Energy as it relates to Poverty Alleviation and Environmental Protection (UNDP, 1998, 36 p.): Key Energy Issues as They Relate to Poverty and Environment: First-cost effect generates poverty-energy-environment lock-in

Energy as it relates to Poverty Alleviation and Environmental Protection (UNDP, 1998, 36 p.)

Key Energy Issues as They Relate to Poverty and Environment

		(introduction...)
		Inefficient and environmentally harmful energy use
		First-cost effect generates poverty-energy-environment lock-in
		For the poorest of the poor, small improvements in commercial energy services produce large welfare benefits
		Conventional energy paradigm contributes to perpetuation of poverty
		Environmental problems such as urban air pollution and climate change affect people living in poverty more directly due to current patterns of energy usage
		Inordinate expenditure on energy

First-cost effect generates poverty-energy-environment lock-in

Since they cannot afford the initial costs of more efficient and cleaner devices and systems for cooking, lighting, etc., people living in poverty are often locked into a vicious cycle. They rely on patterns of energy use that contribute to depleting their resource base or they expose themselves to environmental harm and thereby deepening their misery. They deplete nearby fuelwood resources for cooking, and harm their habitat while further increasing their poverty.

Households make choices among the energy carrier options presumably on the basis of both the household's socio-economic characteristics and the attributes of the alternative energy carriers. Income is the main driver in choosing an energy carrier (Leach, 1992; Reddy and Reddy, 1994). From the standpoint of the consumer, the choice of energy carrier depends on whether or not it is affordable, accessible, convenient, easily controllable, clean, and efficient. Fuel costs have fixed and variable components. The division of costs into fixed, quasi-fixed, and variable components is relevant to household decisions about fuel choice. The outcome of these decisions depends upon the household's preparedness to forego present consumption for future benefits (i.e., upon the rate at which a household discounts future benefits). This discount rate is determined, in part, by the household's level of wealth and the liquidity of its assets. For example, households that apply high discount rates to fuel consumption decisions, either because of the high cost of diverting resources from other uses or of borrowing funds to cover up-front capital costs, will tend to prefer fuel carriers that involve lower up-front costs.

Compared to those who are better off, people living in poverty tend to attribute far more value to present benefits than to future ones. That is to say, they use much higher discount rates than do the rich when making decisions about energy carriers and think primarily in terms of the first cost, rather than the life-cycle cost (Reddy and Reddy, 1994). This attitude is quite judicious given their circumstances. They are among the least likely to receive conventional sources of credit from financial institutions and have highly uncertain income streams (Dasgupta, 1993).