershead et al., 2021[62]).7 Economic efficiency of the Pigouvian tax is maximized when all economic agents face a uniform emissions price (Goulder and Parry, 2008[63]). This requires a broad tax base across sectors and energy sources. Exemptions for certain energy products or users from the tax base are counter effective on efficiency grounds. The optimal tax rate would equal the marginal social cost of carbon (or air pollution).
Internalising the external cost of GHG emissions
Given the difficulty of directly monitoring GHG emissions across all households, taxes and ETSs covering energy use from the buildings sector typically tax the amount of a given input (‘tax on inputs’, also referred to as second-best optimal taxes). A specificity of CO2 is that its emissions from fuel use are directly proportional to the amount of fuel used. However, while taxes or ETSs might encourage households to lower their energy use, they provide no additional incentives for households to install heating systems that burn polluting less (for example through “end-of-pipe” treatment such as filters) (Goulder and Parry, 2008[63]; Knittel and Sandler, 2018[64]).
National carbon price instruments have been implemented in several EU member states to apply the polluter pays principle in the residential building sector. By targeting non-ETS sectors, such as buildings and transport, this provides incentives to reduce emissions under the ESR. Due to different stringency of ESR targets for 2030, the incentive to introduce such polluter pays instruments differs across countries. Figure 2.6 provides an overview of the carbon tax rates covering energy use from the building sector across EU countries, out of which some examples are discussed below:
One example is the French carbon tax, active since 2014 and pricing CO₂ emissions at a rate of EUR 44.6 per tonne of CO₂ in form of a carbon component in the fuel excise duties. The fixed price component increases annually to predetermined levels, yet since 2018 it remained unchanged due to lack of public support. The tax is applied to all fossil fuel consumption, including household heating, and is taxed upstream (see Annex B, Table A B.2. for a review of the French carbon tax).
Slovenia is another example for national carbon pricing covering emissions from buildings, taxing the carbon content of energy products since 2010. At a price point of EUR 17.30 per tonne of CO₂ as of 2023, the tax is additional to excise duties and set to meet the countries 70 % reduction target specifically for emissions from buildings until 2030 in comparison to 2005.
The Swedish national carbon taxation has the highest carbon tax rate of EUR 128 per tonne of CO₂ in 2023. Together with the ETS, Sweden covers now 95% of its fossil emissions with an explicit carbon price.
Besides carbon taxes, some EU countries such as Germany and Austria introduced a national ETS to price energy-related carbon emissions from energy use covering amongst others the building sector.
Germany introduced a carbon tax-sharing mechanism between landlords and tenants in 2022, effective from 2023, based on the emissions performance of the building. The measure aims to ease the carbon price burden on tenants and incentivise landlords to invest in energy efficiency, while still encouraging tenants to reduce consumption.
Note: The figure displays the 2023 nominal carbon price (per tonne of CO₂) in EU countries that apply either a carbon tax or an emissions trading system (ETS) covering energy use in the building sector.
Source: Author’s elaborationbased on OECD (2024[65]).
Both carbon taxes and national ETSs covering energy-related emissions from the building sector will soon co-exist with the upcoming introduction of the EU ETS2. This is already the case in other jurisdictions, where carbon taxes and ETSs co-exist (OECD, 2023[66]). Figure 2.7 presents the different options available to member states. Countries have the choice between (i) full replacement of the national policies, opting out from the ETS2, which is possible it the national carbon tax is higher than the ETS price, (ii) opting-in, implying that national measures cover additional emission sources or sectors not covered by the ETS, or (iii) keeping parallel systems, where the national price can act as price floor of the ETS or strengthen the price signal. For example, Germany announced to “opt-in” to maintain the national ETS (nEHS) for waste incineration (Deutscher Bundestag, 2025[67]). Many countries with national carbon pricing have not yet officially announced which option they will choose.
There can be substantial complementarities between a domestic instrument and the ETS2 where there are multiple tax policy objectives and differing coverage and intensities. These can be related to reaching more ambitious national targets, addressing coverage gaps in terms of emissions or sectors, or also improving the predictability of the price signal and hence improving long-term investment decisions and ensure stable revenue (Table 2.7).
Source: Author’s elaboration.
Internalising the external cost of air pollution
Taxing local air pollutants should consider location specific external costs, depending on population exposure, population density, demographic factors, and local weather conditions. A Pigouvian tax to price external costs from air pollution would price the pollutants at their respective costs (see Annex E, Table A E.1. for the external cost of air pollution across Romanian municipalities). Given the significant heterogeneity in external costs from air pollution across locations, there is an economic rationale for location-specific tax rates (Gauthier and Henriet, 2023[68]). However, implementing geographically differentiated air pollution taxes poses considerable practical and administrative challenges, particularly in tracking and attributing emissions by location and emitter. Implementing an air pollution tax targeted at the local level would for example require the development of disaggregated emissions inventories, enabling accurate identification of high-emission areas and effective policy design. Further, an air pollution tax can be levied on different air pollutants, e.g. PM2.5, NOX or SOX. Implementing air pollution taxes to internalise external costs may therefore be administratively burdensome, as it would require highly granular emissions and activity data.
Air pollution taxes or fees are not common in the residential building sector. Poland, Slovakia and the Czech Republic levy air pollution taxes, however, these do not apply to air pollution from energy use in residential buildings, but to emissions from industrial plants. Similarly, Romania levies an air pollution fee on the emission of air pollutants (NOx, SOx, and Persistent organic pollutants) from economic operators (Ordinance no. 196/2005 on the Environmental Fund, with subsequent amendments and additions). Air pollution from energy use in the building sector is more commonly addressed through regulations and subsidies, such as the subsidy programme “Energy Savings in Existing Housing Programme” to support energy efficiency improvements for residential housing in Greece (see Box 2.6 for further details) or the city-wide ban on solid fuel use for heating in Krakow, Poland (see Box 2.7 for further details).
To ensure consistency between climate and air quality objectives related to energy use in the residential building sector a central concern is the taxation of firewood. While a carbon tax may apply reduced rates or exemptions to certain biofuels, such as firewood, on the grounds that they are a renewable energy source, firewood combustion remains a major source of PM₂.₅ emissions. While fuel taxation is not the most efficient tool to capture location- and technology-specific external costs of air pollution (as discussed above), it would at least assign a price to PM2.5 emissions from firewood combustion for heating in the absence of a dedicated air pollution tax. In Romania, current excise taxes on energy products fully exempt firewood used for heating, and firewood is not covered under the EU ETS2. Similarly, the EU Energy Taxation Directive (ETD) currently excludes firewood from its harmonised minimum tax rates and explicitly permits partial or full exemptions under Article 16.8
2.4.2. Tax policy to reach environmental goals: the role of behavioural effects
Another objective of tax policy relates to achieving specific policy goals, including environmental outcomes. These environmental goals can relate to GHG emissions or air pollution reduction as included in Romania’s Long-Term Renovation Strategy, its Integrated National Energy and Climate Plan, the EU National Emissions Ceiling for air pollutants, and the EU Ambient Air Quality Directive.
In the residential building sector, emission reductions can be achieved through energy efficiency improvements and energy source switching. In the residential building sector, short-term emission reductions from buildings can be achieved through lower energy use, while long-term abatement may rely on energy source switching, the adoption of cleaner and more efficient technologies (including end-of-pipe abatement solutions), and structural investments in housing energy efficiency, such as improved insulation and renovation of heating systems.
To what extent taxes lead to specific air pollution or GHG emission reductions depends on the responsiveness of tax bases to changes in tax rates, the broader policy mix and economic context. The responsiveness of households’ consumption decisions is shaped by changes in average price levels, which affect disposable income (i.e. income effect) and changes in relative prices (i.e. substitution effect) (OECD, 2024[69]). If substitutes (i.e. a better insulated house, a new stove, connection to district heating or natural gas grid) are expensive or unavailable, behavioural responses may only occur at very high price levels. In contrast, where substitutes are readily available at small additional cost, price response can be substantial even at relatively low prices. The responsiveness of tax bases to taxation also depends on other factors such as the income level, time horizon (responsiveness in the short vs. long term can be different), and being a tenant or an owner, living in a single family or multi-family building.
The responsiveness of energy used for heating to price changes in the residential sector is generally lower than in other sectors. Heating energy constitutes a necessity good for households, particularly in colder climates, where consumption is relatively insensitive to price changes (Labandeira, Labeaga and López-Otero, 2017[70]). Further, short-run responses in the residential sector are constrained by the fixed nature of the building stock and heating technologies; households cannot easily or rapidly substitute between energy sources or retrofit buildings in response to price signals (Haas and Schipper, 1998[71]). Upfront costs and liquidity constraints, information asymmetries and behavioural frictions, such as imperfect knowledge about energy use, bounded rationality, or low salience of energy costs, further dampen responsiveness (Allcott and Greenstone, 2012[50]; Gillingham, Newell and Palmer, 2009[72]).
Within the residential sector empirical evidence suggests that households are, to varying degrees, responsive to energy price signals (Labandeira, Labeaga and López-Otero, 2017[70]). Access to a warm home is considered a necessity good. However, when confronted with increasing heating costs, households may seek to reduce energy use in the short term, through lowering indoor room temperatures or modifying ventilation practices to minimise heat loss, or through investing in thermal insulation or clean energy technologies in the longer term. These behavioural adaptations highlight that energy use is not entirely inelastic and that households' responses are conditioned by a variety of factors, including the time horizon, the income level or house type (Box 2.2 provides a review of empirical estimates on energy price elasticities in the residential building sector).
Empirical estimates of the price elasticity of air pollutant emissions in response to taxation remain limited. However, available descriptive evidence and modelling studies suggest that air pollution taxes are associated with reductions in emissions (Juřík and Braathen, 2021[73]; Mardones and Cabello, 2019[74]). As abatement technologies continue to advance and decline in cost, the responsiveness of emissions to price signals is expected to increase over time.
Estimates of responsiveness of households to price changes vary significantly across a variety of factors. Recognising and quantifying these heterogeneous elasticities is critical for the analysis and design of energy pricing policies.
