Study Overview
We study household decisions to acquire energy-using assets in the presence of rising incomes. We develop a theoretical framework to characterize the effect of income growth on asset purchases when consumers face credit constraints. We use large and plausibly exogenous shocks to household income generated by the conditional-cash-transfer program in Mexico, Oportunidades, to show that asset acquisition is nonlinear, depends, as predicted in the presence of credit constraints, on the pace of income growth, and both effects are economically large among beneficiaries. Our results may help explain important worldwide trends in the relationship between energy use and income growth.
Study Results
Our results suggest that credit-constrained households in the developing world are likely to acquire energy-using assets such as refrigerators at rapid rates as their incomes rise above a certain threshold. While these assets help improve health and human development, the energy they use can be significant. Energy forecasters concur that the bulk of the growth in energy demand and associated greenhouse gas emissions is likely to come from the developing world (EIA, 2011a; IEA, 2012). Their analyses suggest growth of over 90 percent through 2035 in the developing world while only about 15 percent in the developed countries. Several pieces of evidence suggest, however, that existing forecasts have not allowed for the possible nonlinear relationship between income growth, especially pro-poor growth, and energy demand suggested by our model.