Research from Wharton’s Susanna Berkouwer is helping economists and policymakers better understand the impact that climate change has on the poor across the world. In this conversation, they explain why low-income populations are so vulnerable to the climate crisis and what can be done to improve their future.
Dan Loney: Susanna, you’re very interested in the issues around climate change and inequality. How did this first become an interest of yours?
Susanna Berkouwer: When I was younger, I spent a lot of time living in different countries including Sri Lanka, Egypt, Kenya, and Costa Rica, so I’ve always been interested in trying to understand why there are huge differences in income across countries and within countries. As I became an economist, I was interested in trying to understand income inequality, what policies might work for reducing poverty. More recently, one of the most important issues for people living in poverty over the next several decades are environmental issues or issues related to climate change or energy access and things like this. My research and my policy engagement really lies at the intersection of poverty and trying to reduce poverty, while also understanding environmental change that’s happening.
Loney: Why have low-income populations become especially vulnerable in the last couple of decades?
Berkouwer: I think when we talk about low-income populations, that’s both the majority of people living in low-income countries or middle-income countries. But also here in the U.S., there are obviously low-income populations as well. There are some things that you can identify that are pretty similar, even across what look like pretty different contexts. I think one of those things is access to legal institutions. If you want to engage the government or engage other businesses, having access or recourse to address the issues that you’re facing can be really difficult for low-income populations. Things like access to the financial system, to financial infrastructure, credit, which are crucial if you’re thinking about adapting to different risks that you might face. Low-income populations tend to have much less access to those types of financial tools that might help them bridge those types of risks. Political influence or political care are something that people living in poverty tend to have much less of as well, and that can interfere with their economic growth and well-being.
Loney: To what level do you think governments are looking at this issue? And how much have they missed at this point, where they can really effect some positive change?
Berkouwer: When you think about environmentalism, it’s really a classic case of a negative externality, as we would say in economics, where some transactions happening between other people are affecting a third party that isn’t engaging. And this is exactly where you want government intervention, addressing a negative externality. Environmental issues are a key space where government regulation can improve welfare for everybody, especially people living in poverty who don’t have access to negotiations or financial tools.
I think governments are increasingly realizing the importance of this. Of course, they have lots of different incentives. They have political incentives, financial incentives, and different governments will have different goals. But I think increasingly, as the science becomes overwhelmingly clear, governments are realizing the importance of addressing environmental issues by implementing the policies that they’re able to.
Loney: But doesn’t the public need to have a say in this process?
Berkouwer: Yes, absolutely. This is what democracy functions as, right? There are elections for this particular purpose. Of course, elections are often subject to financial forces, financial influences. Especially in the U.S., that’s the case, as has been discussed pretty frequently. But I think as governments are realizing that the majority of their populations are going to be affected by this, they don’t have any other choice but to address it and make sure that they are responding to the needs of the electorate.
Loney: What is it about infrastructure that you focus on specifically?
Berkouwer: Yes, most of the research that I’ve done on infrastructure is on how large banks or investors — like the World Bank or the African Development Bank or the Millennium Challenge Corporation — will invest in infrastructure, primarily electricity infrastructure? And thinking about the effectiveness of those investments and how you can provide oversight on investments. Often these investments are done by private-sector partners, so you have public/private partnerships. How can you provide oversight in a way that is not excessively burdensome administratively? You don’t want to provide too much discretion, because then you might worry about things like corruption or leakage where you’re not sure where the funds are going.
So, it’s trying to identify what are the best ways that you can provide oversight into how these funds are being spent, how to make sure that they’re being spent in a way that improves the economic conditions on the ground while still not overburdening these companies, and trying to find methods that enable a smooth continuation of the project.
Energy Efficiency Leads to Lower Costs — Eventually
Loney: In some of the countries you have visited, how is the issue of energy efficiency being addressed or not addressed so that it has a positive impact on low-income families?
