THE BIGGEST NUCLEAR SUBSIDY: Pathetically Inadequate Insurance for a Colossal Liability
By Robert Bell, Ph.D.

   One of the main obstacles to renewable energy has been the low cost of existing electricity generation. In particular, nuclear, with its seemingly low cost, has been a real block.

   However, the consumer price of nuclear energy does not even remotely cover what its true cost would be if it were not heavily subsidized. But it is subsidized roughly to the same extent wherever it is in use on the planet — the US, the UK, Japan, France, etc. The biggest subsidy by far is the rarely discussed insurance liability cap for nuclear, which essentially passes nearly all the risk of a major nuclear catastrophe onto massive numbers of individual members of the public who are immediately victimized by a radiation spill and, if they ultimately choose to accept it, onto the taxpayers.

   But, the triple nuclear meltdowns and explosions at the Fukushima Daiichi power plants after an earthquake and tsunami on 11 March 2011 has put the potential liability for a major event into clear focus — entire populations evacuated from areas that may be abandoned for a very long time, massive disruption to industrial production, extensive pollution of agricultural areas, sea water irradiation destroying commercial fishing, widespread fears, whether grounded or not, of cancer. On top of all this is the nationalization of the utility, TEPCO, and damage to the nuclear industry as an export earner. Wherever people discuss nuclear, the same question now seems to be heard: Could a devastating event such as Fukushima happen here? And if it does and I initially live through it, what happens to my family and me?

   Here’s how the insurance subsidy works in the US. Under a 1950s law, the Price-Anderson Act, each license holder of a nuclear power plant has to pay for private insurance for up to $375 million of liability claims of damages outside the plant itself for each reactor unit. In case of a claim larger than that, each license holder is assessed a prorated share up to $112 million in a mutual insurance fund of all the nuclear license holders. The entire (virtual) US pot holds $12.6 billion. This would have to cover the personal losses of individual victims including the loss of their homes, businesses, offices, jobs, cars, written records, and those items for which they may have paid taxes for years such as community infrastructures --- hospitals, schools and universities, mass transit systems, airports, roads, electric lines, water lines, sewers, etc. After the $13 billion fund is depleted, victims have to rely on the good faith of the US government to make them whole — Good Luck! In any case, the total liability exposure of a license holder is just under $500 million ($375 million plus $112 million). After that — no legal liability.

   A study in 1982 by Sandia National Laboratories updated in 2004 put the worst case dollar cost of an evacuation of New York City due to an event at the 50km away Indian Point reactor at about $2.1 TRILLION (in 2004 dollars) — it would be much higher now, in 2012 dollars.

   So there is a gap between about $13 billion theoretically available and the $2.1+ trillion exposure. A similar, if not greater, gap could probably be determined for Paris --- or Bordeaux, along with its regionally linked wine and cognac industries (both major sources of French export income). One could add similar extraordinarily expensive liabilities for other areas of France, such as Alsace with its wine industry, Reims and its champagne industry, the Mediterranean coast with its tourist industry, etc. The odds that millions of victims would be even remotely made whole for their lost houses, businesses, jobs, etc. are probably roughly the same as in the US — approaching zero, even with the best intentions of the French government and, in my view, a much greater sense of solidarity among the French than among the Americans.

   On 22 January 2012, the English language website of a major Japanese newspaper, The Mainichi Daily News (http://mdn.mainichi.jp) revealed the existence of a 25 March 2011 secret report, created at the request of then Prime Minister Kan and produced under the direction of Japan Atomic Energy Commission Chairman Shunsuke Kondo. In the worst case—if all plant workers at the Fukushima Daiichi site had to be pulled out because of too-dangerous radiation levels within the plant--anyone inside a 170 kilometer radius would also have to be evacuated. Those within a second radius, 250 km, which would include Tokyo, could leave if they chose to do so. Obviously, quite a few of the foreign business located there would run. Many left, even if only temporarily, after the initial 20 km evacuation on 12 March 2011. An unnamed senior official of the government is quoted by the newspaper as saying, "It [the report] contained such shocking content that we decided to treat it as if it never existed." Former Japanese Prime Minister Kan said in a September 2011 interview that just after the Fukushima event, “I wasn't sure whether Japan could continue to function as a state.''

