Towards a carbon neutral economy: How government should respond to market failures and market absence

The transition towards a carbon-neutral economy is a fundamental change, it involves not only transforming the energy sector but also radical reforms across the whole economy. Managing fundamental and wholesale change across such a large economy is a massive coordination challenge requiring the simultaneous deployment of a collection of instruments and institutional change. This paper looks into the key challenges in building a carbon-neutral economy and discusses how governments and markets should work together in addressing these challenges. Due to significant failures in key markets relevant to tackling carbon emissions and to the absence of crucial markets, this paper argues that governments must play an active role in formulating and implementing effective environmental policies, regulations and design. This paper discusses major market failures and market absence, leading to suggestions on policy measures that governments should take to overcome these challenges, enabling markets to give better signals in directing resource allocation and guiding the low-carbon transition. Governments must act to facilitate a transition that enables equity in opportunities and outcomes across regions and individuals. Implementing these strategies and policies requires cohesive government structures, led from the most senior levels, to foster the necessary investment, innovation and change needed.