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About energy-related financial literacy for household energy use

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This presentation describes energy-related financial literacy, a concept connecting a person’s knowledge and skills related to energy use, shortly referred to as energy literacy, and financial decision-making, shortly referred to as financial literacy. Both types of literacy are crucial for achieving long-term changes in people's awareness and behaviour regarding their energy use at home. The information in this presentation is taken from an article by Julia Blasch, Nina Boogen, Claudio Daminato and Massimo Filippini called “Empower the consumer! Energy-related financial literacy and its socioeconomic determinants”, published in Economics of Energy and Environmental Policy. .

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In this presentation we will explain to you why knowledge about energy and financial investments is important for energy use at home. We will introduce you to energy-related financial literacy, a concept connecting a person’s knowledge and skills related to energy use, shortly referred to as energy literacy, and financial decision-making, shortly referred to as financial literacy. Both types of literacy are crucial for achieving long-term changes in people's awareness and behaviour regarding their energy use at home. The information in this presentation is taken from an article by Julia Blasch, Nina Boogen, Claudio Daminato and Massimo Filippini called “Empower the consumer! Energy-related financial literacy and its socioeconomic determinants”, published in Economics of Energy and Environmental Policy. . We developed the content of this presentation with the expert support by dr. Julia Blasch from the Institute for Environmental Studies (IVM) at the Vrije Universiteit in Amsterdam (VU), one of the eight NEWCOMERS consortium partners. The part highlighted in blue could probably also be provided as a written “footnote” to the presentation, to shorten the intro? 2. CENTRAL PART – CONTENT In their article, Julia Blasch and colleagues show that many households underinvest in new and more energy-efficient appliances and energy-efficient home renovations, despite the fact that these investments are often financially viable – when considering the energy savings over their entire lifetime. This underinvestment is called energy efficiency gap. There are two explanations for this – either markets do not work as they should (then we speak of market failures) or people do not behave as expected (then we speak of behavioural failures). Lack of information and high transaction costs are examples of market failures. Risk aversion or loss aversion are examples for behavioural failures. In this presentation we are going to explore the consequences of one particular type of behavioural failure, called bounded rationality. Bounded rationality refers to people’s limited capacity to find and process all the relevant information that they need to take optimal rational decisions. This has consequences for the decisions people make about energy use. To assess the potential savings from an energy-efficient appliance or from energy-efficient renovations, people need to have specific skills. They need to understand their energy consumption, as well as the lifetime and consumption of their appliances and also understand how to use and apply this knowledge in everyday life. This knowledge and the ability to apply this knowledge is called ENERGY LITERACY. The definitions of energy literacy differ in many ways as academics are focusing on different dimensions. Some stress the importance of cognitive abilities, while others are considering also attitudes and behaviour. Technical, environmental and financial dimensions are also added in some definitions, proving that being literate is more than just having knowledge, it is also about applying that knowledge for making everyday life decisions. One of such indicators is the ability to evaluate the long-term financial benefits related to investments that improve energy efficiency. Considering the financial dimension of energy literacy and its importance, the researchers propose a concept they call energy-related financial literacy, which is an integrated concept that connects energy literacy and financial literacy. It takes into account energy-related knowledge but also the cognitive abilities that are needed in order to take decisions with respect to the investment in relation to energy services and their consumption. Are people energy- and financially literate? The research shows, that while most responded well to basic financial literacy questions, there is a large gap in knowledge in the energy domain. Only a fourth of respondents knew the average price of electricity in their country and less than a half correctly calculated the lifetime costs for their appliances. People with a rather low level of energy-related financial literacy have been observed to be less likely to have invested in energy-efficient lighting. This means they forego the lifetime-cost savings from using energy-efficient LEDs rather than inefficient incandescent light bulbs. The research also finds there is a large gender gap in energy related financial literacy, with males being generally more literate. Although the reason for this is unclear, it might be due to the division of work in households, where men invest traditionally more in acquiring financial decision-making skills while women invest in other forms of human capital. If you want to dive deeper into the research, you can find the research paper linked below.

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