  In this paper, we compare different mitigation policies when housing
investments are irreversible. We use a general equilibrium model with
non-homothetic preferences and an elaborate setup of the residential housing
and energy production sector. In the first-best transition, the energy demand
plays only a secondary role. However, this changes when optimal carbon taxes
are not available. While providing subsidies for retrofits results in the
lowest direct costs for households, it ultimately leads to the highest
aggregate costs and proves to be an ineffective way to decarbonize the economy.
In the second-best context, a phased-in carbon price outperforms the
subsidy-based transition.