One key dimension is the time horizon. Short-term elasticities predominantly reflect adjustments in fuel demand conditional on existing fuel technologies and the prevailing energy efficiency of housing stock. In contrast, medium- and long-term elasticities incorporate households' broader behavioural and technological responses, such as energy source switching (captured through cross-price elasticities) and investments in energy efficiency upgrades, including housing retrofits. Focusing on the European context, Ewald et al. (2021[75]) estimated price elasticities of −0.1 in the short run and −0.5 in the long run. A meta study by Labandeira et al. (2017[70]) provides a review of short- and long-run price elasticities of energy use by energy type (see Annex C, Table A C.1.).
When comparing empirical estimates of price elasticities, it is essential to consider the estimation methodology and underlying assumptions. Cross-sectional estimates reflect long-run equilibria, as they capture the cumulative effect of adjustment processes over time (Flues and van Dender, 2017[76]). In contrast, studies that control for endogenous factors, such as the energy efficiency of the building stock, focus on short-run behavioural responses. Studying natural gas price changes in Ukraine, Alberini et al. (2020[77]) study the responsiveness of household consumption and find a price elasticity of -0.16. Another empirical approach capturing differences in the time dimension is through discrete-continuous models (Hanemann et al., 2024[78]). These models differentiate between the discrete choice of energy-using appliances or heating technologies and the continuous demand for energy associated with their usage.
Income levels are another important factor shaping the price elasticity of residential heating demand. In line with Engel's Law, lower-income households allocate a disproportionately higher share of their income to essential goods such as heating energy, especially in colder climates where heating is indispensable and substitutes are limited (Flues and van Dender, 2017[76]). This heightened budgetary pressure means that lower-income households are often more responsive to changes in energy prices, exhibiting higher price elasticities as a result (Auffhammer and Rubin, 2018[79]; Alberini, Khymych and Ščasný, 2020[77]; Trotta, Hansen and Sommer, 2022[80]).
Different studies have shown that in the short-term lower income households react stronger to energy price increases than high income households (Auffhammer and Rubin, 2018[79]; Alberini, Khymych and Ščasný, 2020[77]; Krauss, 2016[81]; Trotta, Hansen and Sommer, 2022[80]; Feger, Pavanini and Radulescu, 2022[82]). Krauss (2016[81]) estimates that following a 1% increase in gas price in Armenia, the poorest two quintiles reduce monthly gas consumption by 0.15%, while households in the richest quintile reduced their consumption by 0.09% only.
Evidence on long-run energy price elasticities across income groups remains limited and mixed. Long-run elasticities capture demand adjustments that develop over time, reflecting structural changes such as shifts in lifestyle, social norms, and the gradual replacement or acquisition of energy-using durable goods, particularly improvements in energy efficiency. Schulte and Heindl (2017[83]) find that, in the context of residential heating demand in Germany, households in the top income quartile exhibit price elasticities three times higher than those in the lowest quartile. By contrast, Trotta et al. (2022[80]) analysing residential district heating in Denmark, report that low-income households are significantly more price elastic than high-income households.
Another dimension elasticity estimates vary is by house type. Single family or detached houses typically exhibit higher price elasticities of residential heating demand compared to apartments in multifamily buildings due to structural and institutional differences (Alberini, Khymych and Ščasný, 2020[77]; Hellmer, 2013[84]; Hansen, 2018[85]; Leth-Petersen and Togeby, 2001[86]). This is largely attributable to differences in energy use patterns, autonomy over heating systems, and structural characteristics of the buildings. Occupants of single-family homes generally have more direct control over heating systems, greater exposure to full energy price signals, and more discretion to invest in energy efficiency measures such as insulation or boiler upgrades. In contrast, residents in multifamily dwellings often face collective heating systems, limited individual metering, and shared thermal envelopes, which dilute price signals and reduce incentives to adjust consumption (Hellmer, 2013[84]; Leth-Petersen and Togeby, 2001[86]).
2.4.3. Equity considerations relating to pricing energy use in residential buildings
Understanding and addressing the distributional impacts of environmental taxation is key to ensure equitable policy outcomes. Estimating the effects of tax reforms across income groups and regions can inform the development of targeted accompanying measures (OECD, 2024[69]).9 Such measures are vital to mitigate adverse short-term impacts on vulnerable households with limited financial capacity or access to alternatives, thereby enhancing the political and social acceptability of the reform. While this section provides an overview of the key conceptual considerations, Chapter 3 turns to the Romanian context, analysing in detail the distributional impacts of alternative tax policy reform scenarios and discussing the associated policy implications in greater depth.
Taxes on heating fuels and end-use electricity consumption tend to have regressive impacts. Domestic fuels are a basic necessity good with relatively inelastic demand. Increases in fuel prices can disproportionately affect lower-income households, which allocate a significantly larger proportion of their income to heating fuels compared to higher-income households, lack sufficient savings or flexibility to reduce other expenditures (Flues and van Dender, 2017[76]; Sologon et al., 2025[87]). Energy source preferences differ not only across income levels (horizontal inequality), but can also differ across regions, and household compositions (vertical inequality). Such preferences are influenced by factors such as urban-rural location, climatic conditions, and infrastructure availability, which can result in uneven exposure to energy taxation. Without mitigating measures, such effects risk exacerbating existing inequalities, notably through heightened risks of energy poverty (Flues and van Dender, 2017[76]).
A well-designed policy mix can address concerns related to distributional concerns or energy poverty of an environmental tax (OECD, 2025[88]). It is preferable to deliver support not through differentiated tax rates or bases within a given tax, but through complementary transfer mechanisms. However, the design of transfers must be tailored to each country’s fiscal and social context, taking into account existing tax structures and the specific vulnerabilities of affected populations:
Lump-sum transfers, which provide equal payments to all households, have been shown to be progressive and effective in reducing inequalities (Owen and Barrett, 2020[89]) and energy poverty (Berry, 2019[90]). An example for a lump-sum transfer is the Austrian Climate Bonus (“Klimabonus”), which directly redistributes revenue from the nETS to all citizens.10 The mechanism is designed as an annual direct transfer per citizen and amounts to a minimum of EUR 145 in 2024. The bonus is staggered into 4 broad categories on a spectrum from city to remote areas, with citizens in the most remote areas eligible for the maximum transfer of EUR 290. Children under 18 qualify for half of the lump-sum. differentiated in 4 steps from urban to rural
Targeted social transfers can reduce inequality and better support vulnerable households. Transfer strategies that target vulnerable populations, based on income, household composition, geographic location, or climate zone, can increase the equity of carbon pricing reforms and help mitigate energy poverty (Vandyck et al., 2023[91]). Targeted transfer for energy efficiency improvements has been shown to stand out as cost-effectively saving energy and increasing comfort (Bourgeois, Giraudet and Quirion, 2021[92]).
New approaches to targeting heating and energy support increasingly rely on alternative or composite indicators to determine eligibility, recognising the importance of addressing vulnerability factors beyond income (Hemmerlé et al., 2023[93]). Transfers can address vertical equity concerns (across income groups), but also horizontal equity concerns (within income groups, e.g. households with similar income levels but differing energy needs). See Box 2.3 for an in-depth discussion.
Whether targeted support is funded through revenue recycling (instead of the general budget) may be relevant for public perception. Even partial revenue redistribution can already yield significant improvements for the lowest income households (Vandyck et al., 2023[91]) . However, strict and narrow earmarking is associated with risks of less efficient public spending, given spending needs can change (Marten and van Dender, 2019[94]).
Reduced VAT rates on the use of certain energy products can be intended to alleviate the tax burden on households but entail significant policy trade-offs (OECD, 2024[95]). In times of crisis, such as the COVID-19 pandemic or the recent energy crisis, temporary VAT reductions have been deployed as emergency measures to limit the impact on households and businesses (OECD, 2024[95]; Hemmerlé et al., 2023[93]). Benefits of reduced VAT rates on energy products, may accrue disproportionately to large energy consumers who often have higher incomes. Reduced VAT rates lower consumer prices, weakening incentives for energy savings, energy source switching and new infrastructure investments, and can even trigger rebound effects by encouraging consumption. One example are reduced rates for firewood, which can drive distortionary behaviours. For example, Greece, Slovakia and Bulgaria are taxing firewood at their standard rates, contributing to a less distorted tax base. Out of the three, particularly Bulgaria’s final energy use is constituted very similarly to Romania, with more than 40% derived from wood (Keliauskaitė et al., 2024[96]). Reduced VAT rates also result in foregone revenue, which poses particular challenges in countries such as Romania where public finances rely heavily on VAT receipts (OECD, 2024[95]). To maintain revenue neutrality, governments may need to raise other taxes, potentially introducing additional economic distortions. Reduced rates can also generate arbitrary differences in tax treatment across consumption categories and inequitable outcomes, disproportionately benefiting consumers with particular preferences or consumption patterns.
During the 2021-22 energy price crisis, governments provided large support to help households and firms. In a recent report, Hemmerlé et al. (2023[93]) analyse the support measures that were put into place by different countries. While in most countries, support has been largely untargeted and fiscally costly, the report provides insights into novel strategies to improve targeting. Countries have increasingly adopted two main strategies to improve the targeting: digitalisation and integrated data systems, and the use of novel indicators through categorical targeting.
Digitalisation enables governments to combine multiple datasets, such as income information, household characteristics, and energy use patterns, to more accurately identify households in need of support. In Denmark, the government linked the national real estate register with income data to automatically deliver heating cheques to households most exposed to high energy prices. In the United Kingdom, postal code information is linked to local weather station data to trigger automatic Cold Weather Payments for each seven-day period of very cold weather. The wider deployment of smart meters can also enhance targeting by providing real-time data on household energy use, allowing governments to link usage patterns with administrative data on income and household size.
The second approach involves the use of alternative indicators or a combination of indicators to determine eligibility, recognising that vulnerability extends beyond income alone. In France, a lump-sum energy payment is allocated based on income, household size, and age composition, enabling more precise identification of vulnerable households. Italy’s social bonus discounts energy bills for low-income households while also considering serious health conditions or physical discomfort. The Netherlands has provided a one-off energy allowance to households not receiving social assistance but with incomes up to 120% of the social minimum, thereby extending support to some middle-income households and mitigating potential work disincentives. Other countries have targeted support based on heating source: Denmark provided tax-free cheques to households using gas or electricity from gas-fired plants and below an income threshold; Luxembourg subsidised the purchase of bulk wood pellets; and Latvia compensated part of the cost of granules and briquettes used for heating when prices exceeded a set threshold.
