This paper reviews the available methods for incorporating externalities into energy use and resource development decisions, and highlights the potential benefits and limitations of each. It examines international practice regarding externalities, focusing on recent policy decisions in the U.S., Europe and Asia, and considers the applicability of these approaches to Australia. Findings from the recent Victorian study are also discussed. Finally, the paper deals with the critical issue of the immense changes taking place in the electricity and gas industries. Vertical dis-integration of utility systems, corporatization and privatization will have profound impacts on the ways that governments in Australia will choose to deal with externalities. Moves toward a free market for electricity and gas may limit governments' current abilities to make societally optimal decisions regarding energy resource development and use; new methods may have to be considered.