Evaluating Policies to Attain the Optimal Exposure to Nuclear Risk

Abstract

This paper describes how limited liability leads to risk-loving behaviour in nuclear power companies and unsafe nuclear power plants. 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 none of these instruments in its pure form can be recommended. Thus, we 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 power plant 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 fee. Society ultimately acts as an explicit insurer for nuclear risk and is, on average, fairly compensated for the risk it is taking over.