How to maximise the social benefits of clean energy policies for low-income households

Putting people and inclusivity at the centre of all clean energy transitions plays a crucial role in effectively implementing energy and climate policies. It also presents an important opportunity to address existing socio-economic inequalities.

As we approach a turning point for energy investment, with expenditures on clean energy technologies significantly outpacing spending on fossil fuels for the first time, governments should seize the moment, developing comprehensive policies that address climate action, poverty reduction and inequality simultaneously. Equality and inclusion must also be built into clean energy policies to mitigate the risk of disproportionate or unintended consequences for certain segments of society.

The International Energy Agency – together with its partners from the Committee on Energy Research and Technology – recently hosted an online workshop on the social impact of clean energy policies on low-income households, organised as part of the People-Centred Clean Energy Transitions work programme. The event shed light on crucial considerations for policymakers, outlined below, as they design clean energy policies that maximise equity and beneficial outcomes for all parties.

While there are clear frameworks for designing policies to reduce carbon emissions, there is a lack of knowledge about how those policies can also reduce inequality and poverty. For instance, government incentives for retrofits intended to make buildings more energy efficient can generate immediate positive effects for low-income households by creating jobs in the construction sector.

However, the same projects may unintentionally exacerbate inequality over time. For example, the increased market value of the upgraded, energy-efficient properties could lead to higher rents in the area that burden low-income households. Careful policy design is required.

Programmes targeting the renovation of public housing, as well as policies designed to provide low-income households with financial incentives to pursue energy efficiency improvements, can also yield long-term positive equity outcomes.

The design of socially progressive energy policies requires careful consideration of contextual factors. Policymakers have a responsibility to recognise the effects of energy policies can shift significantly based on local circumstances.

For instance, renewable energy initiatives for households could unintentionally exacerbate poverty in countries with full electrification if government-backed programmes result in higher electricity prices without protections for lower-income consumers. Similarly, policies that trigger a rise in transport fuel prices would heavily burden low-income households in nations where car ownership is common. But in countries where car ownership is concentrated among the highest earners, fuel price increases are likely to affect the wealthiest households most. Understanding these nuances is essential for equitable policy design.

There are numerous policy tools that can shape clean energy programmes in ways that reduce poverty. These include incentives specifically aimed at low-income groups, such as cash transfers and loans for energy efficiency improvements, or strategically working to increase energy access in poor areas. Local energy communities, or community-based energy projects, have also shown clear benefits in deploying renewables and improving efficiency while delivering financial savings to vulnerable populations.

To enhance social equity, policymakers should also implement policies to address the unique challenges faced by low-income households alongside clean energy initiatives. For instance, in emerging and developing economies, providing decentralised solar energy systems in remote or rural areas may require additional policies to support skills training to ensure communities have the technical expertise to manage and maintain these systems. Without that capacity, a system breakdown could result in long periods without energy, impacting daily life and local economies.

Similarly, carbon pricing policies can help reduce poverty if they are supplemented with policies that redirect the collected tax revenues towards programmes aimed at low-income households.

It is important to identify economically vulnerable groups early in the policy design process. Since the beginning of the global energy crisis, governments have funnelled an estimated USD 900 billion towards short-term measures to lower consumer prices, in addition to pre-existing support programmes and subsidies. Only a quarter of these affordability measures are specifically directed towards low-income households and the hardest-hit industries.

Understanding the diverse ways in which households consume energy is another key step in designing effective clean energy programmes. For example, the Brazilian Energy Research Office recently conducted a study focused on how different income groups use residential electricity. As part of this research, the office introduced the Electrical Gini Index. This innovative tool allows for the monitoring of inequality in access to energy services by gathering regular data on the ownership and power usage patterns of home appliances across income groups and regions.

The findings could be helpful for implementing energy efficiency subsidy programmes that target low-income households. For instance, they might be used to identify appliances low-income households are more likely to purchase as their economic situations improve. Policy makers can then develop subsidies to boost access to more energy-efficient options. This will ensure an improvement in living standards doesn't lead to higher utility bills due to increased energy consumption. Such policies would help these households sustain their economic gains while also supporting energy efficiency goals.

Including the voices of economically vulnerable groups in the design of clean energy policies is a key step in preventing undesirable social consequences. One example of this approach is the LA100 Equity Strategies study by government authorities in Los Angeles as the city works to generate 100% of its electricity from renewables by 2035. Early in the process, officials launched a thorough consultation to identify the priorities of various local communities, especially low-income ones, with the aim of ensuring a fair transition. The study also highlighted the value of long-term partnerships between utilities and communities for an equitable clean energy transition, and it underscored that current investments in clean energy need to be reassessed to address disparities in resource allocation among residents.

All policies, particularly those that may affect the price of energy, have distributional impacts and require careful design to prevent negative outcomes or perceived unfairness. Enhanced evidence and new analytical tools are required to understand social implications and maximise the long-term positive consequences of clean energy policies.

As we support governments to ensure their clean energy transition strategies are fair and inclusive, the IEA will expand its global research and analysis on the full social impacts of clean energy policies, as well as of the long-term distributional effects of energy policies on the most vulnerable consumers.