Hemmerlé et al. (2023[93]) put forward a comprehensive approach to guide countries in their targeting efforts. It employs a combination of targeting methods to identify vulnerable households to energy price increases. It also lays out required data to determine eligibility. This approach divides the factors affecting vulnerability to energy price shocks into five layers: the energy burden (e.g. the energy cost’s share of income), the income and wealth status (e.g. below the poverty line), the main heating source (e.g. the heating systems), the energy efficiency of the house (e.g. energy efficiency label), and the energy needs (e.g. household composition and size). These layers result in a vulnerability ranking based on which support could be targeted.
A similar vulnerability-based approach has recently been adopted in Moldova to compensate households facing high energy costs. Under this system, households are assigned vulnerability coefficients based on several parameters, including income level, the share of energy expenditure in total consumption, the type of heating system, and household size. These coefficients are then combined to place households into distinct vulnerability categories, with the level of compensation increasing in line with the degree of vulnerability.
2.4.4. Tax policy to raise revenue
Another objective of tax policy relates to revenue raising. Romania faces a persistently high fiscal deficit, underscoring the need for sustainable revenue-enhancing measures. Romania’s general government deficit rose to 9.3% of GDP in 2024, driven by substantial increases in public sector wages and pension outlays (EU, 2025[97]), and Romania has been subject to the EU Excessive Deficit Procedure (EDP) since 2020. Expanding the role of environmental taxation presents an opportunity to strengthen public finances while simultaneously addressing pressing climate and environmental challenges.
In the context of energy taxation, governments capacity to raise revenues will depend on the responsiveness of household energy use to price and tax rate changes. The responsiveness of energy used for heating to price changes in the residential sector is generally lower than in other sectors, but varies amongst others across time horizon, income levels, and house types (see Box 2.3 for a review). Household’s demand elasticity will also depend on the possibilities of substitution between different energy sources.
Raising revenue also relies on tax compliance and energy sourcing. Widespread tax fraud and illegal logging remain a key challenge in Romania (see Box 2.4). These risks weakening the intended revenue raising potential. Broader measures to strengthen enforcement, reduce tax evasion, and curb illegal logging are essential.
Low tax compliance significantly constrains Romania’s capacity to mobilise domestic revenue. The informal economy remains sizeable, estimated at 29% of GDP in 2022 (Schneider and Asllani, 2022[98]), undermining the tax base for both income and consumption taxes. In particular, widespread VAT evasion and the extensive application of reduced rates limit the revenue-raising potential of the VAT system. Romania recorded a VAT compliance gap of 36.7% in 2021, the highest in the EU, compared to a range of 0–5.5% in most member states (OECD, 2024[16]). Although Romania intensified efforts to combat tax fraud over the past decade, progress in adopting modern compliance tools has been slow. Only since 2022 has the country begun implementing real-time transactional reporting for VAT payers, following the lead of countries like Hungary and Latvia (European Commission, 2023[99]). Delays in the digitalisation of tax administration continue to hinder improvements in compliance and enforcement.
Illegal logging remains a significant challenge in Romania, with a substantial share of firewood used for residential heating sourced either privately or through illegal channels (OECD, 2024[16]). Romania’s forests are among the most biodiverse in Europe, but illegal logging remains a major environmental threat. Extending the tax base to include firewood risks exacerbating these behaviours by increasing incentives to purchase wood on the black market.
The new Romanian Forestry Code is addressing some of these challenges through the provision of a new legal framework for the protection of forests. Adopted by Law no. 331/2024 and published in the Official Gazette on January 9, 2025, the new Forestry Code introduces several policies. The surveillance of forest roads will be carried out through video systems, with images stored for a minimum of 3 months. The Forestry Authority will connect these systems to the national IT platform, and the Police, Gendarmerie and Forest Guard will have direct access to this data.
One of the main concerns of carbon (or air pollution) taxes is that these may not offer a stable long-term revenue source, as their primary objective of emissions reduction ultimately erodes the tax base (OECD, 2024[100]). One policy solution to this is to introduce carbon taxes gradually. In the short to medium term, the effect of rising tax rates can outweigh the reduction in emissions. Only slight reductions are foreseeable until 2030 (Chapter 3), such effects might be more significant in the longer term. To address these concerns, revenue-neutrality and fiscal sustainability can be supported by strengthening alternative tax bases. In particular, reforms in other areas, such as recurrent property taxation, can help secure stable revenue streams as households and businesses decarbonise and, over time, contribute less to energy and carbon tax revenues.
2.4.5. The existence of several market failures in the building sector calls for a policy mix
The presence of multiple market failures and economic, institutional, and behavioural barriers in the residential sector call for a sound policy mix. Combining policy instruments can enhance the effectiveness, efficiency, and equity of Romania’s decarbonisation efforts. According to the Tinbergen rule, one policy can only achieve one goal (Tinbergen, 1952[101]). At the same time certain market failures might be best addressed through specific policy instruments (Allcott, Mullainathan and Taubinsky, 2014[102]). While abatement technologies in the building sector are either already available or expected to become deployable in the near future, their widespread adoption is hindered by different market failures, regulatory barriers, and political economy constraints (Hoeller et al., 2023[43]) (as discussed in Section 3).
When designing a sound policy mix interactions between instruments is key and should be considered to maximising effectiveness and avoid unintended trade-offs. Sweden stands out as a best practice example in reducing GHG and air pollution emissions from the residential buildings sector, having achieved substantial progress through the implementation of a comprehensive and well-coordinated policy mix (see Box 2.5).
Sweden achieved a 70% reduction in GHG emissions from the residential sector between 1990 and 2021 through a comprehensive policy framework combining regulatory measures, economic instruments, and support mechanisms (Odysee-Mure database, 2025[18]). Also, the air quality in Swedish cities has improved continuously over the last twenty years and has led to significant health benefits (Kilbo Edlund et al., 2024[103]).
Some of the key elements of the Swedish policy mix are outlined below:
Carbon tax covering residential buildings: Sweden's carbon tax of EUR 134 per tonne CO2 in 2025 is the world's most stringent rate. Since 1990, the tax has increased gradually, making the tax acceptable for the general public while sending a strong price signal. Combined with the EU ETS, Sweden covers 95% of its GHG emissions with explicit carbon pricing, creating strong decarbonisation incentives. Revenues from the Swedish carbon tax fund the general budget, which can be used to address distributional concerns.
Tax deductions for installation of energy efficient heating: Act 2009:194 introduces a tax deduction of 30% of labour costs from a household’s personal income tax for a maximum of EUR 5 000 for the installation of heat pumps, conventional heating installations with solar panels the replacement of fossil-based heating systems, but not for biomass heating. A similar tax deduction of 15% of the labour cost applies for the installation of grid-connected photovoltaic systems.
Stringent performance standards for new buildings: In line with Sweden's net-zero carbon economy target by 2045, all new public buildings were required to be zero-energy from 2019 onwards. From 2021, all new buildings must meet the nearly zero-energy standard under regulations introduced in the Planning and Building Ordinance in 2016 (IEA, 2025[104]).
Information campaigns: Sweden leveraged information instruments to address market failures through two key initiatives (Swedish Long term Renovation Strategy). The country established a "Reliable Renovation" planning system providing property owners with tailored energy efficiency recommendations based on their financial circumstances, resulting in an average 61% reduction in energy use. Additionally, Sweden promotes green leases (i.e. voluntary agreements between the tenant and landlord that allow to split costs and benefits between the parties so that both parties can benefit from an energy efficiency upgrade) to resolve split incentives between landlords and tenants, with the Swedish Energy Agency developing online courses and brochures to educate stakeholders about this approach that aligns energy costs with investment responsibilities.
Energy Performance Certificates (EPCs): EPCs were introduced in Sweden in 2006 through the Energy Declaration Act. It is required by law that newly constructed buildings and buildings that are sold should have an EPC.
Reporting obligation: The Act (2021:787) establishes the obligation to report the climate impact of the construction of a new building in a climate declaration to generate salience of that impact.
Targeted support measures
Financing constraints can justify the use of well-targeted subsidies or tax incentives. Subsidies and tax incentives can help households to invest in retrofits and switching energy sources. Targeting such measures well can help mitigate potential distributional concerns, e.g. that only high-income earners with sufficient financial capacity may invest and thus benefit from the support. One example taking this into account is MaPrimeRénov’ in France, which provides higher grants for retrofitting projects undertaken by lower-income households and advance payments for the lowest-income groups to facilitate renovations. Another example for targeted energy efficiency subsidies is the Greek Exoikonomo programme, which is the central part of the Greek policy mix (see Box 2.6). Several OECD countries also offer tax reliefs to encourage energy-efficient housing renovations by providing financial incentives for investments in renewable energy or energy efficiency retrofitting (OECD, 2022[29]; OECD, 2024[105]).
The effectiveness of targeting retrofitting support to lower-income households depends on homeownership rates at the lower end of the income distribution, which vary significantly across countries (OECD, 2022[29]). In Romania, the high rate of home ownership implies that a large share of low-income households are owner-occupiers, which may enhance the effectiveness of such support measures in alleviating financing constraints.
The Greek policy mix shows how a combination of different policy instruments can reinforce each other, yielding significant emission reductions while supporting lower income households in particular. Greece has decreased GHG emissions from heating and cooling in households by more than 50% between 2005 and 2021 (Keliauskaitė et al., 2024[96]). However, energy poverty continues to be a challenge (Sarafidis et al., 2025[106]; Maier and Dreoni, 2024[107]). The main instruments of the Greek policy mix for residential buildings are the following:
The “Energy Savings in Existing Housing Programme” (Exoikonomo) is the main tool supporting energy efficiency improvements for residential housing. Active since 2010, the socioeconomically staggered subsidy for energy investments combined with an interest free loan was initially granted to homeowners in three eligible income brackets, specifically targeted lower income households.11 An evaluation of the programme’s environmental impacts over the 2010-2017 period showed that the 51 152 households receiving funds led a reduction in GHG emission by 612 kt CO2 (European Investment Bank, 2025[108]). Survey results showed 70% of homeowners would not have participated without the grant (Drivas, Rozakis and Xesfingi, 2019[109]).
A deduction of renovation works from the personal income tax is available for up to 40% of expenses, spread over 4 years. This intervention is available to all income brackets.
The Greek Climate Law includes a ban on the installation of oil boilers in 2025.
