The year of the cat: taxing nuclear risk with the help of capital - - PowerPoint PPT Presentation

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

(joint with Jakob Eberl)

Darko Jus

Center for Economic Studies Ludwig-Maximilians University of Munich November 5th, 2012 31st USAEE/IAEE North American Conference, Austin

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

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Agenda

• Limited liability – ‘the greatest single discovery of modern times’
• ‘It’s like getting blood out of a stone’
• Limited liability in the financial industry
• Limited liability in the nuclear industry
• Regulatory instruments
• Taxing nuclear risk with the help of capital markets

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

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Limited liability – ‘greatest single discovery of modern times’

• Babylonia, the Italian commenda and the Dutch East India Company
• legal foundations for stock corporations in the 19th century

limited liability corporation: success model of capitalism

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

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‘It’s like getting blood out of a stone’ – a simple example

Company 1 Company 2 Equity 100 10 Project Project A B A B Expected return 4*0.95+ 0.05*(-100) = -1.2 1 4*0.95+ 0.05*(-10) = 3.3 1 Invest? N Y Y (N)

• A company can choose between two projects

Project A: profit of $4 with a 95%-probability; loss of $100

• therwise

Project B: profit of $1 with a probability of 100%

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

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A re-interpretation: a nuclear power company builds a reactor Company 1 Company 2 Equity 100 10 Reactor Reactor A B A B Expected return 4*0.95+ 0.05*(-100) = -1.2 1 4*0.95+ 0.05*(-10) = 3.3 1 Invest? N Y Y (N) Reactor type A is unsafe but gives a higher profit if no accident

• ccurs: $4 with a 95%-probability and $-100 otherwise (accident)

Reactor type B is safe: gives $1 with a probability of 100%

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

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‘It’s like getting blood out of a stone’ – the theory

• risk-averse

individual/firm

• 2 states of the

world

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

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Limited liability in the financial industry Equity-to-asset ratios in 2006 Bear Stearns 3.5% Goldman Sachs 4.3% Lehman Brothers 3.8% Merrill Lynch 4.6% Morgan Stanley 3.2%

• Basle III regulation
• a global regulatory standard on bank capital adequacy
• will require banks to hold 6% of Tier I capital of risk-weighted

assets

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

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Limited liability in the nuclear industry

Selection of countries with de jure limited liability Countries with de facto limited liability

(equity capital in 2011, TEPCO: 2010)

China RMB 300 million Germany E.ON EUR 39.6 billion Czech Republic CZK 8 billion RWE EUR 9.9 billion France EUR 91 million EnBW EUR 6.1 billion India INR 5 billion Vattenfall SEK 138.9 billion United Kingdom GBP 140 million Japan TEPCO JPY 2.47 trillion United States USD 375 million Switzerland Axpo CHF 7.6 billion

• Fukushima accident: clean-up costs alone could exceed JPY 20 trillion

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

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Regulatory instruments

Instrument Safety regulation Needed, but has severe limitations Minimum equity capital requirements Not as powerful as in the financial industry Mandatory insurance Shifting the problem to a higher layer Mutual risk-sharing pools Creates a free-riding problem Catastrophe bonds Full coverage infeasible, incomplete coverage reintroduces the negative externality

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

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Taxing nuclear risk with the help of capital markets

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

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Conclusions

• Limited liability is an important pillar of a capitalist society
• However, It may imply large externalities in some industries
• Current liability regulation does not address this problem sufficiently
• A tax on nuclear risk-taking is needed; would make the use of nuclear

power (privately) more expensive

• Some nuclear reactors (in particular the unsafe ones) may become

unprofitable; the ones that remain profitable are also socially profitable

• Thus, solving the problem of excessive risk-taking is an important

element of the future use of nuclear power

• The decision concerning the use of nuclear power should be taken on

the basis of nuclear power plants where the level of care satisfies allocative efficiency.

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

Thank you for your comments and questions!

Darko.Jus@lrz.uni-muenchen.de Center for Economic Studies University of Munich

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

Backup

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

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Nuclear liability regulation

• major goal of nuclear liability regulation: protect nuclear power

companies against potentially ruinous claims

• United States: Price-Anderson Act in 1957;
• first comprehensive nuclear liability law
• utside the United States: two conventions
• the Paris Convention
• the Vienna Convention

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

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Global stock of equity and debt outstanding USD trillion, end-of-year, constant 2010 exchange rates, cf. Roxburgh et al. (2011)

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

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‘It’s like getting blood out of a stone’ – the theory