Common Tragedies

Thoughts on Environmental Economics

A push or a pull for nuclear?

Posted by Daniel Hall on October 8, 2007

There’s an interesting article in today’s WaPo about what lies behind the resurgence of nuclear power in the U.S.:

Nuclear plants are hugely expensive to build; they have long lead times and a history of cost overruns. Bottlenecks loom for key components if more than a few plants are built. The price of uranium has soared in recent years. So has the cost of construction materials and skilled labor, which is in short supply. Politicians, environmentalists and business still can’t decide how to dispose of radioactive waste. …

To ease financial concerns, the nuclear power industry has turned to Congress. Among the biggest reasons for renewed interest in nuclear power are the tax breaks, loan guarantees and other subsidies in the Energy Policy Act of 2005. …

For each nuclear plant seeking federal approval before the end of 2008, the act provides tax credits of up to $125 million for eight years, loan guarantees for up to 80 percent of a plant’s cost, shared application costs and insurance that would cover the costs of regulatory delay. Nuclear plants also receive other subsidies, including local tax breaks and limits on liability for catastrophic accidents.

The article also does a nice job drawing out the question of whether the government (read: taxpayers) should be insuring investors and utilities:

“I don’t take the position that there should be no nuclear power, but I believe that the price of the energy they produce should be reflective of their actual cost structure and they should not be shifting their risk of cost overruns and poor performance to us, the taxpayers,” said Doug Koplow, a Cambridge, Mass., researcher whose Earth Track consultancy monitors government energy subsidies. …

A study by a Keystone Center group — which included academics, investment bankers and nuclear industry experts — said that when capital costs are included, the price of nuclear power is 8 to 11 cents a kilowatt hour, about the same as natural gas. If Congress adopts a carbon tax or pricing scheme to curb greenhouse gases, it could give nuclear an edge.

I think this cuts to the heart of the issue. What market failure is the government trying to fix by providing these various deployment subsidies to nuclear power? Why are these subsidies needed? If nuclear power is too risky for private investors, why should the public take on the risk? My sense is that, during the last round of nuclear construction in the U.S., the regulatory structure was part of the problem — the rules changed in the middle of the game — so I can understand the need for a stable regulatory environment. But why offer up all the dollars?

If these nuclear policies are attempting to curb greenhouse gas emissions, the most efficient way to achieve reductions is to price emissions (read: carbon tax or cap-and-trade). Utilities can then make up their own mind about which technologies make the most economic sense; they shouldn’t get to rely on the public purse to bail them out for the risks they take.

2 Responses to “A push or a pull for nuclear?”

  1. Rich Sweeney said

    The US actually has a long history of subsidizing the risks of nuclear energy. This all started with the Price-Anderson Act in 1957. Initially, prospective nuclear generators were unable to get financing to build reactors, as there was too much uncertainty surrounding the potential liabilities of a nuclear disaster. The PA act capped the exposure of all private parties at $10 billion dollars, and made the federal government liable for any claims above that amount. Without this crucial guarantee, we wouldn’t have any nuclear power today.

    As for why this is necessary, there are a several potential reasons. In industries that face a lot of regulatory risk or have an unusually high exposure to litigatory risk, it may make sense for the government to mitigate these fears through subsidy or public guarantee (The FDIC’s guarantees are another good example). A more economically sound justification for government intervention would, as Daniel mentioned, be to correct for some sort of market failure. Currently there are two big positive externalities from nuclear energy: reduced carbon emissions and increase energy independence. While I agree that none of this makes sense without capping or taxing carbon, I’m not as opposed to public involvement as well. After all, we’re also spending billions of dollars a year subsidizing oil refineries and renewables R&D. While I think its always good to be weary of government pork, I don’t see why subsidizing the construction and operation of nuclear plants is particularly worrisome.

  2. Nuclear is also not the only sector that has been subsidized via limited liability. Some examples are airlines (international flights) and oil tankers. In the realm of emissions abatement, one potential push policy for CSS coal is a limit on liability for carbon leakage. A good paper by Figueirido, et al, analyzing the relevant liability can be found here.

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