Targeted subsidies are implemented to alleviate energy poverty in Greece: e.g. a social household tariff to reduce electricity prices for vulnerable households, a biomass grant for citizens in mountainous municipalities, and heating allowances for lower income brackets and specific localities (Sarafidis et al., 2025[106]). However, Greece also implemented a series of untargeted support measures to increase energy efficiency. The electricity subsidy and the gas subsidy on 50% of gas price increases in 2021 are some examples where support is paid to citizen regardless of income levels.
Greece's strategy demonstrates preliminary successes in increasing energy efficiency. While the income specific targeting reduces cost, the focus on non-market-based policy instruments for decarbonising the residential building sector continues to create fiscal burden. A policy mix including carbon pricing would generate fiscal revenues while targeting energy efficiency improvements and energy source switching more effectively.
Empirical evidence focusing on residential buildings suggests that untargeted support measures tend to have regressive effects and can increase existing inequalities. Such support measures tend to benefit higher-income households with greater capacity to invest in low-carbon technologies. Analysis of subsidies for residential renewable energy technology in Lithuania shows that while the support reduces aggregate energy use, it provides most benefits to high-income households (Lekavičius et al., 2020[110]). Another paper evaluates renovation grants in Estonia and finds that despite equal access to subsidies, socio-economic inequalities across regions persist. Regions with lower socio-economic indicators acquired fewer public subsidies than regions with higher ones (Lihtmaa, Hess and Leetmaa, 2018[111]). Similar findings of the regressive impact of retrofitting subsidies have been found in the Italian context (Forni, Giarda and Sommer, 2025[112]). Ultimately, the distributional impact of subsidies depends on their design and targeting mechanisms.
The burden on fiscal budgets is more pronounced when the support mechanism does not achieve additional energy-efficiency improvements or energy source switching. Support measures come with budgetary impacts, either directly for subsidies or through forgone tax revenue for tax expenditures. Such revenue losses are difficult to justify when the supported activity is redundant, i.e. beneficiaries from the support would have proceeded with the subsidised activity either way and the support only represents a windfall gain for the household. One example, where this has occurred is the Italian Superbonus scheme, a 110% tax credit for renovation costs (see Annex B, Table A B.1. for a detailed review of this policy). During its early implementation years, the scheme benefitted high income households that were aware of the support and able to readily invest (Forni, Giarda and Sommer, 2025[112]). The full expense coverage far exceeded the planned budget and additionally increased prices as there was little incentive for homeowners to negotiate (Keliauskaitė et al., 2024[96]). In comparison, the current Ecobonus scheme covers only a share of expenses, which limits fraud and encourages least-price options.
Information provision
Information asymmetries and behavioural biases in the residential sector can motivate the complementing a carbon tax with information instruments, helping households reflect energy prices in their consumption decision. These include the use of energy performance certificates (EPCs), energy audits, and product labelling schemes, which aim to improve consumer awareness and decision-making. Empirical evidence suggests that home energy audits (or EPCs) have mixed effects on energy efficiency investments (Frondel and Vance, 2013[113]; Cornago and Dressler, 2020[46]). Similarly, the effectiveness of energy labelling appears to be ambiguous. While some studies find that labels influence consumer choices positively (Ward et al., 2011[114]), others report mixed effects (Houde, 2018[115]; Allcott and Sweeney, 2017[116]).
Regulatory measures
Other policies to reduce the consumption of fossil fuels for heating are regulatory instruments such as performance standards, technology standards, and bans of certain technologies. Standards, regulations, and bans can help overcome additional market failures, such as the split incentive problem, coordination failures, and enforce the upgrading of new housing equipment and appliances. Bans on highly polluting stoves can deliver rapid and predictable air quality improvements.12 However, bans and regulations come with additional costs and risks, such as distributional concerns (e.g. households that do not have an alternative or cannot afford an alternative heating source will suffer) or lock-in of the technology chosen by the government or of existing technology (in contrast to emerging technology). The EU “Save Energy” Communication proposes several elements to phase-out fossil fuels for heating: At Member State level, the Communication proposes “to introduce national bans for boilers based on fossil fuels in existing and new buildings by setting requirements for heat generators based on GHG emissions or the type of fuel used”. However, current regulations only address about 10% of the total fossil energy use for heating in the EU (Braungardt et al., 2023[117]).
A key distinction among regulatory approaches is whether they target only new products or also regulate existing installations. At the EU level, the Ecodesign Directive introduced minimum emission and efficiency standards for solid fuel local space heaters through Commission Regulation (EU) 2015/1185, in force since 2022. These standards set minimum energy efficiency and maximum permissible emissions of PM, CO, NOₓ, and organic gaseous compounds (OGC) for manufacturers and importers, applying exclusively to new products placed on the EU market. On its own a policy focusing on new products risks worsening pollution, encouraging households to keep their older heating stove, for example, instead of buying a new one.
By contrast, some EU member states, regions, or cities have implemented measures that also address existing installations, which allows to phase out highly polluting stoves more quickly. In France, since 2022, the use of open fireplaces and the most polluting wood stoves has been banned in urban areas with more than 250 000 inhabitants and in regions where pollutant concentrations exceed legal limits under regional Plans de Protection de l’Atmosphère (French Environmental Law, 2025[118]). Similarly, the city of Kraków combined a ban on solid fuel heating with enhanced monitoring, public engagement, and education to accelerate the transition to cleaner heating solutions (Box 2.7).
Kraków, formerly among the European cities with the poorest air quality, implemented a comprehensive and innovative Air Protection Programme, leading to significant and measurable improvements in air quality. Key elements of this best practice include:
Legally binding local framework:
Adoption of the Air Protection Programme as an act of local law, ensuring enforceability.
Introduction of a city-wide ban on solid fuel (coal and wood) use for heating as of September 2019, targeting the largest source of particulate matter emissions.
Comprehensive subsidy programmes
Poland introduced a number of comprehensive programmes from which households can obtain subsidies, including the Clean Air Programme, My Warmth, the Stop Smog Programme, but also the Thermomodernisation Tax Relief. These subsidy schemes cover support for the replacement or elimination of high-carbon heat sources for low-carbon ones, the installation of heat pumps, the thermomodernization of single-family residential buildings, and the connection to the heating or gas network.
Monitoring and transparency for evidence-based policymaking:
Deployment of eight air quality monitoring stations (including five provided by the Chief Inspector of Environmental Protection).
Comprehensive inventory of all wood and coal-fired heating appliances (stoves, boiler rooms, fireplaces) to quantify the scale of the challenge and prioritise action.
Public engagement and education:
Extensive environmental education campaigns tailored to all age groups, including outdoor events, training, lectures, and interactive activities.
Establishment of an Energy Advisory Centre offering information on financial incentives, technical support for renewable energy installation, building modernisation and heating system conversion.
Targeted outreach to disadvantaged households by municipal advisers, assisting them in replacing solid fuel stoves and accessing funding opportunities.
Thermal imaging tests offered to single-family homes, visualising heat losses and motivating investments in energy efficiency and thermal modernisation.
Kraków’s efforts has yielded substantial results. By prioritising the replacement of outdated solid fuel stoves, the city successfully decommissioned over 45 000 furnaces and installed more than 2 600 renewable energy systems by the end of 2020, complemented by the voluntary removal of an additional 20 000 furnaces by increasingly environmentally conscious residents. These measures collectively avoided the combustion of over 330 000 tonnes of coal and prevented approximately 1 600 tonnes of dust emissions between 2012 and 2019.
Source: https://environment.ec.europa.eu/topics/urban-environment/european-green-capital-award/inspiration/krakow-air-protection_en#:~:text=One%20element%20of%20the%20air,improve%20air%20quality%20in%20Krak%C3%B3w. More information on the subsidy design can be found, for the Clean Air Programme https://www.iea.org/policies/11538-polands-clean-air-programme, for My Warmth https://www.iea.org/policies/21061-my-warmth, for the Stop Smog Program https://www.iea.org/policies/12227-stop-smog-program, and for the Thermomodernisation Tax Relief https://www.iea.org/policies/26920-thermomodernisation-tax-relief.
While bans can be effective in driving behavioural change, they also raise important equity concerns. Without targeted exemptions or compensation mechanisms, such measures can impose significant asset-replacement costs on lower-income households (Torné and Trutnevyte, 2024[119]). One example of a policy package taking into account equity concerns is the Sarajevo Canton’s Strategy for Limiting the Use of Coal and Other Solid Fuels for the period 2023–2033, which introduced seasonal bans on the use of coal for residential heating in Sarajevo due to severe winter smog, alongside subsidy schemes for cleaner heating alternatives (UNDP, 2023[120]).
Local approaches to air pollution regulation can be motivated by heterogeneous pollution levels within a country and the higher economic costs of air pollution in densely populated areas. Regulating at the local level can enhance efficiency, as the health and environmental damages of air pollution are more pronounced in urban settings. Localised measures also help avoid the drawbacks of uniform, nationwide bans or regulations, which may raise equity concerns in case of significant differences between urban and rural contexts. For example, while urban areas experience higher air pollution costs, they also tend to have higher average incomes. It may therefore be more efficient to target bans in urban areas, where the benefits of reducing air pollution are greatest.
Ultimately, to build an appropriate policy mix it is important to consider the different types of instruments available, evaluate their benefits and costs in the specific country context, and understand the interactions of different policy instruments. For example, the effectiveness of economic instruments such as carbon taxes or subsidies to support energy efficiency in energy poor household may be improved if they are combined with targeted consultancies or awareness raising campaigns.
Ensuring that tax policy in Romania’s residential building sector is aligned with economic and environmental principles is critical to achieving effective, efficient, and equitable outcomes. This section examines the extent to which Romania’s tax framework in the residential building sector reflects these principles, based on the preceding stocktake of current policies, the review of tax policy principles and best practices in other EU member states. It suggests strategic reform options across the different tax types. Chapter 3 models selected reform options and evaluates their environmental, economic and distributional effect.
2.5.1. Taxation of energy use and GHG emissions
In Romania, energy prices are not aligned with the carbon and air pollution content of different energy sources, weakening incentives for energy savings and cleaner energy use. In the buildings sector, firewood and LPG are exempt from excise duties, while coal and natural gas face low excise duties, and no explicit carbon price applies to energy sources, leaving the majority of carbon-intensive and air-polluting energy use in residential buildings effectively untaxed (Figure 2.7). For residential heating purposes, exemptions are granted not only for firewood and LPG but also for coal and natural gas. This misalignment undermines both climate and air quality objectives, as well as Romania’s revenue raising capacity in the short to medium term.
