By: Barrett Hunter, Editor-in-Chief

Until recently, nuclear power was expected to be an increasingly large part of the United States’ energy portfolio. Near-disasters, however, like Three Mile Island and full-scale disasters like Chernobyl and Fukushima have shown that there are significant potential costs to nuclear energy that might outweigh its promise of relatively clean, cheap energy. As with many risky activities, the potential costs can be offset by insurance, which also has beneficial effects on encouraging nuclear power plant operators to behave in safer ways and to restrict the proliferation of nuclear power plants to socially optimal levels. However, at the inception of the nuclear power generation industry in the 1950s, private investors and insurers decided that the risks of nuclear power plants were too great, so they would not participate.[1] In response, the federal government passed the Price-Anderson Act (“Act”), which put a cap on liability for nuclear power plant operators and allowed for the creation of the creation of the nuclear power generation industry in the United States.[2]

The Act created a pooled insurance fund, of which all nuclear power generators must be members. It also created a two-tiered liability system; the first tier limited liability for each individual generator and the second tier limited liability for the nuclear power generation industry as a whole. Initially, individual generator liability was limited to $60 million[3] and the government would provide $500 million for the industry as a whole.[4] The liability caps have since been increased to $375 million for individual generators and $12 billion for the industry as a whole.[5]

Proponents of this system argue that this level of insurance coverage is clearly more than sufficient because the fund has come nowhere close to being depleted. In other words, because it has been sufficient in the past, it will be sufficient in the future. However, the United States has not experienced nuclear disasters on the scale of Fukushima or Chernobyl.[6] Until those disasters occurred, neither Japan nor Ukraine had experienced disasters on those scales either. Proponents might argue that the United States has a superior regulatory and safety system in place to prevent disasters of that scale. However, the U.S. regulatory system did not prevent the Three Mile Island scare and it is impossible to predict how a regulatory system will behave in the future. This faith in the regulatory and insurance regime is expensive if it is later shown to have been misplaced. Chernobyl is estimated to have cost over $300 billion dollars in damages,[7] which would have exhausted the Price-Anderson insurance fund without even taking into account all of the damage and lost productivity that resulted from the disaster that went unaccounted or uncompensated. It is estimated that the total direct financial cost of the Fukushima disaster and ensuing cleanup could cost between $71 and $250 billion,[8] which is several orders of magnitude more than the individual cap and several times more than the liability cap for the industry as a whole set by the Act. As a result, if a significant nuclear disaster were to occur in the United States, victims might go uncompensated and taxpayers would be left holding the bag.

This disastrous consequence is more likely because of the negative incentives that the insurance cap places on nuclear power generators, which stem from moral hazard. Moral hazard is the idea that an entity will behave in a riskier way than it otherwise would if it were not insured,[9] because it does not have to fully bear the costs of its actions. In the context of nuclear power generation, this is most obviously thought of in terms of cutting corners with regard to maintenance and safety measures in order to increase profitability.[10] Critics might fairly argue that there are significant regulations placed on nuclear power generators with regard to maintenance and safety measures,[11] though this objection does assume rigorous enforcement of those measures. More significant, though, is not that any particular generator will behave in increasingly risky ways, but simply that there will be more nuclear power plants. Operation of a nuclear power plant carries with it the risk of significant disaster, so the more plants there are, the greater the risk of disaster occurring. By limiting the cost of insurance to a level below that at which the market would provide insurance, nuclear power plants become relatively more profitable and so will be built in increased numbers, which increases the risk of a significant disaster.

Although there may have been significant social benefits to allowing the nuclear power industry to receive subsidies in the form of capped insurance liability during its incipiency, it is time for the industry to either stand on its own or to be replaced by other, more socially preferable forms of power generation. Otherwise, the United States will be exposed to significant risk unnecessarily. Nuclear power represents a promising source of energy for the future, yet it should not be forced on society regardless of its actual costs.