Berkouwer: Oftentimes when people hear the words “energy efficiency,” they think about conservation with the goal of reducing your environmental footprint. What some of my research has pointed out is that not only does energy efficiency generate large environmental benefits, there are often potentially big financial benefits. Most obviously, if you’re using less energy, your energy bills are going to go down. For many people and also for many firms, their energy bills can be a pretty substantial part of their expenditures.
For really low-income families both in the U.S. and abroad, they might spend more than 10% or even up to 20% of their income on energy-related expenditures. That could be cooking or heating or lighting. So, energy efficiency becomes not just about environmental goals but also just finding ways to reduce expenditures for low-income families that allow them to spend their money on other things they might need, such as food or education or health care.
Documenting that first, saying, “How can these financial savings benefit these types of families?” The next question you might ask is, “What are the barriers for adopting these types of technologies?” And this is going back to the financial barriers that we discussed earlier, where if you want to invest in energy efficiency, it might require a large, lump sum investment upfront. If you think about refrigerators in a store, the more energy-efficient version might be a lot more expensive than the standard one. If you don’t have access to credit, you might just have to buy the cheaper one because that’s the only cash that you have available on the day that you’re buying it, even though over a two-year period, for example, the total cost might be a lot lower for the energy-efficient version because your electricity bills would go down so much.
The friction here is your total costs would be a lot lower, but low-income families just don’t have the upfront finances to pay for it. They don’t have the credit to borrow, even though they could pay back the loan using the reductions in the energy expenditures that they’ve gained. That’s an example of how financial friction, which is pretty common in a low-income setting, can prevent them from investing in energy-efficient technologies that have both environmental and financial benefits.
Loney: You did some research on the adoption of cook stoves in Kenya, which was a very interesting study. Give us a bit of background on that.
Berkouwer: Yes, the study was on the Jikokoa charcoal stove, which is produced by BURN Manufacturing. They have a factory just outside of Nairobi. For the study, we worked with 1,000 individuals living in low-income areas in Nairobi. All of these individuals used charcoal cook stoves, and we gave them the opportunity to adopt the Jikokoa that’s a more energy-efficient version. With charcoal stoves, they’re actually pretty similar. It’s just that the Jikokoa is constructed using improved materials in a modern factory, so it uses much less charcoal to cook the same meals in less time. Because people had to buy less charcoal, that saved them a lot of money.
A lot of the existing research on cook stoves has been done in rural areas, and what we found in these urban areas is that charcoal is really expensive. If you live in a rural area, often people gather firewood. That costs time, but it’s often free. But in urban areas, people are spending a ton of money buying charcoal, so there were these huge financial savings from adopting this more efficient charcoal stove.
Loney: Is this part of the decision process, either staying with the old stove or adopting with the new stove?
Berkouwer: Yes, that was what we were trying to understand. How were people making that decision? What are the costs and benefits that they’re weighing? And if there are people who want to adopt the more efficient stove, what are the barriers for them? More recently, there has been an emphasis on psychology in economics or behavioral economics. Perhaps people are focused on that sticker price upfront, and they’re not really thinking so much about the energy costs. If you’re just spending a dollar a day, say on energy, you’re not realizing how much that adds up to, that you would actually stand to save a lot of money.
We didn’t find that that was the case. If you’re living in poverty, you’re so aware of your financial expenditures, people didn’t need to be reminded. Instead, we found that this financial barrier, the upfront cost, was the big thing that was preventing people from adopting it. That’s kind of the first step. In the past few years since we did that study, there has been huge uptake of LPG, which is potentially even cleaner than charcoal stoves. We’re not currently studying the LPG, but I think it’s important to recognize that that adoption is one step in potentially many steps.
In the U.S., you’re then seeing the next step, which is going from gas stoves all the way to electric stoves, as well.
Loney: Were the participants in your study thinking about the potential benefits that they could get down the road, or were they thinking about the here and now?