Note: Tax rates as applicable on 1st April 2023. The effective carbon rates include energy sources used for business heating such as LPG and natural gas, with rates that differ from non-business (domestic) heating. The exemption for non-business heating LPG use implemented from August 2025 is not illustrated.
Source: OECD (2026[121]).
Notwithstanding the forthcoming introduction of the EU ETS2, Romania could consider a complementary carbon tax, either to function as a carbon price floor or to gradually prepare economic actors in the event that the ETS2 implementation is further delayed. A national carbon price floor could ensure all carbon-intensive energy sources are priced at a certain minimum level, thereby increasing efficiency of abatement decisions across the economy, avoiding distortions and generate co-benefits in form of tax revenues and reduced air pollution. National approaches are currently in place in Switzerland, Sweden, Norway, Finland, Ireland, France, Luxembourg, Iceland, Austria, Germany, Denmark, Portugal, and Slovenia (see Figure 2.6). The interaction of a national carbon price with the EU ETS2 would need to be well articulated and follow respective EU-level rules.
Similarly to explicit carbon prices, fuel excise taxes can provide relevant price signals to households. If a national carbon price is not conceivable in Romania, fuel excise taxes can also reflect the external costs of fuel consumption and put a price of carbon-intensive energy use, influencing fuel consumption, CO₂ and air pollutant emissions. Following the arguments above, the current fuel excise regime would need to gradually phase out currently generous exemptions for residential heating fuels, including coal, firewood, LPG and natural gas, and harmonise implicit carbon price levels (i.e. not tax levels) across fuels.
Policies that increase the price of energy use in residential buildings come with distributional and energy poverty concerns that can be addressed through targeted policies. Instead of costly and often ineffective broad-based support measures like reduced VAT rates, energy price caps, and untargeted subsidies, support for vulnerable households would be more effective if targeted. Targeting approaches provide support based on the various factors impacting negative distributional consequences, household vulnerability, and energy poverty e.g. energy burden, income, primary heating system, energy efficiency of the dwelling, and household energy needs (e.g. composition and size). Currently heating support in Romania is targeted solely based on income. Targeting could be improved by including additional vulnerability factors, such as Moldova’s household compensation that includes several parameters, including income level, the share of energy expenditure in total consumption, the type of heating system, and household size. Targeting could be greatly enhanced by the availability of high-quality, granular household level data on these indicators. While this might come with administrative challenges, in the absence of good data, proxies such as location and household size might already be helpful.
Achieving decarbonisation in the building sector requires a broad and coherent policy package. Tax policy measures should be embedded within a comprehensive strategy that enables households to switch more easily to low-carbon energy sources and to improve the energy performance of the building stock. In this context, public investment in enabling infrastructure—such as district heating networks and natural gas grids—together with well-designed support schemes, including subsidies and below-market interest rate loans, play a critical complementary role.
2.5.2. Taxation of energy use and air pollution
It is central to consider reducing air pollution as a separate policy objective. Hereby, it is critical to define whether the aim is to internalise the full external costs of air pollution, or to achieve compliance with specific air quality standards (e.g. EU limit values). A local air pollution tax can be motivated by heterogeneous pollution levels within a country and the higher economic costs of air pollution in densely populated areas. Regulating at the local level can enhance cost-effectiveness, as the health and environmental damages of air pollution are more pronounced in urban settings. Localised measures also help avoid the drawbacks of uniform, nationwide bans or regulations, which may raise equity concerns in case of significant differences between urban and rural contexts.
If the main goal is to strongly reduce air pollution, an air pollution tax risks being administratively burdensome and risks significantly raising the burden for consumers in the short run. Administrative resources may better be spent in designing a reform that pushes for firewood stove bans in certain high polluting areas or support investment to stove switching, instead of engaging in marginal but burdensome reform to align a nation-wide tax with external cost estimates.
Air pollution in Romania is addressed only through spending measures, which have drawbacks compared with taxation. For example, Romania currently uses subsidies to promote renewable energy and energy-efficiency retrofits. This approach imposes a fiscal burden, may be hard to adjust in response to technological change, and can be inefficient when the marginal cost of abatement varies across households. It also provides no ongoing incentive for emissions reductions or technological innovation once public funds have been allocated. In contrast, air pollution taxation addresses some of these issues, by generating revenue, maintaining incentives for emissions reductions and allowing household and firms to adopt and develop the most appropriate technologies.
A broad policy package is likely needed to tackle air pollution in Romania. Given air pollution varies strongly by location, air pollution taxes that differ by household location could theoretically address such concerns but comes with high administrative costs. Also, high upfront costs of investments to renovate buildings or switch heating systems may limit the effectiveness of such a tax. Currently, no other EU country has an air pollution tax on energy use in residential buildings. An alternative approach, could be to design a well-aligned policy package that include phase-outs of highly polluting heating stoves, improving firewood quality and usage practices,13 building efficiency standards, targeted subsidies for low-income households or below-market financing to replace such stoves and invest in building retrofits, strengthened air quality monitoring systems, and enhanced public information on benefits from insulation and energy source switches through information campaigns and environmental education initiatives. Hereby, integrating local authorities into air pollution policy design is central, in particular to identify vulnerable household, conduct local heating and cooling planning, and operate renovation one-stop shops.
2.5.3. Other considerations related to the taxation of energy products
VAT rates on energy products should be uniform and aligned with the VAT system’s primary role of raising revenue, while distributional and environmental objectives are more effectively addressed through complementary and targeted policy instruments. In Romania, the application of reduced VAT rates to certain energy products creates price distortions, most notably through the preferential treatment of firewood. Using differentiated VAT rates to pursue social, environmental, or distributional goals risks creating inefficiencies and distortions. Dedicated, well-targeted policy instruments are more effective for addressing these objectives. A key reform option would be to harmonise VAT rates across all energy products, thereby removing implicit subsidies for more polluting fuels, strengthening price signals, and improving the efficiency and neutrality of the VAT system. Such a reform could, however, be politically challenging in the short term given the recent VAT reform in August 2025. Over the longer term, VAT base broadening should be considered as part of a gradual reform strategy. To safeguard affordability and avoid adverse distributional effects, any increase in VAT on energy products can be accompanied by well-targeted support policies to compensate low-income households.
To ensure the effectiveness of an environmentally related tax reform in Romania’s residential building sector, accompanying measures should address challenges with tax compliance and illegal logging. Widespread tax fraud and illegal logging remain a key challenge in Romania (see Box 2.4). This risks weakening the price signal on energy products and limit the intended behavioural and environmental outcomes of an environmentally related tax. Broader measures to strengthen enforcement, reduce tax evasion, and curb illegal logging are therefore essential.
2.5.4. Taxation of buildings and equipment
Property taxes are typically not an environmental tax tool, and instead well-suited for revenue raising and should be designed accordingly. In Romania property taxes include various reduced rates and correction factors that do not seem to follow a clear policy objective, limiting their efficiency and fairness. For example, it is not straightforward whether the differentiation of building typologies aim to address distributional concerns, or to include buildings’ energy efficiency criteria. In Romania, both the construction material and the availability of utilities (i.e. water, sewage, electricity, heating) are used in the tax base calculation. The availability of utilities might reflect equity concerns, while it is only loosely connected to energy efficiency.14 Further, reduced rates for older buildings and a correction factor when major improvements were undertaken may be motivated by equity considerations but might disincentivise energy efficiency improvements or switching energy sources. Lastly, the area-based property tax calculation does not reflect location-specific market values, making it more challenging to ensure equity and fairness and adequate tax revenues (IMF, 2022[31]).
Reduced property taxes for energy-efficient buildings in certain municipalities should be removed to improve equity and revenue mobilisation at the local level. Reduced property tax rates apply to highly energy-efficient buildings or energy-efficiency related characteristic in certain Romanian municipalities. These tend to disproportionately benefit owners of high-value, high-efficiency properties, many of whom would likely have invested in retrofits regardless, resulting in windfall gains and foregone municipal revenue without additional environmental benefits.
As a result, Romania’s property tax system would benefit from a comprehensive reform. A key priority should be to clearly define the primary policy objective of recurrent property taxation and to design the tax accordingly, in line with the principle of “one policy objective, one tax”. Exemptions, allowances and preferential treatments should be strictly limited to well-defined objectives, notably the protection of low-income households. Objectives such as promoting energy efficiency improvements are better pursued through more targeted policy instruments, as embedding such incentives in property taxation can entail high foregone revenues, benefit high-income households and risks subsidising investments that would have occurred in the absence of the tax incentive. In this context, a central reform priority is the transition from the current area-based assessment to a market value-based property tax, which would better align tax liabilities with taxpayers’ ability to pay (World Bank, 2023[122]).
The removal of reduced VAT rates for low-emission heating systems and solar energy generation from August 2025 avoids high foregone revenues (Law no.141/2025). Further, the reduced rates disproportionately benefited higher-income households. The reform aligns with the principle of “one policy objective, one tax”, and is an opportunity to redirect resources towards targeted support for households facing barriers to undertaking energy efficiency improvements or heating system switches.
Overall, Romania should enhance its data infrastructure to provide a comprehensive, publicly accessible, and up-to-date national database of the building stock and its energy performance. Critical information, such as construction materials, occupancy rates, energy use, the status of renovation activities, the implementation of energy-saving measures, and the share of Near Zero Energy Buildings (nZEB) within the overall construction market, is either unavailable or dispersed across multiple institutions. Although efforts are underway within the Ministry of Development to address this gap, the establishment of an integrated data-sharing mechanism would significantly enhance the accuracy and robustness of simulation exercises, policy analysis related to the residential building sector, as well as allow to design more accurate and cost-effective targeting of energy support for vulnerable households.
References
[54] Al-Addous, M. and A. Albatayneh (2020), “Knowledge gap with the existing building energy assessment systems”, Energy Exploration & Exploitation, Vol. 38/3, pp. 783–794.
[77] Alberini, A., O. Khymych and M. Ščasný (2020), “Responsiveness to energy price changes when salience is high: Residential natural gas demand in Ukraine”, Energy Policy, Vol. 144, p. 111534, https://doi.org/10.1016/j.enpol.2020.111534.
[50] Allcott, H. and M. Greenstone (2012), “Is There an Energy Efficiency Gap?”, Journal of Economic Perspectives, Vol. 26/1, pp. 3-28.
