Heat Pumps Reduce Smog in Southern California. Available Incentives Mean They Can Also Cost Less Than Gas Equipment.
Southern California residents can save money by switching to a heat pump — even without current federal incentives.
Southern California’s progress on tackling its notorious smog problem has stalled and even reversed in recent years, costing billions of dollars and leaving millions of residents breathing air so polluted it violates federal health-protective standards set under the Clean Air Act. The human and economic costs of exposure to this pollution is severe: It contributes to respiratory problems like asthma, heart attacks, dementia, and thousands of premature deaths across Southern California households.
An often-overlooked contributor to Southern California’s air pollution crisis is smog-forming nitrogen oxides pollution (NOx) from gas-burning equipment like furnaces and water heaters. Gas-burning equipment in residential and commercial buildings generates seven times more harmful NOx pollution than power plants in the region. NOx pollution from heating equipment interacts with sunlight to create ground-level ozone – the primary component of smog – and contributes to the formation of deadly fine particulate matter (PM2.5).
Fortunately, progress is on the horizon. The South Coast Air Quality Management District (SCAQMD) — which regulates air quality for 17 million residents of Los Angeles, Orange, Riverside, and San Bernardino Counties — is considering stronger pollution limits on residential furnaces and water heaters. Under these new standards, manufacturers would need to limit the number of polluting furnaces and water heaters they sell over time, while increasing sales of clean alternatives like heat pumps, which produce no on-site air pollution.
While these air quality improvements are crucial — even more so in a time of high wildfire pollution exposure — and could save residents an estimated $2 billion annually in health costs, policymakers must ensure that the price of upgrading to pollution-free heat pumps doesn’t burden households already struggling with California’s high housing costs. To evaluate Southern California’s progress in expanding heat pump accessibility and identify remaining affordability challenges, particularly for low-income households, we analyzed the cost of upgrading to a heat pump with federal, state, utility, and local incentives for Southern California households.
The economics of clean heating
To calculate the cost differences between baseline and clean heating technologies, we analyzed the incremental costs when switching from gas furnaces and air conditioning units to air-source heat pumps for space heating and cooling, and from gas water heaters to heat pump water heaters. Our analysis focused on the most populous city within each of the four counties under SCAQMD’s jurisdiction: Los Angeles, Anaheim, Riverside, and San Bernardino.
Using SCAQMD’s assumptions on the up-front cost of equipment, we examined the full spectrum of available and upcoming funding sources (as of January 2025) for both heat pump technologies and their conventional counterparts, from federal and state programs to local and utility incentives. We also included SCAQMD’s new Go Zero Incentive Program, which will launch in early 2025 to help South Coast residents and building owners upgrade their HVAC and water heating equipment to efficient electric heat pumps.
Comparing an air-source heat pump to a combined furnace and air conditioning system provides the most accurate picture of real-world costs, as an efficient electric heat pump provides both heating and cooling functionality in a single unit. Our analysis reveals that zero-emission equipment can deliver more than $10,000 in up-front cost savings for some Southern California residents.
Key Findings:
Without federal home energy rebate funding
- Low-income households can save between $2,400 and $4,200 when choosing an air-source heat pump over a traditional furnace and AC system.
- Savings of $2,125 to $2,925 are available for low-income households switching to heat pump water heaters from traditional gas units.
With federal home energy rebates funded by the Inflation Reduction Act
- Savings increase dramatically, to over $10,000 for low-income households choosing air-source heat pumps and nearly $3,000 when choosing heat pump water heaters.
- Middle-income households can save between $7,200 and $9,000 when choosing an air-source heat pump over a traditional furnace and AC system.
These numbers demonstrate that with full incentive availability, clean heating technologies are not just cost-competitive — they also represent a significant opportunity for household savings on technology costs, potentially reducing net up-front costs by thousands of dollars compared to conventional gas equipment. Importantly, the cost-effectiveness of this transition does not depend on federal funding; state and local incentives alone make heat pumps the more affordable choice for South Coast residents.
Improving affordability and access across the region
While our analysis demonstrates that the incentive levels available in the South Coast region are sufficient to make heat pumps the more affordable choice, the total funding available through state and local programs will likely be inadequate to meet demand once new standards go into effect. The success of incentive programs funded at existing levels shows that the per-household cost barrier has been solved — now funding must be scaled up to match the region's clean heating and cooling needs, particularly for low-income residents. For instance, state and utility incentive programs frequently pause and restart due to funding availability and administrative processes. Since the completion of this analysis, TECH Clean California and Riverside Public Utilities both paused single-family HVAC incentives for some months due to high uptake, and TECH Clean California’s single-family heat pump water heater incentives for most publicly owned utilities are fully reserved.
Moreover, it's crucial to note that the savings documented here can be difficult to access in practice. Currently, households and contractors in the SCAQMD region may need to apply to as many as six different programs to maximize savings on clean equipment installations. This fragmented system often prevents households from accessing the full range of incentives they're eligible for, particularly impacting the many people who may lack the time, resources, or technical knowledge to navigate multiple applications.
As one example, a low-income household in Los Angeles would need to apply for five different incentives to maximize their savings for an air-source heat pump. It is essential to note that this “stack” represents both current and upcoming funding that a Los Angeles household could be eligible to receive; not all of the incentives below are available today, and program funding is not sufficient for all South Coast households to receive all applicable incentives.
Making incentives more accessible
To ensure low- and moderate-income households benefit from available incentive funding for zero-emission HVAC and water heating equipment, California should:
- Streamline the application process: Create a single, unified application portal that consolidates multiple programs (similar to Colorado's PEAK program) and implement a pre-approval process so households know their total incentive package before beginning work.
- Enhance technical assistance: Expand beyond web-based resources to provide hands-on support through community-based organizations, offering assistance in multiple languages and training contractors to help households navigate the process.
- Align equipment performance standards: Establish consistent performance standards for heat pumps and heat pump water heaters across federal, state, and local incentive programs. This standardization will help households and contractors easily ensure their technology choice is eligible for all sources of funding.
- Reform electric and gas rates: Modify electric and gas rates to support electrification in a manner that reflects actual costs to the energy system. RMI’s analysis has found that heat pump customers are often overcharged by their utilities, especially in warmer climates like Southern California. These customers often pay more than their fair share of their utility’s actual costs to provide electricity. Utility regulators can implement rate design solutions to address this cost discrepancy and lower bills for heat pump customers. Utility regulators can also bring electric bills down for all customers by removing the costs of wildfire mitigation from electricity rates.
The path forward
RMI’s analysis shows that existing incentives can bring the up-front purchase cost for clean heat pump HVAC units and water heaters well below the cost of conventional alternatives for many Southern California households. Effectively realizing these savings, however, requires simplifying a complex web of incentive programs into one that is more broadly accessible to all residents and building owners. By bolstering financial support to the incentive programs and streamlining their administration for both households and contractors, California can ensure that the healthy air benefits of upgrading home heating equipment reach all communities, particularly those most impacted by air pollution. As SCAQMD moves forward with its proposed pollution limits on furnaces and water heaters, these accessibility improvements will be crucial for achieving the state’s air quality, public health, economic and equity goals.