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

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. - Highlights: ► Limited liability leads to excessive risk-taking in nuclear power companies. ► Current regulation does not address this issue sufficiently. ► We evaluate five regulatory instruments and explain their shortcomings. ► We propose a market-based nuclear risk tax as a new regulatory instrument.