[102] Allcott, H., S. Mullainathan and D. Taubinsky (2014), “Energy policy with externalities and internalities”, Journal of Public Economics, Vol. 112, pp. 72-88.
[116] Allcott, H. and R. Sweeney (2017), “The Role of Sales Agents in Information Disclosure: Evidence from a Field Experiment”, Management Science, Vol. 63/1, pp. 21-39, https://doi.org/10.1287/mnsc.2015.2327.
[79] Auffhammer, M. and E. Rubin (2018), “Natural gas price elasticities and optimal cost recovery under consumer heterogeneity: Evidence from 300 million natural gas bills”, NBER Working Paper Series, Working Paper 24295, https://www.nber.org/system/files/working_papers/w24295/w24295.pdf.
[127] Austrian Federal Ministry of Agriculture and Forestry, Climate and Environmental Protection, Regions and Water Management (2025), Klimabonus.
[32] Banzhaf, H. and N. Lavery (2010), “Can the land tax help curb urban sprawl? Evidence from growth patterns in Pennsylvania”, Journal of Urban Economics, Vol. 67/2, pp. 169-179, https://doi.org/10.1016/j.jue.2009.08.005.
[90] Berry, A. (2019), “The distributional effects of a carbon tax and its impact on fuel poverty: A microsimulation study in the French context”, Energy Policy, Vol. 124, pp. 81-94, https://doi.org/10.1016/j.enpol.2018.09.021.
[125] Bohi, D. and M. Toman (1993), “Energy security: externalities and policies”, Energy Policy, Vol. 21/11, pp. 1093-1109, https://doi.org/10.1016/0301-4215(93)90260-m.
[92] Bourgeois, C., L. Giraudet and P. Quirion (2021), “Lump-sum vs. energy-efficiency subsidy recycling of carbon tax revenue in the residential sector: A French assessment”, Ecological Economics, Vol. 184, p. 107006, https://doi.org/10.1016/j.ecolecon.2021.107006.
[22] Bouzarovski, S. and S. Petrova (2015), “A global perspective on domestic energy deprivation: Overcoming the energy poverty–fuel poverty binary”, Energy Research & Social Science, Vol. 10, pp. 31-40, https://doi.org/10.1016/j.erss.2015.06.007.
[33] Bowman, J. and M. Bell (2004), “Split-rate real property taxation: Property tax redistribution across land uses in three virginia localities”, Proceedings. Annual Conference on Taxation and Minutes of the Annual Meeting of the National Tax Association, Vol. 97, pp. 104-110, https://www.jstor.org/stable/pdf/41954826.pdf.
[51] BPIE (2012), “Implementing nearly zero-energy buildings (nZEB) in Romania – towards a definition and roadmap”, The Building Performance Institute Europe, https://bpie.eu/wp-content/uploads/2015/10/nZEB-Full-Report-Romania.pdf.
[117] Braungardt, S. et al. (2023), “Banning boilers: An analysis of existing regulations to phase out fossil fuel heating in the EU”, Renewable and Sustainable Energy Reviews, Vol. 183, p. 113442, https://doi.org/10.1016/j.rser.2023.113442.
[42] Castellazzi, L., P. Bertoldi and M. Economidou (2017), Overcoming the split incentive barrier in the building sectors: unlocking the energy efficiency potential in the rental & multifamily sectors, https://doi.org/10.2790/912494.
[56] Chan, N. and K. Gillingham (2015), “The Microeconomic Theory of the Rebound Effect and Its Welfare Implications”, Journal of the Association of Environmental and Resource Economists, Vol. 2/1, pp. 133-159.
[45] Charlier, D. (2015), “Energy efficiency investments in the context of split incentives among French households”, Energy Policy, Vol. 87, pp. 465-479.
[46] Cornago, E. and L. Dressler (2020), “Incentives to (not) disclose energy performance information in the housing market”, Resource and Energy Economics, Vol. 61, p. 101162, https://doi.org/10.1016/j.reseneeco.2020.101162.
[39] Croci, E., T. Molteni and A. Palma (2016), “Synthesis Report On The Outcomes Of The Questionnaire Survey On Barriers To Energy Efficiency In The Building And Transport Sectors In Heron Partner Countries”, IEFE Research Report n. 24, https://heron2017.wordpress.com/wp-content/uploads/2017/07/d-2-5-synthesis-reports-on-the-outcomes-of-questionnaire-survey.pdf.
[37] De Bruyn, S. and J. De Vries (2020), “Health costs of air pollution in European cities and the linkage with transport”, https://cedelft.eu/wp-content/uploads/sites/2/2021/03/CE_Delft_190272_Health_costs_of_air_pollution_in_European_cities_and_the_linkage_with_transport_Def.pdf.
[67] Deutscher Bundestag (2025), , https://dserver.bundestag.de/btd/20/147/2014775.pdf.
[6] Doroftei, A. (2023), “How renewable energy could reinvigorate Romania’s slumbering district heating sector”, https://bankwatch.org/blog/how-renewable-energy-could-reinvigorate-romania-s-slumbering-district-heating-sector.
[109] Drivas, K., S. Rozakis and S. Xesfingi (2019), “The effect of house energy efficiency programs on the extensive and intensive margin of lower-income households’ investment behavior”, Energy Policy, Vol. 128, pp. 607-615, https://doi.org/10.1016/j.enpol.2019.01.040.
[17] Ekins, P. (2024), Stopping Climate Change, Policies for Real Zero, Taylor & Francis.
[97] EU (2025), “European Economic Forecast: Spring 2025”, European Economy Institutional Papers, Vol. 318, https://economy-finance.ec.europa.eu/document/download/e9de23c8-b161-40d0-9ad7-e04a25500023_en?filename=ip318_en.pdf#page=156.
[99] European Commission (2023), “VAT Gap in the EU”, Publications Office of the European Union, 2023, https://doi.org/10.2778/911698.
[7] European Commission (2022), “State aid: Commission approves €390 million Romanian scheme under Recovery and Resilience Facility to support high-efficient cogeneration of electricity and heat”, https://ec.europa.eu/commission/presscorner/detail/en/ip_22_5044.
[128] European Commission (2021), “Council Directive restructuring the Union framework for the taxation of energy products and electricity (recast)”, https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52021PC0563&from=EN.
[10] European Commission (2016), Directive 2016/2284 of the European Parliament and of the Council of 14 December 2016 on the reduction of national emissions of certain atmospheric pollutants, amending Directive 2003/35/EC and repealing Directive 2001/81/EC.
[108] European Investment Bank (2025), “Energy Savings in Existing Housing Programme: Greece”, https://www.fi-compass.eu/library/case-studies/energy-savings-existing-housing-programme?page=1.
[2] Eurostat (2025), “Disaggregated final energy consumption in households - quantities”, https://ec.europa.eu/eurostat/databrowser/view/nrg_d_hhq__custom_15528986/default/table.
[25] Eurostat (2025), “Inability to keep home adequately warm”, https://ec.europa.eu/eurostat/databrowser/view/ILC_MDES01__custom_6037156/bookmark/table?lang=en&bookmarkId=8f6604d8-6581-4f7b-adde-7a9e53a28caf.
[21] Eurostat (2024), “Housing in Europe – 2024 edition”, https://ec.europa.eu/eurostat/web/interactive-publications/housing-2024#quality-of-housing.
[4] Eurostat (2024), “Persons living in private households by heating system used in the dwelling, household composition and degree of urbanisation”, https://ec.europa.eu/eurostat/databrowser/view/ilc_lvhe02/default/table.
[75] Ewald, J. et al. (2021), “Saving energy in residential buildings: the role of energy pricing”, Climatic Change, Vol. 167/1-2, https://doi.org/10.1007/s10584-021-03164-3.
[82] Feger, F., N. Pavanini and D. Radulescu (2022), “Welfare and Redistribution in Residential Electricity Markets with Solar Power”, The Review of Economic Studies, Vol. 89/6, pp. 3267-3302, https://doi.org/10.1093/restud/rdac005.
[13] Flammini, A. (2023), “Quantifying greenhouse gas emissions from wood fuel use by households”, Earth System Science Data, Vol. 15/5, pp. 2179-2187, https://doi.org/10.5194/essd-15-2179-2023.
[76] Flues, F. and K. van Dender (2017), “The impact of energy taxes on the affordability of domestic energy”, OECD Taxation Working Papers, No. 30, OECD Publishing, Paris, https://doi.org/10.1787/08705547-en.
[112] Forni, L., E. Giarda and S. Sommer (2025), Are Incentives for Energy Retrofitting Regressive? Evidence from the Italian Superbonus, Elsevier BV, https://doi.org/10.2139/ssrn.5292174.
[55] Fowlie, M., M. Greenstone and C. Wolfram (2015), “Are the Non-Monetary Costs of Energy Efficiency Investments Large? Understanding Low Take-up of a Free Energy Efficiency Program”, American Economic Review: Papers & Proceedings, Vol. 105/5, pp. 201–204.
[44] Franke, M. and C. Nadler (2019), “Energy efficiency in the German residential housing market: its influence on tenants and owners”, Vol. 128, pp. 879-890.
[118] French Environmental Law (2025), Section 2 : Plans de protection de l’atmosphère (Articles L222-4 à L222-7).
[113] Frondel, M. and C. Vance (2013), “Heterogeneity in the Effect of Home Energy Audits: Theory and Evidence”, Environmental and Resource Economics, Vol. 55/3, pp. 407-418, https://doi.org/10.1007/s10640-013-9632-4.
[68] Gauthier, S. and F. Henriet (2023), Targeting taxes on local externalities, The IFS, https://doi.org/10.1920/wp.ifs.2023.2223.
[35] Gerarden, T., R. Newell and R. Stavins (2015), “Assessing the Energy-Efficiency Gap”, NBER Working Paper, Vol. 20904.
[19] Gerőházi, É., N. Katona and S. Kollár (2023), “Mechanisms linking economic potential of European cities to housing inequalities of young people”, Frontiers in Sustainable Cities, Vol. 5/1163984.
[126] Ghosh, S. and B. Bigelow (2025), “Comparative Analysis of Energy Efficiency: Insulated Concrete Form vs. Wood-Framed Residential Construction”, Buildings, Vol. 15/5, p. 804, https://doi.org/10.3390/buildings15050804.
