Climate & Energy Policy

Report
EN
01.07.25

Energy Prices Don’t Curb Demand as Much as Policymakers Think

Raising energy prices hardly changes how much households heat or cool. It mostly just makes them poorer.

Executive Summary

Heating and cooling barely respond to price changes. Policymakers often assume that higher energy prices will significantly curb consumption — a key premise underpinning the design of carbon pricing, subsidy schemes, and supply forecasts. In The Price Elasticity of Heating and Cooling Energy Demand, we test that assumption against the evidence and find it does not hold. Using a dataset of 4,974 elasticity estimates from 421 studies, the paper shows that heating and cooling demand is far less responsive to prices than commonly believed.

Price signals alone can’t drive meaningful reductions. Corrected estimates of demand elasticity fall in the range of –0.05 to –0.2 in the short run and –0.1 to –0.3 in the long run — roughly half the values used in many policy models. In practice, even dramatic price shocks lead to modest cuts in demand: when German gas prices rose by 143% in 2022, consumption fell by only 11%, an implied elasticity of –0.08.

Structural limits, not behavioural inertia, explain the rigidity. Heating and cooling are basic necessities with few immediate substitutes. Renters face split incentives or delayed price signals, and firms in concentrated energy markets have limited scope to adjust production. These structural constraints cap how much users can adjust, even over longer horizons.

Patterns are consistent across regions and fuels. Electricity is slightly more responsive than gas, and households adjust more than firms, but differences remain small. Long-run effects are stronger than short-run ones, yet still modest, reflecting technological lock-in and slow capital turnover.

Policy implications 

  1. Energy security planning must be realistic. Demand will not adjust significantly to sudden price spikes.
  2. Carbon pricing cannot carry the burden alone. Its limited impact on heating and cooling demand makes complementary measures essential.
  3. Targeted policies are more effective. Efficiency standards, support for clean heating and cooling technologies, and measures that enhance consumer responsiveness can deliver stronger and more cost-efficient results.