We used wool insulation to pack around window frames and other nooks and crannies. Basically places where you would use polyurethane foam ('Great Stuff') in conventional construction. It works really well for that use.
We ordered from Oregon Shepard. There is also Good Shepard Wool and maybe others.
It would probably work well as your primary insulation. As you mentioned it is expensive.
I suppose commercial wool insulation products are treated to prevent this, but a few years ago a friend used goat hairs (a waste product of the pashmina cleaning machine in this region) as insulation, and the house owner told me this year that he's had a big problem with wool moths ever since.
Works at a residential alternative high school in the Himalayas SECMOL.org . "Back home" is Cape Cod, E Coast USA.
Wool makes great insulation. You can get tons of free or extremely cheap wool from meat sheep owners who shear late winter--january, february--as they do not generally sell the wool but give it to their shearers. Check your local extension office to find out about 4-h programs for fairs, they will often bag tons of wool get kids sheep ready for "market weight". That wool would be unwashed though. The best way to home wash it is to stomp it with soapy water in a kiddy pool and give it a few rinses.
Rebecca, that may have more to do with the differences between goat and sheep than anything, but I can't be certain of that. It seems like it wouldn't be difficult to make thick, partially felted batts to use as insulation, and then treat the batts with some sort of pest deterrant (borax, possibly more lanolin, possibly other things).
Edit: I am reading some posts about making natural wool insulation, and stumbled across this one. Which basically details what's already been discussed here, sans using lanolin or felting. In retrospect, felting is a bad idea, lol. If I'd thought about it for more than a minute I would realize that.
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