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The year of the cat: Taxing nuclear risk with the help of capital markets

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  • Eberl, Jakob
  • Jus, Darko

Abstract

This paper proposes new regulation for nuclear power reactors aimed at increasing their safety. We begin by describing how limited liability leads to risk-loving behaviour in nuclear power companies and unsafe nuclear power reactors. By reviewing current regulatory regimes, we show that this issue is not being sufficiently addressed today. Therefore, we evaluate five regulatory instruments: (1) safety regulation, (2) minimum equity requirements, (3) mandatory insurance, (4) risk-sharing pools, and (5) catastrophe bonds. We conclude that any of these instruments either cannot be recommended in its pure form or is infeasible in reality. We therefore propose a new approach that, in its core, consists of a two-stage procedure. In the first stage, capital markets assess the risk stemming from each nuclear reactor via catastrophe bonds. In the second step, the regulator uses this private risk assessment and intervenes by charging an actuarially fair premium in the form of a Pigouvian risk tax. Society ultimately acts as an explicit insurer for nuclear risk and is, on average, fairly compensated for the risk it is taking over.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 51 (2012)
Issue (Month): C ()
Pages: 364-373

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Handle: RePEc:eee:enepol:v:51:y:2012:i:c:p:364-373

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Web page: http://www.elsevier.com/locate/enpol

Related research

Keywords: Nuclear risk-taking; Limited liability; Catastrophe bonds;

References

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  17. Kambhu, John, 1989. "Regulatory Standards, Noncompliance and Enforcement," Journal of Regulatory Economics, Springer, vol. 1(2), pages 103-14, June.
  18. Sinn, Hans-Werner, 1982. "Kinked utility and the demand for human wealth and liability insurance," Munich Reprints in Economics 19909, University of Munich, Department of Economics.
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