Diversifying the Brazilian electricity mix: Income level, the endowment effect, and governance capacity

Low and middle income countries are usually trapped by their natural resource abundance, and thus have little opportunity to diversify their electricity matrix. On the other hand, in high income countries, new electricity sources have been growing faster, regardless of their resource endowments. As income grows, countries should have more opportunities to develop new technologies. Thus, the evolution of technologies to generate electricity should lead to a new mix of fuel consumption along the steps of an imaginary electricity ladder, from the more traditional to the more advanced and cleaner technologies. Notwithstanding the income effect, the endowment effect could hinder the diversity of electricity sources. In this context, we examine whether or not Brazil has been able to diversify its electricity mix with respect to income growth, by breaking what we called the “endowment trap”. Based on an economic model developed in this research, we found evidence that Brazil has succeeded in breaking its hydroelectric dependency, but has not eliminated the polluting sources.