   So the gap between the derisory insurance coverage and the reality of the true liability exposure is not a theoretical possibility posed by boring academics and insistent greens — it was at the time of the meltdowns and explosions in serious discussion in Japan.

   Obviously, insurance for liabilities on the order of $2.1 trillion is unobtainable, or if some extremely optimistic company would write it, no reasonable person could expect the insurance company to pay off. In any case, whatever its premium would be, it would be prohibitively high, which is precisely why liability was capped in the first place.

   Interestingly, in 2003 the European Commission released a report it had commissioned which gave a rough order of magnitude for how much private insurance for a major nuclear catastrophe would increase the cost of French nuclear power per kilo Watt hour (kWh). The report titled Environmentally harmful support measures in EU member states, discussed a scenario in which “the operator is privately insured for the full risk of severe accident, but in this scenario the higher end of damage costs is used for premium calculation.”

   So, what would happen if the operator had to pay the full freight of buying private insurance for the worst possible catastrophe? According to the report, “This insurance scenario would thus lead to a tripling of total generating costs.” (For the full discussion, please see: http://www.mng.org.uk/gh/resources/EC_env_subsidies.pdf, pp. 131-140. The quote is on page 136.)  Clearly, if nuclear operators had to pay the sort of liability insurance nearly every other business had to pay, renewable energy would look pretty good by comparison.

   A UK green group, Energy Fair, has filed a complaint with the European Commission that the capping of liability for UK nuclear operators distorts competition and is a subsidy that has not been approved by the Commission. A German legal firm, BBH, drew up the complaint. Will the Commission do anything about it? A lawyer at the firm, Ms. Dorte Fouquet is quoted in a 20 January 2012 BBC story on the filing: "The Commission has repeatedly underlined that distortion of the market is to a large extent caused by subsidies to the incumbents in the energy sector."
Energy Fair’s complaint details a number of UK subsidies to nuclear, of which the insurance cap is by far the largest. A November 2011 report on its website states:
“Several of these subsidies are so large that withdrawal of just one of them would make nuclear power entirely uncompetitive. For example, full insurance against nuclear disasters would increase the price of nuclear electricity by a range of values of € 0.14 per kWh up to € 2.36 per kWh — depending on assumptions made.”

   So, what to do? I have two suggestions. One requires government action, the other doesn’t but is strictly on a volunteer basis.

   Since nuclear is effectively uninsurable, the government action would be to get out of it and into renewables by taxing nuclear energy producers for some of their now legally ignored, unpaid catastrophic insurance liability premiums. The money should be locked up into a long-term fund (what I called at the G20 in Seoul, Korea, a Green Redemption Fund), which would be used exclusively to finance renewable energy development. To protect the Fund from being raided for other purposes by cash strapped democratically elected governments, it should be set up by referendum, thus requiring another referendum to undo it. The Fund managers would have an incentive to quickly create sufficient green energy jobs to generate a lobby to keep the Fund from being raided or abolished in a subsequent referendum. Democracy could actually work for the environment, instead of as now, largely against it as soon as there is an economic pinch.
How much should the in-lieu-of-catastrophic insurance tax be? For France we could use as a basis of argument the carbon tax that has actually been seriously discussed. In 2009, two former French Prime Ministers, Michel Rocard and Alain Juppe proposed a carbon tax of 32 euros per ton of CO2. Mr. Rocard wanted it applied to electricity as well. Just for the sake of discussion, suppose this tax were applied directly to EDF and other electricity producers (who would then pass it on to their customers as they choose). A conservative estimate would probably yield about 2 billion euros per year. This money could be used to guarantee renewable energy developers, manufacturers, and providers’ accounts receivables in the manner of the French post WWII export insurance company, COFACE. Under the banking rules of Basel III it could help finance at least ten times that figure --- 20 billion euros --- each year in renewable energy investments. This could every year unlock financing for the equivalent of 2 projects the size of the current 10 billion euro, 600 turbine, 3-gigawatts offshore wind project underway now off the coasts of Brittany and Normandy. If used in this way, an in-lieu-of-catastrophic insurance tax on nuclear would create jobs by creating a massive green boom. Nuclear could be phased out as green energy replaces it, thus seriously reducing the uninsurable nuclear risk.