Berkouwer: That’s why we ran a randomized experiment. Of the 1,000 people that we worked with, we randomly assigned them to two groups. One group was the control group. With the other group, we went through a whole accounting exercise where we walked through how much they would save on a daily basis, on a weekly basis, on a monthly basis. What would you do with these savings? We did that for a whole year. We said, “Next February you might save $15 in your charcoal expenditures. What are you going to do with that money?” We really worked hard to emphasize just how much money they would save from adopting the stove.
After we did that, we compared that group with the control group, where we didn’t do all those reminders. We compared the rates at which they bought the improved stove, and we really didn’t see any difference there. Doing all those reminders really didn’t have any impact. From that, we can conclude that it seemed like people were already pretty aware of these long-term benefits.
The Future of Climate Change and Socioeconomic Inequality
Loney: What do you think is the future in terms of inequality and climate change?
Berkouwer: I think one of the key defining characteristics of climate change is risk and uncertainty. This applies for low-income households who may not know what type of weather is going to be realized. They might rely on the agriculture that they produce to feed their own households. From the poorest farmers that you can think of, all the way to the largest corporations in the U.S., risk and uncertainty, especially associated with climate change, is one of the defining characteristics, even of why we have financial markets.
I think in order to address those risks and that uncertainty, evolution of financial tools, for example insurance or savings, or new types of technologies that allow people to better leverage these different financial tools could be crucial in enabling households and firms to respond to these risks and uncertainties that climate change is causing.
Loney: This process sounds like it’s ongoing, but it will get better over time?
Berkouwer: Yes, I think so. I think especially with private-sector players. For-profit companies are realizing how important it is to factor in these types of risks and uncertainties into their daily operations. You’re seeing a recognition of that, and as a result, more development of financial products that could help with that. As those products are being rolled out, often initially in Europe or the U.S., we also want to understand how we can bring these products to even lower-income countries.
I think one of the great recent innovations on this has been a shift from indemnity insurance, where somebody from the insurance company has to evaluate what damage you incurred in a certain storm. There is a shift towards parametric insurance, which basically just says, “If there was a storm that was near where you live, you’re going to get a fixed payout.” That really changes the accounting and the economics of insurance. We’re trying to understand how exactly that changes the take-up decision and how it influences people’s ability to mitigate their risks, and also how we can get that product available to low-income families in low-income countries.
Loney: Probably like a lot of areas right now, the data that you need to make a lot of these decisions is going to be important, correct?
Berkouwer: Yes, absolutely. Different parts of the world will have huge differences in how much risk they’re facing. Trying to understand the exact risk over time is one of the key things that you might want to do. There is a huge increase in data availability over the past 10 years — satellite imagery, administrative records. There’s always a tension where, on the one hand, these types of administrative records are representative. It doesn’t rely on asking people questions or asking people to respond to surveys and such, but looking at how people actually make decisions. How many people took up insurance? How many people chose to invest in a certain savings account? Getting those administrative records can be really useful, and increasingly researchers are benefiting from those types of data sets.
At the same time, you want to be really concerned about confidentiality and privacy and making sure you’re doing this in a way that’s anonymous, respectful of what people were intending to do with their data. There’s definitely a tension there between the quality of the research that you want to do and also respecting the privacy concerns that people have justifiably raised.
Loney: Where do you want to take this research in the future?
Berkouwer: I think the interplay with financial decision-making. I have some ongoing work on how people make financial decisions, how people perceive risk and uncertainty when they’re choosing how much to save or how much to consume in the context of climate insurance, as well as in the context of energy efficiency adoption.
I’m also pretty excited about Wharton’s new ESG initiative. As part of that, they launched the Climate Center, so there’s faculty not just in economics, but also from real estate, from finance, from accounting — lots of faculty from across Wharton who are working on climate-related issues. We just launched that last year, so I’m pretty excited to see what is going to happen with that initiative over the next five to 10 years or so.