World Development Report 2024: The Middle-Income Trap

A wide body of literature has now demonstrated that patents for low-carbon technologies “build on the shoulders” of earlier developments. Thus patenting is path-dependent, meaning that innovations are more likely to follow existing innovations, which can impede innovations in new technologies at an early stage. This literature has generally pointed out the need for initial subsidies to jump-start the innovation process and correct for the positive externalities that result in underinvestment in R&D on low-carbon technologies, as well as the need for carbon pricing to correct for the negative externality of carbon emissions.

Inertia in keeping up with, and planning for, exponential progress in low-carbon technologies has also slowed the changes needed in energy systems. The rapid technical progress in a range of low-carbon technologies described earlier has generally outpaced the expectations of leading agencies and energy-economy models. For example, for many years the IEA forecasted linear growth in the supplies of solar under its business-as-usual scenarios, even as supplies continued to rise exponentially. Not only the IEA but historically most energy-economy models have underestimated the deployment rates for renewable energy technologies and overestimated their costs, as outlined by Grubb et al. (2021) and Way et al. (2022). The reason is that most national energy-economy models and large-scale global integrated assessment models label energy technology cost developments as exogenous. However, energy systems investments are often large and indivisible (lumpy)—that is, they are not easily divided or sold in parts—and they are made over long time horizons, often spanning multiple decades. Thus such downside forecast inaccuracy has deterred investments in low-carbon technologies and resulted in inertia in planning.

Studies have found that peer effects and social learning are important factors in decision-making related to climate change. Preferences on technology adoption or social change are not cast in stone, but they change in response to decisions made by peers. The result is inertia in adoption initially and then rapid adoption later once a critical mass of peers adopts the technology. Similarly, the production of low-carbon technologies is subject to external economies of scale, which lead to lower production and operating costs for all companies in the industry. These, in turn, can increase profitability and competitiveness. However, these cost reductions do not occur until a sufficient number of industry players or scale is reached—meaning costs are higher for first movers.

Legacy transmission networks built to serve large fossil fuel plants slow diffusion of low-carbon energy

Because of the market structure of electricity generation and transmission, the deployment of clean energy technologies is more challenging and more complex than that for other technologies. Variable renewable energy sources provide energy only at certain times of the day or in certain seasons. Such intermittency poses challenges for their integration into power systems, particularly before electricity storage is fully developed. Integration also requires new approaches to demand-side management. The scale-up of the electrification of transport and buildings, which will increase the demand for electricity, also depends on the reliability of the power system. Scale-up requires accurate forecasting and forward planning. All these aspects of the energy transition create barriers and necessitate strong systemwide coordination and institutional capacity.

Legacy transmission networks built to serve large fossil fuel plants, along with outdated regulations, also create barriers to entry in middle-income countries. Typically, legacy networks have been designed for traditional energy sources for which generation can be located close to the source of demand (map 6.2). However, the renewable generation capacity for wind and solar must be built at the decentralized sites where these natural resources are found. Thus networks to transmit power are critical for the scale-up of variable renewable energy. Because electricity transmission has elements of a public good that often result in its underprovision, transmission networks in many countries are not keeping pace with the ambitions of governments or the plans of firms. This inertia in transmission networks serves as a major barrier to the energy transition in many middle-income countries. In addition, outdated regulations related to the siting of renewables or permitting for rooftop solar also create inertia, hindering diffusion.