Rising Middle Class Fuels Global Energy Surge: Catherine Wolfram

A gentleman with a thick Georgia drawl once told me that he could explain the erosion of communism in China with two words: “AY-ur conditioning.”

The citizens of the People’s Republic, he said, looked at their compatriots in Hong Kong and decided that their lives would be much improved if they, too, could afford such modern conveniences.

Running an air conditioner requires electricity, which can deliver a host of other benefits as well. As electrification spreads, more people can pump clean water, refrigerate food and medications, provide light for children to study at night, connect to the Internet, and do many other things that enhance health, education and security. Countries such as Brazil, and India are expanding their grids and bringing electricity to many of the about 1.5 billion people (more than one-fifth of the world’s population) who currently live without it.

Yet, when we think exclusively about poverty alleviation and economic development, we often ignore the resulting surge in energy use. If we fail to take account of these increases, we will have to contend with a global energy problem much larger than we can now imagine.

Income Growth

In recent research, my co-authors and I observed that energy consumption and the energy needed to manufacture goods increases sharply when households move out of poverty into the middle class. This is true in every country we analyzed. On the other hand, when households move from extreme poverty to just being poor, energy use doesn’t increase by much, because these households typically use their growing incomes to consume more calories or higher quality food. Similarly, when households move from the middle to upper-middle class, their energy use doesn’t change much.

Our research also showed that in countries that improved the living standards of the poor, a 1 percent increase in gross domestic product leads to a 1 percent or higher increase in total energy consumption. Conversely, in countries where the upper-middle class or the wealthy benefit the most from growth, a 1 percent increase in GDP increases energy consumption by only about half as much.

This suggests that $1 of GDP growth will have very different implications for energy use depending on what type of household consumes it. When a country’s economic growth elevates many people into the middle class, its energy consumption grows quickly.

Going back to the example of air conditioning in China, we see that the share of Chinese families living in poverty has declined dramatically, while sales of air conditioners have skyrocketed. For example, in urban China in 1995, there were eight air-conditioning units for every 100 households; by 2009, there were 106 units for every 100 households.

This mirrors trends in the rest of the world. As households come out of poverty and join the middle class, the share of their budget devoted to food declines and the share of their budget devoted to modern conveniences such as refrigerators, fans, water heaters, washing machines, motor scooters, cars and air conditioners goes up. Many of the goods the rising middle class purchases require energy to use and to manufacture.

Consider the case of Brazil, where the government embarked on an aggressive and hugely successful anti-poverty program called “Bolsa Familia.” Among Brazilian households in the lowest 25 percent of the income distribution, only half owned refrigerators in 1999. By 2009, that number increased to 85 percent.

Rising Prices

The arrival of all these new energy users will have profound implications for the price of oil, coal and other fuels, as well as for concentrations of greenhouse-gas emissions in the atmosphere and the resulting climate change. A poor Brazilian family’s decision to buy a refrigerator or a Chinese family’s decision to buy an air conditioner may seem remote and inconsequential. Yet, when millions of other families around the world buy refrigerators and air conditioners simultaneously, there will be real impacts on prices at the local gas station and on our prospects for controlling climate change.

Unfortunately, this pattern indentified in our research isn’t captured well by the most prominent energy forecasts. For example, in the case of China, the Energy Information Administration’s five-year forecast for energy consumption in 2005 fell short by almost 25 percent. These forecasts probably underpredict future medium-run growth in energy demand, as well. To develop more accurate forecasts, we need to account for growth driven by the rising middle class.

In the coming decades, a substantial fraction of the world population is poised to go through a Chinese and Brazilian-style transformation. As household incomes grow and programs to bring electricity to more homes succeed, the growth in energy demand over the next decade will be sizable -- perhaps startlingly so.

There is no doubt that the rise of the global middle class is a positive development. Yet, if we don’t forecast and plan accordingly, it could lead to dire unexpected environmental consequences and cause dramatic increases in energy prices that ultimately diminish the very livelihoods we are trying to improve.

(Catherine Wolfram is associate professor of business administration at the Haas School of Business at the University of California, Berkeley, where she is co-director of the Energy Institute. She is a contributor to Business Class. The opinions expressed are her own.)

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