Earth-sheltered construction imposes unusual demands on thermal insulation. Although the insulation can be located on either the inside or outside of the structure, it must be emphasized that placing it outside is the more desirable method. Holding the mass of the building within the insulating envelope provides heat capacity that prevents rapid temperature changes within the structure, smoothing out the heating-and-cooling cycle and conserving energy. If it is impossible to place the insulation on the outside it may be used on the inside. In that case the characteristics needed in the insulation change somewhat.

Designers may wish to consider locating the insulation within the concrete walls to protect it from mechanical damage and to provide an additional impediment to absorption of moisture. The main body of the concrete should be on the inside to give maximum heat-retaining capacity. For example, in a 12-inch-thick wall with 2 inches of insulation, 8 inches of concrete could be placed on the inside of the insulation and 2 inches on the outside (300, 50, 200 and 50 millimeters respectively).

This article provides a table listing characteristics desirable in insulation for earth-sheltered buildings, exterior and interior installation, which includes compression strength sufficient to resist lateral earth loads; high resistance to producing toxic fumes during fire; R-value stability; tongue-and-groove interlock between sheets to prevent heat flow or water movement; and other characteristics.