Credit market failures could slow the adoption of energy efficiency in low-income countries, according to a new research paper titled “Credit, attention and externalities in the adoption of energy efficient technologies by low-income households. “

Low-income households face credit constraints to adopt energy-efficient technologies, which policymakers can address with finance programs and grants, according to the document. The authors of the article are Susanna B. Berkouwer, professor of business economics and public policy at Wharton, and Joshua T. Dean, professor of behavioral science and economics at the Booth School of Business at the University of Chicago.

Berkouwer and Dean generated these results during a recent 14-month study on the adoption of energy-efficient charcoal stoves among 1,018 low-income households around Nairobi, Kenya. They selected a popular brand of energy efficient stoves called Jikokoa and offered them to attendees at a subsidized price. More than 500 households have chosen it. The range is designed with improved insulation for better heat retention.

Using data collected in four rounds of surveys, the researchers estimated that households that switched from traditional charcoal stoves to the energy efficient alternative saw their charcoal spending fall by 40%, saving the average household $ 118 per year. The authors put this in context: these households have an average monthly income of $ 120. The Jikokoa range sells for $ 40, so the savings equate to a 300% annual rate of return on investment.

Despite these gains, households without access to credit were prepared to pay on average only $ 12 in advance for the stove which sells for $ 40. But the group with access to the credit was willing to pay $ 25 to buy the stove. “The biggest obstacle to adopting a more energy efficient stove is simply money. People don’t have money on hand, ”Berkouwer said.

Dimensions of financial constraints

The median household in the study spent 20% of its budget on energy, compared to 3.5% for the median US household and over 7% for the poorest Americans. With these high energy costs, “the focus on savings” may already be high for low-income families, the newspaper notes. Unlike similar studies in rich countries, inattention to saving has not contributed to low willingness to pay, Berkouwer pointed out.

Instead, “credit market frictions” were the reason for the low willingness to pay. More than a third of those polled had applied for a loan in the past year and had been turned down, and more than half of those polled said they would borrow more if the cost of borrowing was lower. Loan terms were also strict: one lender charged 7.5% monthly fee and demanded repayment within one month. “In practice, this means that nearly a quarter of our sample would not be able to take out a loan today, even if they wanted to,” the newspaper said.

Ways to resolve friction

Carbon taxes might not be effective in low-income settings where people face credit constraints, the document noted. Policymakers could expand access to credit to increase adoption of energy efficient technologies among low-income households. But the authors note that this path presents obstacles, including “information asymmetry and adverse selection in credit markets, as well as the informal nature of many low-income economies.”

Instead, the authors recommended grants on energy efficient technologies. Berkouwer said these subsidies could apply to both households and stove makers. Some manufacturers, like Burn Manufacturing, which makes the Jikokoa stove, are already receiving subsidies through carbon offsets, Berkouwer added. Burn is also working with women’s groups in Kenya to find new ways to provide loans. Women represented 95% of those interviewed in the study.

“The biggest obstacle to adopting a more energy efficient stove is simply money. People have no money in hand. –Susanna B. Berkouwer

Berkouwer said the energy-efficient cooker also brought health benefits. Compared to traditional charcoal stoves, the energy efficient variant uses half the charcoal and generates half the smoke. “Respiratory disease is a leading cause of death in many low-income communities. Berkouwer and his colleagues are planning a large follow-up household health study that they tracked, where they would measure indicators such as blood pressure and blood oxygen levels.

Why focus on low income countries?

It is important to identify the optimal policies to promote the adoption of energy efficiency in low-income contexts, as almost all of the growth in global energy demand over the next decades is expected to come from countries low- and middle-income earners, the document said, citing the agency’s International Energy Data. Moreover, in Kenya in particular, more than two-thirds of households still use traditional wood and charcoal stoves as their main cooking technology, with “significant negative health consequences,” the document noted.

A growing number of low-income countries are applying carbon taxes to reduce greenhouse gas emissions and local environmental pollutants, the document notes. South Africa, Chile and Mexico have all adopted a carbon tax since 2014, each covering at least 40% of national greenhouse gas emissions, he added.