World Development Report 2024: The Middle-Income Trap

Disruptions are accelerating the diffusion of innovative lower-carbon technologies

Today, two crises—the climate crisis and the global energy crisis—are combining to drive rapid progress in low-carbon technologies (box 6.1). Four technologies—solar panels, wind turbines, lithium-ion batteries, and electrolyzers used for green hydrogen—have been shown to follow “learning curves,” as formalized by Wright’s Law: costs fall as a power function of cumulative deployment due to the positive effects of learning by doing or increasing returns to scale in the unit’s production. Since the first commercial use of solar panels in 1958, their costs have fallen by more than three orders of magnitude. This technology is therefore in a category that has been characterized by exponential rather than linear growth, along with computer processing power, Ford’s Model T cars in the 1900s, and DNA sequencing. figure 6.1 compares the cost trajectories of solar and wind power with other technologies that have undergone rapid cost declines. Critically, this pattern is in sharp contrast to that of fossil fuels, whose prices have stayed broadly constant when adjusted for inflation over the last century.

Diffusion of these technologies, although slow for many decades, recently accelerated. Analysis of 700 million online job postings from 35 predominantly advanced economies reveals that after very modest growth beginning in 2014, the share of jobs related to low-carbon technologies increased by more than 50 percent from 2021 to 2022 (figure 6.2, panel a). Growth was rapid in three-quarters of the countries studied in Asia, Europe, and North America, but stronger in Europe. Driving this growth were electric vehicles (EVs), solar energy, insulation, EV charging, heat pumps, and wind energy. In 2022, openings related to low-carbon technologies grew rapidly in almost every industry, but were particularly pronounced in manufacturing, electricity, heat supply, and construction. Mentions of low-carbon technologies in the shareholder meetings of the world’s largest firms also doubled in 2022 (figure 6.2, panel b).

Box 6.1 The diffusion of low-carbon technologies as defined and measured in this chapter

This chapter defines low-carbon technologies in line with the Y02 classification of patents related to “climate change mitigation technologies” adopted by the European Patent Office. Low-carbon technologies are defined as “technologies or applications which can be considered as countering the effects of climate change.” This classification has seven main categories: energy, greenhouse gas capture, buildings, industry (including agriculture), transport, waste management, and wastewater management. Some examples of the technologies included under these categories are:

• Upstream energy supply technologies: renewable energy, combustion technologies with the potential to mitigate carbon emissions, energy storage technologies, decentralized energy, efficient electrical power generation technologies, and smart grids.

• Downstream end-user technologies: energy-efficient lighting, energy-efficient heating, energy-efficient appliances, heat pumps, electric vehicles, electric vehicle charging, hybrid vehicles; technologies related to processing of metals and minerals and lowering emissions in agriculture (such as solar water pumping and greenhouses); and technologies related to solid waste management, biopackaging, and bioplastics.

Detailed microdata on the adoption of these granular technologies across a wide range of countries, regions, industries, and firms are not yet readily available. In the absence of such data, this chapter relies on a growing literature that takes advantage of real-time data sources and uses text analysis to infer the spread of new technologies through their footprint in the demand for new technology-related tasks or skills in online job postings.a Where possible, the chapter also complements these measures with country-level measures of specific technologies and data on energy intensity and carbon intensity at the country and industry levels. Finally, it also incorporates recent granular firm-level data on green technology adoption from the World Bank’s Firm-level Adoption of Technology (FAT) survey.b

Countries have responded to high energy prices and energy security stemming from the invasion of Ukraine with energy conservation measures, fuel switching, and accelerated deployment of cleaner energy technologies. The energy intensity of the gross domestic product (GDP) is now 3.5 percent below levels before the pandemic in 2019—a rate of decline considerably higher than the 2 percent decline three years after the onset of the 2008 financial crisis. Emissions from natural gas also fell by 1.6 percent in 2022. In light of policy changes, the International Energy Agency (IEA) revised its forecast for renewable capacity additions for 2023 and 2024, raising it by 38 percent from its expectations before the war, in December 2021. Countries more dependent on imports of natural gas before the war were more exposed to the price shock and increased hiring for jobs related to low-carbon technologies.

The global energy crisis also spurred a reshaping of the climate policy landscape in 2022 and 2023. The United States saw a historic shift in climate policy with passage of the Inflation Reduction Act (IRA) in late 2022, which introduced a wide variety of incentives for producing and deploying low-carbon technologies. The IRA could have large impacts on power sector investments and electricity prices, lowering retail electricity rates and resulting in negative prices in some wholesale markets. It could also significantly hasten the adoption of renewable energy in the United States, increasing renewable penetration by about 13 percent by 2030, and it could spur adoption in other countries as the higher US investment drives capital prices lower. The European Union also made substantial shifts in climate policy in 2022 and early 2023. These included the REPowerEU strategy to end the bloc’s reliance on Russian fossil fuels through lower fossil fuel use; the Green Deal Industrial Plan, which aims to boost low-carbon manufacturing and industry in Europe; and an increase in the bloc’s binding renewable energy target from 32 percent to 43 percent. China has also pushed its scale-up of renewables and is now on track to meet its 2030 renewable energy generation target five years ahead of time, by 2025.

