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Energy Market Reform

Governments have recognised that in most cases energy market reform allows markets to operate more efficiently and cost-effectively. However, there are continuing reasons for governments to remain involved in energy markets: long-term uncertainties, the fact that markets do not always take account of environmental and social objectives (including safety and health concerns), the continued monopoly nature of natural-gas and electricity transmission grids, and the global nature of some problems such as climate change. All these examples offer a rationale for a continuing government role. When market prices do not fully reflect environmental and social costs, consumers’ choices are distorted. Sending an appropriate market signal to encourage environmentally rational energy use – including by reducing consumption and changing its composition in favour of more environmentally friendly goods and services – may be accomplished through a variety of economic instruments, from direct taxes to tradable permits. The policies will need to take into account national circumstances.