As UN climate talks approach, it’s innovation that we should bet on for an energy transition

There is much to be worried about. However, there is also good news. Global renewable energy capacity—solar, wind, hydroelectric, bio-thermal and geothermal—keeps growing at a healthy pace, with an installed capacity of 4,250GW in 2024. It is still only a tenth of the total energy consumed by the world, but that ratio is rapidly rising, thanks to the falling costs of new technology.

In its World Energy Outlook 2024, the International Energy Agency (IEA) forecasts the likely installed capacity for renewable energy by 2030 under three scenarios at 9,750GW, 10,900GW and 11,500GW respectively. “From today till 2030, renewables will make up at least four-fifths of total capacity additions in each scenario, heavily outweighing additions of unabated fossil fuel capacity, with solar PV and wind power dominating new capacity in all major markets,” says the IEA.

Only the most optimistic forecast of 11,500GW meets the global pledge made in Dubai in 2023 to triple renewable capacity by 2030. However, what is striking is not just the pace of growth of alternative energy, but how the actual capacity installed in any year has been far higher than what was anticipated earlier by most energy forecasters.

For example, the IEA had forecast in 2010 that global solar energy capacity would be 101GW or 138GW by 2020 [CHK] under two scenarios. The actual number that year was 719GW. The point is not that forecasting can often be wrong, but that it is a tricky task in the midst of an innovation wave. The task is almost impossible when there are structural breaks from the past.

In an interview he gave in July 2023, Philippe Aghion, who recently won the Nobel Prize in Economics along with Peter Howitt and Joel Mokyr, said that “innovation is the key to the challenge of fighting climate change.” This is not adequately recognized in a lot of the public discourse on climate change. There are several important policy implications that can be derived from the centrality of innovation in response to the problem.

First, the world cannot just depend on higher carbon taxes to deal with climate change. That can suppress demand for traditional forms of energy, but it is equally important to increase the availability of new forms of energy. In other words, green policy should focus as much on the supply side as it does on the demand side. This column had earlier drawn a parallel between what happened during the Green Revolution, when countries such as India escaped the clutches of mass hunger through new technology rather than lower food consumption.

Second, innovation is driven by firms. However, Aghion has shown in his work with fellow researchers that there is an important nuance here. The economists studied patent patterns in the automobile industry, based on data from the patent offices in the US, Europe and Japan between 1978 and 2005. They found that firms that innovated with dirty technologies in the past tended to apply for patents in similar technologies in the future as well.

That is part of the usual habit of trying to improve on what you already do, rather than strike out in new directions. This tendency was observed in other industries as well.

Third, Aghion argues that getting firms to change their innovation pattern in a way that involves moving from stuff they are very good at doing to what they must learn will entail a loss of productivity in the economy, a temporary cost of the energy transition. There is thus a role for governments to step in and help redirect innovation efforts in green technologies, so as to make the transition attractive to firms. He wants a carbon tax to be accompanied by green industrial policies to hasten that transition.

“In capitalist reality as distinguished from its textbook picture, it is not (traditional) competition that counts but competition from the new commodity, the new technology, the new source of supply, the new type of organisation,” Joseph Schumpeter wrote in Capitalism, Socialism and Democracy, his classic work. Schumpeter said that this type of competition “strikes not at the margins of profits and the outputs of existing firms but at their very foundation and their very lives.”

This Schumpeterian paradigm is important in the context of climate policy as well. Just as automobiles displaced the horse-drawn carriage or smart phones displaced feature phones, energy systems can also change. However, just as in the case of personal mobility or communications, incumbents are often too invested in the older way of doing things to take advantage of new technological possibilities. It is new firms—Ford Motor Company or Apple Computer—that grab the opportunity. We could see something similar in the ongoing energy transition as well, though it is too early to reach any definitive conclusion.

Dealing with climate change is a serious business, and while international cooperation of the sort that will be pursued at Belém is a critical building block of the energy transition, we must also remember that a combination of public and private innovation will eventually drive change on the ground.

The author is executive director at Artha India Research Advisors.