This acceleration of the clean energy transition is driving the emergence of new spatial clusters and jobs (map 6.1). Evidence extending the work of Bastos et al. (2023) to analyze 1 billion online job postings across 86 countries over the last decade reveals that in 2022 alone 3.3 million new job openings were related to low-carbon technologies—just under 2 percent of jobs posted online in 2022. In absolute terms, new openings have been highest in the United States, Europe, and China (figure 6.3, panel a). The new spatial clusters emerging in terms of low-carbon technology jobs are Catalonia and Madrid in Spain, home to major solar industries; Guangzhou, Beijing, Shanghai, Suzhou, and Shenzhen in China, home to China’s largest EV and clean energy manufacturing hubs; Rhône-Alpes and Île-de-France (the Paris region), home to France’s largest clean energy clusters; and California, the clean energy pioneer in the United States.

Innovation is also driving the creation of start-ups and capital flows (figure 6.3, panels b and c). In 2021, about 1,500 new clean energy start-ups were listed on Crunchbase, drawing on IEA data covering 40 countries, and about one-fourth of the start-ups were in middle-income countries. Of these, more than half were in China and one-third in India, although growth has been most rapid in India, with a tripling of start-up creation over the last decade. Globally, total clean energy financing passed US$1 trillion for the first time in 2022.

These shifts are triggering a reallocation of economic activity across countries, regions, industries, occupations, and firms. Just as fossil fuels have shaped the geopolitical map over the last two centuries, the clean energy transformation will alter the economic geography of manufacturing and global trade and the landscape of international trade policy. Access to fossil fuels has fundamentally shaped the world’s economic geography for nearly a century, with heavy industry close to coal beds and petrochemical plants near petroleum fields. The trade in fossil fuels has been a driving component of global trade and geopolitics for decades, with fuel exports accounting for 11.7 percent of total merchandise exports globally in 2019. However, this picture is starting to change—and more rapidly than had been imagined as the following shifts occur:

• Shifts between countries and between regions within countries. Low-carbon technologies and fossil fuels tend to be produced in different countries, and low-carbon technologies favor countries where manufacturing capabilities are already in place. Even within some countries, a spatial reallocation of production and jobs is under way. In China, for example, although fossil fuel jobs have been highly concentrated in the inland provinces highly reliant on coal mining, low-carbon technology jobs are growing in the manufacturing hubs on the east coast. Spatial disparities will be altered and potentially intensified because the geographical determinants of low-carbon energy sources differ from those of fossil fuel–based economies, and technological innovation is likely to occur most rapidly in centers of research and agglomeration.

• Shifts between industries. Because low-carbon technologies are generally being mass manufactured, the low-carbon transition is driving a reallocation of economic activity across industries from extractives to manufacturing and ancillary services. Jobs are most likely to be in the manufacturing, construction, and sales industries, but low-carbon technology jobs are growing rapidly in the high-skilled white-collar industries able to develop, modify, adapt, apply, and maintain new technologies.

• Shifts between occupations. The manufacture of low-carbon technologies is more skill-intensive than that for the high-carbon alternatives, resulting in a reallocation of economic activity between occupations and skill types. Jobs are also more likely to be filled by younger, college-educated white-collar workers, whereas high-carbon jobs are more likely to be occupied by older blue-collar workers.

• Shifts between firms. Low-carbon technologies are more likely to be adopted by new entrants, exporters, private firms, and firms that use research and development (R&D) more intensively. Low-carbon technology job postings are also highly concentrated in multinational firms and their supply chains. By contrast, high-carbon jobs are more likely to be in older firms and state-owned enterprises.

The energy transition is also shaping a new global trade and industrial policy landscape, which is disrupting the last three decades of trade policy coordination. After decades of such coordination, which yielded significant growth dividends, the world’s major economies now have divergent climate and trade policy approaches. The IRA in the United States, the Net-Zero Industry Act in the European Union, and the growing number of similar policies globally increasingly include local content requirements and other reshoring efforts to support local industries. Although the previous waves of middle-income countries transitioned to high-income status against the backdrop of trade policy coordination, today’s middle-income countries will need to navigate a more complex landscape in which key trade rules have not yet been agreed on.