John

Coogan

2/15/2012

Energy Poverty
Introduction:
Despite astounding economic growth, income inequality and economic disparity are commonplace in the developing world. Energy poverty is defined as having little or no access to electricity in communities that rely on fossil fuels for daily activities, such as cooking and lighting. This widens the gap between the rich and the poor but tends to get overlooked as a contributor to poverty. For example, its not explicitly listed as one of the UNs Millennium Development Goals. However, improving energy access is essential to achieving 1) Child and Maternal Health, and 2) Environmental Sustainability, both of which are Millennium Development Goals. The goal of this project is to define the econometric methods applicable to assessing the relationship between energy access and poverty, and ultimately inform the global community about this pressing issue.

The Impact of Energy Access on the Poor:

This topic has been the focus of significant academic research. Makoto Kanagawa and Toshihiko Nakata of Tohoku University examined the relationships between energy access and improving socio-economic conditions in rural areas of developing countries. Kanagawa and Nakata published their results in Energy Policy, one of the leading journals covering the subject. In order to quantify their hypotheses, they constructed an econometric model explaining fluctuations in literacy rates as a function of three factors: household electrification rates, the density of the road network and the ratio of men to women in the community.

John Coogan

2/15/2012

The most compelling part of the paper is achieved with their link between energy and poverty. They identify four key components of poverty they identify: health, education, income and environment. These serve as pertinent guidelines for analyzing attempts to improve social welfare through increased energy access (Kanagawa and Nakata, 2008). Health can be improved by substituting hazardous pollutants for modern fuels and enabling refrigerated medicine storage. Mechanization in industry, made possible by energy, leads to higher productivity and boosts incomes. The environment can benefit from reduced deforestation through higher use of fuel wood substitutes. Lastly, energy can help improve education by powering lighting appliances that enable night study and by narrowing the digital divide through information communication technologies (Kanagawa and Nakata, 2008). Kanagawa and Nakata find that improving energy access significantly affects the quality of health and education. They also note that improvements have substantial ripple effects on other factors, for example, economy, gender equality, environment, etc., in rural areas of developing countries. (Kanagawa and Nakata, 2008) This study demonstrates the iterative linkages between economic and energy production growth and illuminates fringe benefits, such as womens rights and environmental sustainability. Marcio Pereira, Marcos Freitas and Neilton da Silva explore the theory of the energy poverty line in depth by analyzing Brazilian development data using well-known economic frameworks, such as the Lorenz Curve, Gini Coefcient and Sen Index. They conclude that rural electrification leads to sizeable improvements in energy equality and implore policy makers to prioritize access to electricity when attempting to reduce poverty levels (Pereira et al, 2011).

John Coogan

2/15/2012

The purpose of the Brazilian analysis is to inform and influence public policy in the hopes of helping the countrys poor. They focus on health and education primarily, writing: The public policies whose objective is to reduce poverty and inequality necessarily permeate education and health matters. Both are directly related to the availability of electricity, mainly so far as the rural environment is concerned. Electricity is one of the pillars on which education and health lean. (Pereira et al, 2011) By establishing a clear link between energy and two more popular poverty topics, education and health, they are able to identify the root of the problem, the access to energy.

Energy Demand Factors:

Although the link between poverty and energy access seems clear, the factors that affect demand for energy are more obscure. The economic theory of supply and demand states that in a free market, prices will settle at a point where the quantity demanded by consumers equals the quantity supplied by producers. Applied to energy, increases in electricity supply will lead to lower prices, provided that demand remains unchanged. This process becomes more complicated over time because increased energy access does lead to higher demand. Many academics have researched this topic and their work provides valuable insight. The National Bureau of Economic Research has published some of the most useful analysis on energy economics. Peter Reiss and Matthew White addressed the behavior of consumers in response to price changes with the goal of shedding light on the potential effects of electricity market deregulation. Energy markets often do not behave according to traditional economic theory because they are heavily regulated. Government typically sets rates for energy prices, 4

John Coogan

2/15/2012

thereby exerting significant control over the market. The model they discuss "can be used to evaluate, on a prospective basis, the effects of complex rate schedule changes. For a variety of practical reasons, regulatory agencies are often reluctant to authorize randomized-assignment pricing experiments as a means to evaluate major tariff changes." (Reiss and White 2001) This research helps show the effects of government regulations on energy markets and provides insight into how rate schedules may be able to help ensure equal access to energy in the developing world. Tariff changes, as they point out, create uncertainty in the market and can deter investment in the sector. Policy makers should avoid this in order to facilitate the growth of energy capacity as soon as possible. Within energy consumption, it is important to differentiate between the quantity and the quality of energy consumption. Using 54 of analyses on economic and energy growth within the United States, Warr and Ayers find that the amount of energy available for useful work is the most important factor to consider. Examining such a long period of time allows them to find differences between the quantity of energy supplied and the efficiency of energy use. When discussing potential solutions to energy shortages, it is easy to suggest that the problem lies solely in supply. This naturally leads to a policy focused on the discovery and extraction of additional energy resources. While Warr and Ayers admit that increases in both supply and efficiency are viable ways to sustain long-term economic growth, they suggest that faced with energy security concerns and the negative externalities of fossil fuel use the latter option is preferred. (Warr and Ayers, 2010) This draws attention to the critical fact that efficiency is the key to sustainability.

