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 5 th , 2012 31 st USAEE/IAEE North American Conference, Austin 1
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 2 Jus The year of the cat: taxing nuclear risk with the help of capital markets 2
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 19 th century � � limited liability corporation: success model of capitalism 3 Jus The year of the cat: taxing nuclear risk with the help of capital markets 3
‘It’s like getting blood out of a stone’ – a simple example � A company can choose between two projects � Project A: profit of $4 with a 95%-probability; loss of $100 otherwise � Project B: profit of $1 with a probability of 100% Company 1 Company 2 Equity 100 10 Project Project A B A B 4*0.95+ 4*0.95+ Expected return 0.05*(-100) 1 0.05*(-10) 1 = -1.2 = 3.3 Invest? N Y Y (N) 4 Jus The year of the cat: taxing nuclear risk with the help of capital markets 4
A re-interpretation: a nuclear power company builds a reactor � Reactor type A is unsafe but gives a higher profit if no accident occurs: $4 with a 95%-probability and $-100 otherwise (accident) � Reactor type B is safe: gives $1 with a probability of 100% Company 1 Company 2 Equity 100 10 Reactor Reactor A B A B 4*0.95+ 4*0.95+ Expected return 0.05*(-100) 1 0.05*(-10) 1 = -1.2 = 3.3 Invest? N Y Y (N) 5 Jus The year of the cat: taxing nuclear risk with the help of capital markets 5
‘It’s like getting blood out of a stone’ – the theory � risk-averse individual/firm � 2 states of the world 6 Jus The year of the cat: taxing nuclear risk with the help of capital markets 6
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 7 Jus The year of the cat: taxing nuclear risk with the help of capital markets 7
Limited liability in the nuclear industry � Fukushima accident: clean-up costs alone could exceed JPY 20 trillion Selection of countries with de jure Countries with de facto limited liability limited liability (equity capital in 2011, TEPCO: 2010) China RMB 300 million E.ON EUR 39.6 billion Czech Republic CZK 8 billion RWE EUR 9.9 billion Germany 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 8 Jus The year of the cat: taxing nuclear risk with the help of capital markets 8
Regulatory instruments Instrument Safety regulation Needed, but has severe limitations Minimum equity capital Not as powerful as in the financial industry requirements Mandatory insurance Shifting the problem to a higher layer Mutual risk-sharing pools Creates a free-riding problem Full coverage infeasible, incomplete coverage Catastrophe bonds reintroduces the negative externality 9 Jus The year of the cat: taxing nuclear risk with the help of capital markets 9
Taxing nuclear risk with the help of capital markets 10 Jus The year of the cat: taxing nuclear risk with the help of capital markets 10
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. 11 Jus The year of the cat: taxing nuclear risk with the help of capital markets 11
Thank you for your comments and questions! Darko.Jus@lrz.uni-muenchen.de Center for Economic Studies University of Munich Jus The year of the cat: taxing nuclear risk with the help of capital markets 12
13 The year of the cat: taxing nuclear risk with the help of capital markets Backup Jus
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 � outside the United States: two conventions � the Paris Convention � the Vienna Convention 14 Jus The year of the cat: taxing nuclear risk with the help of capital markets 14
Global stock of equity and debt outstanding USD trillion, end-of-year, constant 2010 exchange rates, cf. Roxburgh et al. (2011) 15 Jus The year of the cat: taxing nuclear risk with the help of capital markets 15
‘It’s like getting blood out of a stone’ – the theory 16 Jus The year of the cat: taxing nuclear risk with the help of capital markets 16
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