Energy-Related Financial Literacy and Fuel Efficiency: Evidence from Motorcycles in Nepal

Abstract

Air pollution is a grave problem in urban areas of developing countries, with the transport sector often being a significant contributor. A gamut of behavioral anomalies and market failures have been known to inhibit individuals from investing in more fuelefficient vehicles (due to the well-known ‘energy efficiency gap’). For example, low levels of knowledge and skills to calculate the lifetime costs of a durable may induce underinvestment in energy-efficiency. This level of knowledge and skills has been encapsulated in the idea of ‘energy-related financial literacy’ (ERFL). In this study, we use novel data from Kathmandu, Nepal to understand the determinants of ERFL, and to evaluate its effect on the energy efficiency gap in the choice of motorcycles. Our results provide suggestive evidence that individuals with higher levels of ERFL are more likely to own motorcycles that have comparatively low total lifetime costs, i.e., more fuel-efficient motorcycles, especially individuals with stronger computational skills. This study has important implications for the design of relatively low-cost policies such as educational programs that may nudge buyers to invest in energy efficiency.

Keywords: Energy-related financial literacy, fuel efficiency, Energy efficiency gap, Motorcycles, Nepal