John Coogan

2/15/2012

Applying these theories allows for more detailed findings and recommendations. Energy consumption theory is specifically relevant in India, where over 400 million people currently live in energy poverty. Without access to reliable energy, these people are often forced to resort to using animal dung or other hazardous non-renewable sources of energy. The indoor air pollution caused by cooking with these toxic fuels is roughly equivalent to smoking two packs of cigarettes per day and often leads to chronic respiratory and eye diseases. Analysis of the determinants of fuel consumption choices and the effect of income distributions has shown that fuel subsidies can be used to spread the use of cleaner and more efficient energy sources in India. Traditional fuel choice theory evolved by using an energy ladder approach (Leach, 1992), wherein households switch to superior energy sources as their disposable income increases. By subsidizing cleaner forms of energy, governments can help those at the bottom of the energy ladder and have a significant impact on their lives.

Implications for Sub-Saharan Africa:

While the majority of energy research has focused primarily on developed nations, the potential impact of these theories, if put to proper use, is arguably largest in the developing world. Sub-Saharan Africa has fortunately been the subject of numerous research projects aimed at discovering ways to improve the lives of the millions of rural poor. One contrarian view regarding the relationship between energy consumption and economic growth comes from Yemane Wolde-Rufael. Using labor and capital as controlling variables, his analysis finds that in fifteen out of the seventeen Sub-Saharan countries in his sample, labor and capital were more important factors than energy consumption. 6

John Coogan

2/15/2012

He explains the motivations for his project by stating, "the research about African countries is almost exclusively based on the bivariate causality model with energy consumption used as the sole factor input. (Wolde-Rufael, 2009) Dissenting views often receive harsh criticism, so Wolde-Rufael spends significant time reviewing prominent research on the topic before presenting his analysis. His findings show the importance of considering changes in labor and capital while simultaneously researching the impact of energy access. This research demonstrates that, in many situations, a population boom or sudden influx of investment dollars may be the underlying reason that both energy consumption and economic output grow. Nicholas Odhiambo dives even deeper into the Sub-Saharan context by examining three specific countries; South Africa, Kenya and Congo. His approach is unique in that it addresses the problems of using a cross-sectional method and accounts for country-specic effects of energy consumption on economic growth. Traditionally, researchers group countries regardless of their current stage of economic development, which magnifies the flaws identified by Wolde-Rufael. Using this modified econometric framework, Odhiambo finds that, in both Kenya and South Africa, there is a unidirectional causal flow from energy consumption to economic growth (Odhiambo, 2009). This means that increasing access to energy will lead to higher economic output, but not necessarily the other way around. Although this model does not control for labor or capital as in the Wolde-Rufael model, the results are still relevant because they reveal that, regardless of the fundamental driving force, energy consumption precedes economic growth. This implies that investment in energy should be a priority during periods of high-growth. Odhaimbo recommends that government policy

John Coogan

2/15/2012

be specifically tailored to a countrys energy dependence. Because South Africa and Kenya have economies that are heavily dependent on energy, these countries will benefit from exploring more efficient and cost-effective sources of energy. Understanding the relationship between energy consumption and economic growth in Sub-Saharan Africa allows governments to help their countries grow swiftly and ultimately reduce poverty rates. Policy-making efforts related to creating sustainable development policies and optimizing the allocation of resources should focus on minimizing dependence on volatile energy markets in order to guarantee sustainable development (Akinlo 2008).

Conclusion:
Greater regional energy self-sufficiency can be reached in Sub-Saharan Africa by tapping into the significant potential solar, wind, hydroelectric, and geothermal energy sources as well as the proven oil and gas reserves. Addressing this issue is no easy task for governments and will ultimately require significant involvement from the private sector. Never the less, by understanding the underlying economic factors at work in developing nations, it is possible to help more people and do so more quickly.

John Coogan

2/15/2012

Bibliography
A.E. Akinlo (), 2008. Energy consumption and economic growth: Evidence from 11 Sub- Sahara African countries. Energy Economics 30, 2391-2400. Ekholm, T., Krey, V., Pachauri, S., Riahi, K., 2010. Determinants of household energy consumption in India. Energy Policy 38, 5696-5707. Giannini Pereira, M., Vasconcelos Freitas, M.A., da Silva, N.F., 2011. The challenge of energy poverty: Brazilian case study. Energy Policy 39, 167-175. Kahsai, M.S., Nondo, C., Schaeffer, P.V., Gebremedhin, T.G., n.d. Income level and the energy consumptionGDP nexus: Evidence from Sub-Saharan Africa. Energy Economics. Nicholas M., O., 2010. Energy consumption, prices and economic growth in three SSA countries: A comparative study. Energy Policy 38, 2463-2469. Practical Action Publishing, n.d. Poor Peoples Energy Outlook 2012. Reiss, P.C., White, M.W., n.d. Household Electricity Demand, Revisited. SSRN eLibrary. Warr, B.S., Ayres, R.U., 2010. Evidence of causality between the quantity and quality of energy consumption and economic growth. Energy 35, 1688-1693. Yemane, W.-R., 2009. Energy consumption and economic growth: The experience of African countries revisited. Energy Economics 31, 217-224.