[72] Gillingham, K., R. Newell and K. Palmer (2009), “Energy efficiency economics and policy”, Annual Review of Resource Economics, Vol. 1/1, pp. 597–620.
[57] Gillingham, K., D. Rapson and G. Wagner (2016), “The Rebound Effect and Energy Efficiency Policy”, Review of Environmental Economics and Policy, Vol. 10/1, pp. 68-88.
[53] Giraudet, L. (2020), “Energy efficiency as a credence good: A review of informational barriers to energy savings in the building sector”, Energy Economics, Vol. 87.
[63] Goulder, L. and I. Parry (2008), “Instrument Choice in Environmental Policy”, Review of Environmental Economics and Policy, Vol. 2/2, pp. 152-174, https://doi.org/10.1093/reep/ren005.
[71] Haas, R. and L. Schipper (1998), “Residential energy demand in OECD-countries and the role of irreversible efficiency improvements”, Energy Economics, Vol. 20/4, pp. 421-442.
[24] Halkos, G. and E. Gkampoura (2021), “Evaluating the effect of economic crisis on energy poverty in Europe”, Renewable and Sustainable Energy Reviews, Vol. 144, p. 110981, https://doi.org/10.1016/j.rser.2021.110981.
[78] Hanemann, M. et al. (2024), “Discrete-continuous models of residential energy demand: A comprehensive review”, Resource and Energy Economics, Vol. 77, p. 101426, https://doi.org/10.1016/j.reseneeco.2024.101426.
[85] Hansen, A. (2018), “Heating homes: Understanding the impact of prices”, Energy Policy, Vol. 121, pp. 138-151, https://doi.org/10.1016/j.enpol.2018.06.021.
[84] Hellmer, S. (2013), “Price Responsiveness in District Heating: Single Houses and Residential Buildings—a Cross-Sectional Analysis”, ISRN Economics, Vol. 2013, pp. 1-4, https://doi.org/10.1155/2013/324127.
[93] Hemmerlé, Y. et al. (2023), “Aiming better: Government support for households and firms during the energy crisis”, OECD Economic Policy Papers, No. 32, OECD Publishing, Paris, https://doi.org/10.1787/839e3ae1-en.
[43] Hoeller, P. et al. (2023), Home, green home: Policies to decarbonise housing, https://doi.org/10.1787/cbda8bad-en.
[115] Houde, S. (2018), “How Consumers Respond to Product Certification and the Value of Energy Information”, The RAND Journal of Economics, Vol. 49/2, pp. 453–77, http://www.jstor.org/stable/45147711.
[104] IEA (2025), “Policies database”, https://www.iea.org/policies?country=country.
[1] IEA (2025), “World Energy Statistics and Balances”, https://www.iea.org/data-and-statistics/data-product/world-energy-statistics-and-balances.
[31] IMF (2022), “Romania Technical Assistance Report on Improving Revenues from the Recurrent Property Tax”, https://www.imf.org/en/Publications/CR/Issues/2022/06/28/Romania-Technical-Assistance-Report-on-Improving-Revenues-from-the-Recurrent-Property-Tax-520127.
[14] IPCC (2022), “Buildings in IPCC, 2022”, Climate Change 2022: Mitigation of Climate Change. Contribution of Working Group III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change.
[34] Jaffe, A. and R. Stavins (1994), “The energy paradox and the diffusion of conservation technology”, Resource and Energy Economics, Vol. 16, pp. 91-122.
[26] Janssen, H. et al. (2023), “Cold indoor temperatures and their association with health and well-being: a systematic literature review”, Public Health, Vol. 224, pp. 185-194, https://doi.org/10.1016/j.puhe.2023.09.006.
[9] JRC (2024), “Romania: Status of the heat pump market”, Country fiche - 2024, Vol. 137131.
[73] Juřík, R. and N. Braathen (2021), “Assessment of the air pollution tax and emission concentration limits in the Czech Republic”, OECD Environment Working Papers, No. 174, OECD Publishing, Paris, https://doi.org/10.1787/172ad5b9-en.
[96] Keliauskaitė, U. et al. (2024), “How to finance the European Union’s building decarbonisation plan”, Policy Brief, Bruegel, Vol. 12/2024, https://www.bruegel.org/sites/default/files/2024-10/PB%2012%202024.pdf.
[103] Kilbo Edlund, K. et al. (2024), “High-resolution dispersion modelling of PM2.5, PM10, NOx and NO2 exposure in metropolitan areas in Sweden 2000‒2018 – large health gains due to decreased population exposure”, Air Quality, Atmosphere & Health, https://doi.org/10.1007/s11869-024-01535-0.
[64] Knittel, C. and R. Sandler (2018), “The Welfare Impact of Second-Best Uniform-Pigouvian Taxation: Evidence from Transportation”, American Economic Journal: Economic Policy, Vol. 10/4, pp. 211-242, https://doi.org/10.1257/pol.20160508.
[124] Köppl, A. and M. Schratzenstaller (2022), “Carbon taxation: A review of the empirical literature”, Journal of Economic Surveys, Vol. 37/4, pp. 1353-1388, https://doi.org/10.1111/joes.12531.
[81] Krauss, A. (2016), “How natural gas tariff increases can influence poverty: Results, measurement constraints and bias”, Energy Economics, Vol. 60, pp. 244-254, https://doi.org/10.1016/j.eneco.2016.09.010.
[70] Labandeira, X., J. Labeaga and X. López-Otero (2017), “Energy demand elasticities for OECD countries: A meta-analysis”, Energy Economics, Vol. 65, pp. 233–238.
[52] Langlois-Bertrand, S. et al. (2015), “Political-institutional barriers to energy efficiency”, Energy Strategy Reviews, Vol. 8, pp. 30-38, https://doi.org/10.1016/j.esr.2015.08.001.
[110] Lekavičius, V. et al. (2020), “Distributional impacts of investment subsidies for residential energy technologies”, Renewable and Sustainable Energy Reviews, Vol. 130, p. 109961, https://doi.org/10.1016/j.rser.2020.109961.
[86] Leth-Petersen, S. and M. Togeby (2001), “Demand for space heating in apartment blocks: measuring effects of policy measures aiming at reducing energy consumption”, Energy Economics, Vol. 23/4, pp. 387-403, https://doi.org/10.1016/s0140-9883(00)00078-5.
[111] Lihtmaa, L., D. Hess and K. Leetmaa (2018), “Intersection of the global climate agenda with regional development: Unequal distribution of energy efficiency-based renovation subsidies for apartment buildings”, Energy Policy, Vol. 119, pp. 327-338, https://doi.org/10.1016/j.enpol.2018.04.013.
[3] LTRS (2020), “Romania’s National Long-Term Renovation Strategy”, https://circabc.europa.eu/ui/group/8f5f9424-a7ef-4dbf-b914-1af1d12ff5d2/library/3373bde5-6772-4b46-94f0-5cafbdd8372f/details.
[107] Maier, S. and I. Dreoni (2024), “Who is “energy poor” in the EU”, European Commission, Vol. JRC138418, https://publications.jrc.ec.europa.eu/repository/handle/JRC138418.
[74] Mardones, C. and M. Cabello (2019), “Effectiveness of local air pollution and GHG taxes: The case of Chilean industrial sources”, Energy Economics, Vol. 83, pp. 491-500, https://doi.org/10.1016/j.eneco.2019.08.007.
[94] Marten, M. and K. van Dender (2019), “The use of revenues from carbon pricing”, OECD Taxation Working Papers, No. 43, OECD Publishing, Paris, https://doi.org/10.1787/3cb265e4-en.
[49] Melvin, J. (2018), “The split incentives energy efficiency problem: Evidence of underinvestment by landlords”, Energy Policy, Vol. 115, pp. 342-352.
[20] Metcalf, G. (2013), The economics of energy security, National Bureau of Economic Research, http://www.nber.org/papers/w19729.
[30] Millar-Powell, B. et al. (2022), “Measuring effective taxation of housing: Building the foundations for policy reform”, OECD Taxation Working Papers, Vol. 56, https://doi.org/10.1787/0a7e36f2-en.
[8] Ministry of Energy (2024), “Romanian Energy Strategy 2025-2035, with an outlook to 2050”, https://energie.gov.ro/wp-content/uploads/2024/12/Strategia-Energetica-a-Romaniei-2025-2035-cu-perspectiva-anului-2050.pdf.
[62] Mottershead, D. et al. (2021), “Green taxation and other economic instruments: Internalising environmental costs to make the polluter pay”, https://environment.ec.europa.eu/publications/green-taxation-and-other-economic-instruments-internalising-environmental-costs-make-polluter-pay_en.
[48] Myers, E. (2020), “Asymmetric information in residential rental markets: Implications for the energy efficiency gap”, Journal of Public Economics, Vol. 190/104251.
[15] NECP (2024), “Integrated National Energy and Climate Plan for Romania”, https://commission.europa.eu/document/download/75df0ac2-ecf9-4212-89ac-2a603bd43e36_en?filename=RO_FINAL%20UPDATED%20NECP%202021-2030%20%28English%29.pdf.
[60] Nordhaus, W. (1991), “To Slow or Not to Slow: The Economics of The Greenhouse Effect”, The Economic Journal, Vol. 101/407, p. 920, https://doi.org/10.2307/2233864.
[18] Odysee-Mure database (2025), , https://www.indicators.odyssee-mure.eu/energy-efficiency-database.html.
[121] OECD (2026), “Carbon Pricing and Energy Taxation database (internal extract with additional disaggregation based on the public dataset)”, OECD, Paris, https://www.oecd.org/content/oecd/en/data/datasets/carbon-pricing-and-energy-taxation-database.html.
[58] OECD (2025), Effective Carbon Rates 2025: Recent Trends in Taxes on Energy Use and Carbon Pricing, OECD Series on Carbon Pricing and Energy Taxation, OECD Publishing, Paris, https://doi.org/10.1787/a5a5d71f-en.
[88] OECD (2025), OECD Employment Outlook 2025: Can We Get Through the Demographic Crunch?, OECD Publishing, Paris, https://doi.org/10.1787/194a947b-en.
[95] OECD (2024), Consumption Tax Trends 2024: VAT/GST and Excise, Core Design Features and Trends, OECD Publishing, Paris, https://doi.org/10.1787/dcd4dd36-en.
[16] OECD (2024), OECD Economic Surveys: Romania 2024, OECD Publishing, Paris, https://doi.org/10.1787/106b32c4-en.
