Environmental Policy in Emerging Economies
Almost all of the growth in global energy demand over the next several decades is expected to come from emerging markets. Sound energy and environmental policies will be needed to ensure that economic growth supports broad-based improvements in societal well-being.
Much research exists on environmental and energy policies in the U.S. and Europe, but emerging market economies face a unique set of challenges. These challenges raise a set of open research questions: What does optimal policy look like given the financial market frictions that increase the cost of credit for firms in emerging economics? How do corruption and clientelism affect the feasibility of policy implementation? How do the informal networks that dominate many emerging economies affect the diffusion of information and new technologies? How do behavioral biases impact decisions in settings where individuals face the cognitive stress of living in poverty?
In this project, Risk Center researchers and collaborators are investigating environmental policies to foster sustainable development in emerging markets by simultaneously improving economic and social well-being, environmental sustainability, and personal health. For more information, contact Susanna B. Berkouwer.
Adoption of Energy Efficient Technologies in Emerging Markets
Energy-efficient technologies could meet sustainable development goals by slowing greenhouse gas emissions and improving health through lower pollutant emissions, but also by generating financial savings. Low-income countries use more than twice as much energy per dollar of GDP as middle- and high-income countries, on average. And low-income households face a high energy burden: in Nairobi, for example, some households spend up to 20% of their incomes on energy. Despite the possible benefits, adoption of energy-efficient technologies remains low.
Enter: the Jikokoa charcoal cookstove, produced by Burn Manufacturing. It uses high temperature alloys and ceramic wool insulation to improve efficiency. In a randomized controlled trial, we estimate that adoption of the Jikokoa reduces charcoal expenditures by 40%, saving households more than $120 per year—about one month of income—and generating an internal annual rate of return of 300%. There are also external benefits in terms of lower carbon emissions and reduced local air pollution.
Despite the large financial returns, adoption has been low. The main barrier is lack of financing: households simply do not have the liquidity to invest in technologies such as the Jikokoa cookstove. And credit market failures such as artificially high interest or down payments, quantity limits, or short repayment periods prevent individuals from taking up loans.
There may also be behavioral barriers to adoption. Recent research by BCE’s Arthur van Benthem and co-authors found that households in the U.S. do not always pay attention to energy prices to optimally adjust consumption. This might be especially true in low-income contexts, where the cognitive stress of living in poverty can increase behavioral biases. To test this hypothesis, we designed a behavioral nudge to increase attention to the financial savings of the energy efficient technology. We found, though, that it had no effect, suggesting households are already aware of the savings potential.
What does this mean for policy? Economists do not often achieve unanimous agreement, but one policy with remarkably high support (including 27 Nobel Laureate Economists and four Federal Reserve chairs) is a carbon tax as a tool to incentivize greenhouse gas emissions reductions so as to slow climate change. South Africa, Chile, and Mexico have all enacted a carbon tax—but is this really the best policy everywhere? While carbon taxes can efficiently reduce greenhouse gas emissions in higher-income countries, they could make poor households significantly worse off in settings where individuals face credit market failures and a disproportionate energy burden. Subsidies on energy-efficient technologies could promote widespread adoption of technologies that would lower energy use, thus lowering the regressive impact of a carbon tax.
In urban areas of Ghana, a primary barrier to economic growth is the reliability of the electric grid. Since 2012, persistent power failures have given rise to the term ‘Dumsor,’ meaning ‘lights off-on’ in the Akan language. In the 2013 World Bank Enterprise Survey 61% of firms saw electricity reliability as a major constraint, with firms reporting an average of over 700 hours of outages annually, compared to 1.5 hours for firms in the U.S. Frequent outages constrain economic well-being by reducing the benefits from, and discouraging investments in, welfare-improving appliances (like fans, refrigerators, or income-generating assets like sewing machines). To mitigate the impacts of these outages, customers make large investments in substitutes for high quality grid electricity such as backup generators and stabilizers, which potentially crowd out other productive investments. Furthermore, governments and utilities are forced to make important operational and investment decisions without accurate information on the frequency, duration, and geographic extent of power outages, the extent to which blackouts and brownouts affect households and businesses (and, indirectly, the local economy), or the most cost-effective ways to improve grid reliability.
Policy makers need detailed and accurate data to make cost-effective reliability investments that support economic growth. Standard measures of grid reliability such as the average duration of an outage per customer (SAIDI, the System Average Interruption Duration Index) and the frequency of outages per customer (SAIFI, the System Average Interruption Frequency Index) require measurements of the number of customers affected by each outage and the number and duration of outages across the entire electrical system. In this project we deploy novel GridWatch devices and socioeconomic surveys with firms and households to measure reliability in Ghana, understand the causes of poor reliability, and quantify the economic costs and benefits to improved reliability.
We first study quasi-randomly assigned infrastructure upgrades to estimate the cost of marginal improvements in reliability. We then exploit spatial network discontinuities in power quality across Accra to understand the socio-economic impacts of long-term reliability improvements. We collect temporally and spatially high-resolution reliability data using the GridWatch technology, and combine these with administrative infrastructure network data and 5,000 on-the-ground firm and household surveys to accurately estimate these outcomes.
Political Economy and Governance of Electricity Infrastructure
Governments in low-income countries frequently outsource public good provision to the private sector, but accountability, governance, and political incentives in this sphere remain poorly understood. We study outsourced infrastructure construction in the context of Kenya’s national Last Mile Connectivity Project, a large-scale program to connect all households in Kenya to electricity by 2020 using World Bank and African Development Bank funding. We focus on three factors in particular as potential drivers of construction quality: donor conditionality, political incentives, and independent monitoring in a repeated-game setting. We combine administrative construction data with novel field engineering assessments and household surveys in 300 sites to study the channels affecting leakage and technical construction.
Berkouwer, S.B. and J.T. Dean (2020). “Credit and attention in the adoption of profitable energy efficient technologies in Kenya.” Working Paper.
Berkouwer, S.B. (2020). “Electric Heating and the Effects of Temperature on Household Electricity Consumption in South Africa.” The Energy Journal, Vol. 41:04