Bounded rationality is an important behavioral failure responsible for the energy-efficiency gap, whereby consumers underinvest in energy-efficient technologies. One means of addressing this is by improving the energy-related financial literacy of households, defined as the combination of energy knowledge and cognitive abilities needed in order for decision-makers to make sound choices with respect to investment in durables.

Even though the per capita energy consumption in developing countries is usually quite low, one can expect, at least in urban areas, that consumers will purchase more energy consuming appliances and vehicles as their disposable incomes increase. As economic growth and development brings households closer to durables of their needs and liking, ensuring the adoption of energy-efficient technologies is critical for sustainable energy consumption. However, market and behavioral failures often imply that consumers underinvest in energy-saving technologies. Behavioral failures may stem from low energy-related financial literacy levels of households, which is the combination of energy knowledge and cognitive abilities needed in order for agents to take sound decisions with respect to their investments.

This study sheds light on the barriers to higher levels of energy-related financial literacy, that are specific to low and middle income countries, and also inform policy-makers about how limited levels of energy-related financial literacy may affect their attitudes towards replacement of old appliances. We evaluate the level and the determinants of energy-related financial literacy of about 2,000 urban households in the Terai (lowland) region of Nepal using data from a novel household survey conducted in 2018. We also analyse whether the literacy has an effect on attitudes of households regarding replacement of inefficient technologies.

Results show that the level of appliance ownership is low for households in the region and that respondents have very low levels of energy-related financial literacy. Female respondents have lower levels of literacy than males, while higher levels of education are a determinant of higher levels of energy-related financial literacy. Moreover, the results also show that higher levels of energy-related financial literacy, especially stronger computational abilities, lead to attitudes that are more rational on replacement of inefficient appliances. This is relevant to policy-makers looking to address behavioral reasons for the energy-efficiency gap in developing countries.

Further details about this research are available online.

The people involved in this research project are Dr. Nilkanth Kumar, Dr. Suchita Srinivasan and ESC member Prof. Dr. Massimo Filippini.

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