[69] OECD (2024), OECD Employment Outlook 2024: The Net-Zero Transition and the Labour Market, OECD Publishing, Paris, https://doi.org/10.1787/ac8b3538-en.
[100] OECD (2024), “Pricing Greenhouse Gas Emissions 2024”, OECD Series on Carbon Pricing and Energy Taxation, OECD Publishing, Paris, https://doi.org/10.1787/b44c74e6-en.
[65] OECD (2024), Pricing Greenhouse Gas Emissions 2024: Gearing Up to Bring Emissions Down, OECD Series on Carbon Pricing and Energy Taxation, OECD Publishing, Paris, https://doi.org/10.1787/b44c74e6-en.
[105] OECD (2024), “The IFCMA’s Climate Policy Database: Policy instruments typology and data structure”, Inclusive Forum on Carbon Mitigation Approaches Papers, No. 5, OECD Publishing, Paris, https://doi.org/10.1787/68529f35-en.
[66] OECD (2023), Effective Carbon Rates 2023: Pricing Greenhouse Gas Emissions through Taxes and Emissions Trading, OECD Series on Carbon Pricing and Energy Taxation, OECD Publishing, Paris, https://doi.org/10.1787/b84d5b36-en.
[29] OECD (2022), “Housing Taxation in OECD Countries”, OECD Tax Policy Studies, OECD Publishing, Paris, Vol. 29, https://doi.org/10.1787/03dfe007-en.
[12] OECD (2022), OECD Economic Surveys: Romania 2022, OECD Publishing, Paris, https://doi.org/10.1787/e2174606-en.
[28] OECD (2018), Taxation of Household Savings, OECD Tax Policy Studies, No. 25, OECD Publishing, Paris, https://doi.org/10.1787/9789264289536-en.
[123] Ohlendorf, N. et al. (2020), “Distributional Impacts of Carbon Pricing: A Meta-Analysis”, Environmental and Resource Economics, Vol. 78/1, pp. 1-42, https://doi.org/10.1007/s10640-020-00521-1.
[89] Owen, A. and J. Barrett (2020), “Reducing inequality resulting from UK low-carbon policy”, Climate Policy, Vol. 20/10, pp. 1193-1208, https://doi.org/10.1080/14693062.2020.1773754.
[41] Palmer, K., M. Walls and T. Gerarden (2012), “Borrowing to Save Energy”, Resources for the Future Report.
[38] Pătroescu, M. et al. (2011), “Land Use Change in the Bucharest Metropolitan Area and its Impacts on the Quality of the Environment in Residential Developments”, Forum geografic, Vol. X/1, pp. 177-186, https://doi.org/10.5775/fg.2067-4635.2011.036.i.
[61] Pearce, D. (1991), “The Role of Carbon Taxes in Adjusting to Global Warming”, The Economic Journal, Vol. 101/407, p. 938, https://doi.org/10.2307/2233865.
[47] Petrov, I. and L. Ryan (2021), “The landlord-tenant problem and energy efficiency in the residential rental market”, Energy Policy, Vol. 157/112458.
[59] Pigou, A. (1920), The Economics of Welfare.
[36] Rennert, K. et al. (2022), “Comprehensive evidence implies a higher social cost of CO2”, Nature, Vol. 610/7933, pp. 687-692, https://doi.org/10.1038/s41586-022-05224-9.
[11] Ricardo (2023), “Review of the National Air Pollution Control Programme Romania: Final Report for European Commission - DG Environment”, https://circabc.europa.eu/ui/group/cd69a4b9-1a68-4d6c-9c48-77c0399f225d/library/38d955ae-8bb8-4b81-a76f-6108a59d1f27/details.
[106] Sarafidis, Y. et al. (2025), “Analyzing Energy Poverty and Its Determinants in Greece: Implications for Policy”, Sustainability, Vol. 17/12, p. 5645, https://doi.org/10.3390/su17125645.
[98] Schneider, F. and A. Asllani (2022), “Taxation of the Informal Economy in the EU”, https://www.europarl.europa.eu/RegData/etudes/STUD/2022/734007/IPOL_STU(2022)734007_EN.pdf.
[83] Schulte, I. and P. Heindl (2017), “Price and income elasticities of residential energy demand in Germany”, Energy Policy, Vol. 102, pp. 512-528, https://doi.org/10.1016/j.enpol.2016.12.055.
[87] Sologon, D. et al. (2025), “Distributional Impact of Soaring Prices in Europe: A Cross‐National Decomposition of Inflation’s Regressivity and Progressivity”, Review of Income and Wealth, Vol. 71/2, https://doi.org/10.1111/roiw.70010.
[40] Stiglitz, J. and A. Weiss (1981), “Credit rationing in markets with imperfect information”, The American economic review, Vol. 71/3, pp. 393-410.
[23] Thomson, H. and C. Snell (2013), “Quantifying the prevalence of fuel poverty across the European Union”, Energy Policy, Vol. 52, pp. 563-572, https://doi.org/10.1016/j.enpol.2012.10.009.
[101] Tinbergen, J. (1952), On the Theory of Economic Policy, http://hdl.handle.net/1765/15884.
[119] Torné, A. and E. Trutnevyte (2024), “Banning fossil fuel cars and boilers in Switzerland: Mitigation potential, justice, and the social structure of the vulnerable”, Energy Research & Social Science, Vol. 108, p. 103377, https://doi.org/10.1016/j.erss.2023.103377.
[80] Trotta, G., A. Hansen and S. Sommer (2022), “The price elasticity of residential district heating demand: New evidence from a dynamic panel approach”, Energy Economics, Vol. 112, p. 106163, https://doi.org/10.1016/j.eneco.2022.106163.
[120] UNDP (2023), “Strategija ograničavanja korištenja uglja i ostalih čvrstih goriva u Kantonu Sarajevo za period 2023 - 2033. godine”, https://www.undp.org/sites/g/files/zskgke326/files/2025-01/strategija_final_18.08.2023_0_2.pdf.
[91] Vandyck, T. et al. (2023), “EU climate action through an energy poverty lens”, Scientific Reports, Vol. 13/1, https://doi.org/10.1038/s41598-023-32705-2.
[114] Ward, D. et al. (2011), “Factors influencing willingness-to-pay for the ENERGY STAR® label”, Energy Policy, Vol. 39/3, pp. 1450-1458.
[5] World Bank (2025), “Rural population (% of total population) - Romania, European Union”, https://data.worldbank.org/indicator/SP.RUR.TOTL.ZS?locations=RO-EU.
[27] World Bank (2024), “Romania Energy Poverty Assessment”, https://www.worldbank.org/en/country/romania/publication/romania-energy-poverty-assessment.
[122] World Bank (2023), “Report on the tax system in Romania, including benchmarking and recommendations to inform Client’s reform of the tax framework”, https://mfinante.gov.ro/documents/35673/8180698/ReformingthetaxsysteminRomania_BM.pdf.
← 1. A life-cycle approach to GHG emissions in buildings encompasses all stages of a building’s existence, from material extraction to end-of-life. This includes energy use and process emissions from the extraction and manufacturing of construction materials such as cement, steel, bricks, stone, and glass, as well as energy use during construction, maintenance, repair, and refurbishment. Emissions are also emitted during the operational phase—when buildings are in use and end-of-life, including demolition and material disposal or recycling. This analysis focuses on emissions from energy use during the use of buildings in the operational phase.
← 2. Energy insecurity can lead to welfare losses, for example energy price volatility can create economic costs through wage rigidities and increased unemployment (Bohi and Toman, 1993[125]).
← 3. LAW No. 2021-1104 of 22 August 2021 on combating climate change and strengthening resilience against its effects.
← 4. While tax expenditures refer broadly to provisions that reduce tax liabilities, for example for equity reasons, tax incentives constitute a subset of tax expenditures specifically designed to encourage certain behaviours, such as retrofitting, investment or labour market participation.
← 5. These rates were applicable as of November 2025 but may have changed since.
← 6. Split incentives describe a situation where the benefits of a transaction do not accrue to the actor who pays for the transaction. In the context of energy efficiency in buildings, split incentives are linked with cost recovery issues related to energy efficiency upgrade investments due to the failure of distributing effectively financial obligations and rewards of these investments between concerned actors.
← 7. A recent study by the European Commission’s Directorate-General Environment Mottershead (2021[62]) presents external environmental cost estimates in different countries per unit of emission based on literature. For driving the study focuses on costs related to air pollution and climate change. It also includes estimates of internalisation rates that compare the revenues collected from taxes or other economic instruments to their estimated external costs.
← 8. Under the reform proposal of the EU ETD, firewood is only covered if it is intended for use as heating fuel in installations with a total rated thermal input equal to or exceeding 5 MW (European Commission, 2021[128]).
← 9. Ohlendorf et al. (2020[123]) and Köppl und Schratzenstaller (2022[124]) provide recent reviews on the topic.
← 10. From 2025 the Austrian Climate bonus was abolished. The amount varied depending on the resident’s location. Residents in areas with well-developed public transport infrastructure received less compared to residents in regions with limited access (Austrian Federal Ministry of Agriculture and Forestry, Climate and Environmental Protection, Regions and Water Management, 2025[127]).
← 11. In the first phase, the policy offered subsidies up to EUR 15 000 for energy investments, with low-income households receiving up to 35% of their investment sum, while single (family) households not exceeding incomes between EUR 22 000-40 000 (or EUR 40 000-60 000 for families) received 15%, and households up to EUR 60 000 (or EUR 75 000 for families) were eligible for an interest-free loan but no subsidy. In 2011, 99.3% of recipients were in the lowest income bracket. An amendment in 2012 significantly increased the subsidy shares and loosened the eligible income brackets. The third phase of the programme began in 2025 with the objective to target more extensive energy savings per household.
← 12. When heating demand is price inelastic, taxes risk merely raising household energy costs with slow behavioural change, whereas bans can prompt quicker compliance.
← 13. Firewood quality and burning practices impact local air pollution. A comprehensive policy package should include measures to facilitate access to properly dried firewood, improve household storage conditions, and promote correct burning practices.
← 14. One link could be that buildings lacking utilities often rely on polluting fuels such as firewood and might face greater barriers to energy efficiency improvements. Further, on average, buildings made from reinforced concrete or burnt brick typically offer better insulation potential than those built from wood, unburnt brick, or natural stone (Ghosh and Bigelow, 2025[126]).