TT's Lost in Tokyo — by TokyoTom

Shikha Dalmia, senior policy analyst at Reason Foundation, had a perceptive essay out last week that draws attention to the perverse role of government-provided incentives in Japan’s nuclear power industry. (Dalmia is columnist at Forbes, writes regularly for Reason magazine, and was co-winner of the first 2009 Bastiat Prize for Online Journalism.)

The article appeard in The Daily on March 24, and at Reason Online on March 29. I excerpt beloe parts of the article as it first appeared: Glowing endorsement Japan has pushed nuclear energy hard — at the expense of safety. (e,phasis added):

Nuclear advocates are dismayed that radiation fears over Japan’s Fukushima plant might kill an industry that has a better safety record than virtually any other. But the public in Japan and elsewhere has every right to question the safety of nuclear power that everywhere receives government support. The Japanese government, in particular, has aggressively pushed nuclear in its quest for energy independence, perverting with political considerations the market’s natural ability to take safety issues into account. …

And judged purely by deaths per terawatt hours, nuclear is 10 times safer than solar and a thousand times safer than coal or oil. 

But that doesn’t mean there is nothing to worry about with nuclear. Its potential for catastrophe is orders of magnitude greater than any other technology. Hence, only when investors are willing to foot the entire bill for its construction and liability can we believe that nuclear is truly safe.

That, however, is not the case anywhere — least of all in Japan.

Nuclear meets about a third of Japan’s energy needs (compared to 20 percent in America) not because it is more competitive than the alternatives; it is not. Nuclear’s exorbitant upfront capital costs and long — and uncertain — lead times make it every bit as unattractive to investors in Japan as elsewhere, especially compared to other fuels.

But nuclear appeals to Japan’s mercantilist rulers, who, since the mid-’60s, have regarded the country’s lack of indigenous energy resources as a major strategic vulnerability that must be corrected at all cost. They have committed themselves to increasing Japan’s energy independence ratio from the current 35 percent to 70 percent by 2030. …

Such thinking has prompted Japanese lawmakers to push nuclear more aggressively than street vendors hawking broken Mao watches in Tiananmen Square. From 1990 to 2000, nuclear’s share of Japan’s energy mix has gone from 9 percent to 32 percent.

To get there, Japan has poured lavish subsidies into nuclear, starting with research. Around 65 percent of Japan’s energy research budget goes toward nuclear — the highest of any country — with the industry spending $250 million, well below 10 percent of what the government spends. Even France, which gets 80 percent of its energy from nuclear, spends three-and-half times less than Japan.

Beyond research, the government offers the nuclear energy industry loans that are a full percentage point below commercial levels. And for four decades, Japan has taxed the utility bills of electricity consumers, distributing the proceeds to communities willing to house nuclear plants. In essence, nuclear’s competitors are being forced to act against their own interest to bribe local communities to accept a risk against the communities’ interest. 

But the mother of all subsidies is the liability cap that nuclear enjoys. In the event of an accident, the industry is on the hook for only $1.2 billion in damages, with the government covering everything beyond that. Japan’s cap is generous even by American standards, which require the industry to cover $12.6 billion before Uncle Sam kicks in. ,,,

The liability cap effectively privatizes the profits of nuclear and socializes the risk. It uses taxpayer money to diminish the industry’s concern with safety — which government regulations can’t restore. In 2008, Tokyo actually started offering bigger subsidies to communities that agreed to fewer inspections. The problem of regulatory capture is particularly endemic in Japan given that regulators seek industry jobs upon retirement, and hence often cozy up to companies they are supposed to oversee.

Nuclear’s advocates argue that, if anything, Fukushima testifies to just how safe nuclear is given that the reactor reportedly shut down as designed in the face of a 9-magnitude earthquake even though it was built for only 7.5-magnitude. Had a freak tsunami not knocked out the backup generator needed to cool down the fuel rods, none of this would have happened.

Perhaps. But had the industry been underwritten by private companies that risk getting wiped out by lax procedures instead of a government that risks nothing, might they not have refused to insure a reactor in an earthquake-prone zone or demanded better seismological studies than those available or ensured that backup generators were built to withstand a tsunami?

Only when the nuclear industry fully internalizes safety costs will we know that it is actually safe. Until then, we can only regard Fukushima as an avoidable tragedy.

I believe that Dalmia has left out the rate guarantees that utilities typically receive. In addition, she has ignored the “limited liablity” corporation structure that eliminates any risk of personal liability for all shareholders. These aspect of course also affect the degree to which shaeholders pay attention to the risks that nuclear power plants pose to others or otherwise to diligently oversee management, and rate guarantees are a hidden tax on consumers and a subsidy to nuclear power.