As the coalition prepares to introduce its energy bill into Parliament in the next few weeks, it must demonstrate political leadership and ensure that its policy is based on robust economic analysis, recognising and addressing failures of the market.
The most obvious market failure is created by the fact that, without policy, the price of products and services that involve emissions of greenhouse gases does not reflect the costs of damage caused by climate change.
A strong and stable carbon price corrects this market failure and helps to produce a level playing field on which new low-carbon technologies, such as wind, solar and carbon capture and storage, can compete against fossil fuels. However, it is not the only market failure that holds back these new technologies.
A failure arises as well from the inability of capital markets to manage the risks associated with investments in new technologies properly.
And other failures are associated with the limitations of networks, particularly concerning public transport and grids. Most consumers and many firms do not yet fully understand the technological opportunities that are available.