Technological and social innovation is a complex process of research, experimentation, learning, and development that can contribute to GHG mitigation. Several theories and models have been developed to understand its features, drivers, and implications. New knowledge and human capital may result from R&D spending, through learning by doing, and/or in an evolutionary process. Most innovations require some social or behavioural change on the part of users. Rapidly changing economies, as well as social and institutional structures offer opportunities for locking in to GHG-mitigative technologies that may lead countries on to sustainable development pathways. The pathways will be influenced by the particular socio-economic context that reflects prices, financing, international trade, market structure, institutions, the provision of information, and social, cultural, and behavioural factors; key elements of these are described below.

Unstable macroeconomic conditions increase risk to private investment and finance. Unsound government borrowing and fiscal policy lead to chronic public deficits and low liquidity in the private sector. Governments may also create perverse microeconomic incentives that the encourage rent-seeking and corruption, rather than the efficient use of resources. Trade barriers that favour inefficient technologies, or prevent access to foreign technology, slow technology diffusion. Tied aid still dominates in official development assistance. It distorts the efficiency of technology choice, and may crowd-out viable business models.

Commercial financing institutions face high risks with developing “green” financial products. Environmentally sound technologies with relatively small project sizes and long repayment periods deter banks with their high transaction costs. Small collateral value makes it difficult to use financing instruments, such as project finance. Innovative approaches in the private sector to address these issues include leasing, environmental and ethical banks, micro-credits or small grants facilities targetted at low income households, environmental funds, energy service companies (ESCOs), and green venture capital. The insurance industry has already begun to react to risks of climate change. New green financial institutions, such as forestry investment funds, have tapped market opportunities by working towards capturing values of standing forests.

Distorted or incomplete prices are also important barriers. The absence of a market price for certain impacts (externalities), such as environmental harm, constitutes a barrier to the diffusion of environmentally beneficial technologies. Distortion of prices because of taxes, subsidies, or other policy interventions that make resource consumption more or less expensive to consumers also impedes the diffusion of resource-conserving technologies.

Network externalities can generate barriers. Some technologies operate in such a way that a given user’s equipment interacts with the equipment of other users so as to create “network externalities”. For example, the attractiveness of vehicles using alternative fuels depends on the availability of convenient refuelling sites. On the other hand, the development of a fuel distribution infrastructure depends on there being a demand for alternative fuel vehicles.

Misplaced incentives result between landlords and tenants when the tenant is responsible for the monthly cost of fuel and/or electricity, and the landlord is prone to provide the cheapest-first-cost equipment without regard to its monthly energy use. Similar problems are encountered when vehicles are purchased by companies for the use of their employees.

Vested interests: A major barrier to the diffusion of technical progress lies in the vested interests who specialize in conventional technologies and who may, therefore, be tempted to collude and exert political pressure on governments to impose administrative procedures, taxes, trade barriers, and regulations in order to delay or even prevent the arrival of new innovations that might destroy their rents.

Lack of effective regulatory agencies impedes the introduction of environmentally sound technologies. Many countries have excellent constitutional and legal provisions for environmental protection but the latter are not enforced. However, “informal regulation” under community pressure from, for example, non-governmental organizations (NGOs), trade unions, neighbourhood organizations, etc. may substitute for formal regulatory pressure.

Information is often considered as a public good. Generic information regarding the availability of different kinds of technologies and their performance characteristics may have the attributes of a “public good” and hence may be underprovided by the private market. This problem is exacerbated by the fact that even after a technology is in place and being used, it is often difficult to quantify the energy savings that resulted from its installation owing to measurement errors and the difficulty with baseline problems. Knowing that this uncertainty will prevail can itself inhibit technology diffusion.

Current lifestyles, behaviours, and consumption patterns have developed within current and historical socio-cultural contexts. Changes in behaviour and lifestyles may result from a number of intertwined processes, such as:

• scientific, technological, and economic developments;
• developments in dominant world views and public discourse;
• changes in the relationships among institutions, political alliances, or actor networks;
• changes in social structures or relationships within firms and households; and
• changes in psychological motivation (e.g., convenience, social prestige, career, etc.).

Barriers take various forms in association with each of the above processes.

In some situations policy development is based on a model of human psychology that has been widely criticized. People are assumed to be rational welfare-maximizers and to have a fixed set of values. Such a model does not explain processes, such as learning, habituation, value formation, or the bounded rationality, observed in human choice. Social structures can affect consumption, for example, through the association of objects with status and class. Individuals’ adoption of more sustainable consumption patterns depends not only on the match between those patterns and their perceived needs, but also on the extent to which they understand their consumption options, and are able to make choices.

Uncertainty:

Another important barrier is uncertainty. A consumer may be uncertain about future energy prices and, therefore, future energy savings. Also, there may be uncertainty about the next generation of equipment – will next year bring a cheaper or better model? In practical decision making, a barrier is often associated with the issue of sunk cost and long lifetimes of infrastructure, and the associated irreversibilities of investments of the non-fungible infrastructure capita.

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