Reducing energy poverty by nearly universal pension coverage of rural China

Abstract

This paper estimates the causal effect of income change on reducing energy poverty by exploiting age-based eligibility for China’s New Rural Pension Scheme (NRPS) through a regression discontinuity (RD) design. More than one billion people worldwide live in energy poverty, and the situation is even more difficult in developing world. It is an important development challenge to reduce energy poverty, which could be further associated with health outcome, labor productivity, and educational achievements. While public policies that increase income for poor households are the most direct ways to reduce energy poverty, the reverse causality makes establishing a convincing causal link between income and energy poverty challenging. Using the quasi-experimental variation in income induced by NRPS, this paper addresses the endogeneity of income and examines the impact of exogenous sharp changes in income on energy consumption behaviors. The findings indicate substantial increases in modern energy consumption and sizable reductions in solid fuels (e.g., straw and fuelwood), suggesting that “windfall income” by pension coverage alleviates energy poverty. Although individuals could anticipate the income shocks by pension coverage, the evidence suggests that they do not engage in anticipatory responses to smooth their consumption. Further evidence shows that liquidity constraints may be the underlying mechanism for the lack of anticipatory responses in household energy consumption. Besides reducing energy poverty, the results demonstrate that pension coverage leads to a decrease in elderly labor supply, an increase in subjective health and life satisfaction, and an increase in non-energy consumption, all of which are positively associated with the well-beings of senior citizens. We anticipate that the findings of this paper in the context of China may be extended to developing world which has been expected to set up targeted measures to tackle energy poverty in upcoming decades.