Economic forces can play an important role in facilitating energy choice and potential transition. A common conjecture is that the choice of a more efficient and clean energy source is a direct, or at least a natural, consequence of an increase in living standards. Energy source choices, as they reflect different levels of environmental quality, can be considered a luxury good. Increases in income, among other things, implies greater control over resources and more awareness of the effect of energy choice. This conjecture is behind the widely studied energy ladder hypothesis. In the developing and emerging world that means going from traditional inefficient sources (fuel wood, charcoal, kerosene etc.) to more efficient modern sources (liquid gas, electricity), once higher levels of income are attained. Our paper tests this hypothesis by presenting evidence from households in 17 rural SubSaharan countries. Differently from the existing literature using multi-country datasets, our aim is to causally estimate the impact of income changes on energy choice.
To this end we use random variation in rainfall during the growing season of the main harvested crops. In rural environments, rainfall variations during this period provide a clean source of variation (also called natural experiment) that is not systematically related to other variables. For instance, households experiencing less than average rainfall will obtain lower harvests and thus income. Using random variation in rainfall during the growing season, therefore allows us to make causal inference and circumvent the critical issue of accurate income measurement in developing countries. Our study focuses on such an environment, as we only use observations of rural farm households in the Demographic Health Survey (DHS).
Extreme drought and flooding have a positive impact on the probability that the household will utilise traditional biomass-based energy sources. Coherently with the energy ladder hypotheses, the same extreme variables have a negative impact on the probability to use modern energy sources. However, it should be noted that the magnitude of this effect is very small. Negative income shocks, such as extreme drought or flooding, increases the probability of going from transitional to traditional sources by less than 1%. Similarly, the same negative variation in income reduces the probability of choosing more modern energy sources by less than 1%. While the estimated income variations are associated with movement up or down the energy ladder consistent with the prior, the changes in probability seem very small. The results are robust to the inclusion of a large battery of controls. These include owning either farmland or livestock (which acts as a proxy for agricultural assets), soil moisture and temperature (which act as controls for agricultural production), a wealth index, education, and household size. Results are also robust to the inclusion of controls for access to electricity and vegetation conditions. We avoid making any interpretation of the controls’ coefficient estimates as these may pick up simple correlations.
Excerpt of: New evidence on the rural poverty and energy choice relationship (Springer Nature, 2023)