   So, how about the suggestion that doesn’t require government intervention? The purpose is to bring the insurance risks of nuclear home to its proponents by getting them to think what would happen to them personally in the event of a major nuclear malfunction. Right now, nuclear is like smoking; many persons figure the other guy will get the cancer. However, by arguing that “it can’t happen here” nuclear advocates ignore or minimize (to the vanishing point) the possibilities that others, and maybe themselves, lose all of their property in the event of nuclear disaster. If they truly believe that a nuclear catastrophe is extraordinarily unlikely to happen here, they should make their assertions credible. Right now, opponents of nuclear, or those in doubt of its safety, have no particular reason to believe in the credibility of those making the safety claim, since many are profiting handsomely from nuclear and thus have an obvious conflict of interest. They can, however, gain considerable credibility, according to Game Theory ¹ , by assuring that they will be among the victims if something really bad happens. Therefore, they should pledge all of their own personal property to help fill the uninsured liability gap in the event of a big catastrophe. This would put them in the same boat as any actual victim. The pledge should be public and in writing.
Would any nuclear advocates do that? I doubt it, but, who knows? Many, probably most, appear to be truly honest and sincere, but they’ve never been asked. Those who do ask should start with the top officials in the nuclear industry — the ones who have done very well out of it. If they’ll sign, why shouldn’t all the other advocates?

   [1]   A mathematical theory developed by John von Neumann and Oskar Morgenstern in the 1940s to explain economic conflict and cooperation.  The concept of credibility was added by Thomas Schelling.   He won the Noble Prize in Economics in 2005 largely for this work.

Professor Robert Bell

Since the mid-1980s, Robert Bell, Ph.D. has been at Brooklyn College, City University of New York, where he is a Professor of Management. Formerly the Chair of the Economics Department, he is now Chair of the Finance and Business Management Department. He has authored several books, including Impure Science (N.Y. 1992); Les peches capitaux de la haute technologie (Paris 1998); Beursbedrog—De windhandel op de aandelenmarkt (Amsterdam 2003); La Bulle Verte (Paris 2007), also published in New York in 2008 as The Green Bubble — Waste into Wealth: the New Energy Revolution.
He is a recognized expert on investments in green energy, transition out of oil, and conflicts of interest: in capital markets, civil and military high-technology projects and science fraud.
Dr. Bell is regularly invited to speak at seminars and conferences addressing the issues of renewable energy and the role of financial markets. At the G20 in Seoul, he proposed in a keynote address that civil society, including religious organizations, foundations, private corporations and family trusts, establish long-term Green Redemption Funds to finance the saving of the planet. At a public roundtable which included French Minister of Ecology Nathalie Kosciusko-Morizet, in April 2011 in New York, he proposed an EU-wide 10 euro per barrel of oil equivalent tax on fossil fuels at their point of production or importation. In May 2011 as the keynote speaker on Green Growth at the Dalkia Management Seminar in Porto, Portugal, he outlined plans for national energy policy as well as the probable future of renewable energies and world energy markets. He spoke in a panel at the September 2011 Planet Workshops Global Conference at Evian on financing the transition to renewable energy by establishing very long term Green Redemption Funds.

Dr. Bell would like to acknowledge and thank his former student and current (volunteer) researcher Oleg Rusetsky for his help in researching this article, which is based in part on material researched for Dr. Bell's presentation at the Planet Workshops Global Conference.

© Robert Bell January 2012