Archive for March 15th, 2011

As it stands the danger of a nuclear disaster beyond all expectations in Japan is real and let’s hope our fellow men in Japan can prevent the worst. May God help them.

The question this catastrophe has already raised is what we have to learn from the dreadful happenings in Japan. Thousands of Germans came up with an instant reply: Shut down nuclear power plants in our country!

But maybe we ought to think a little bit more thoroughly about how to deal with the issue of energy supply in the future. What is the role of government in this field, how can we overcome the nuclear age and prevent disasters such as the current Japanese one?

First of all, there is no special role for the government with regard to energy supply. Private companies ought to be free to produce and sell electricity to their customers just like other companies sell Internet or mobile phone services. However, the government is right to intervene the free market whenever third parties are involved. Take the example of a nuclear power plant: the operator makes contracts with clients but not with people living close to the plant. Since the latter are (presumably negatively) affected by the presence of the nuclear power, they have a right to either be compensated or to forbid the whole operation of the plant.

In many cases there are two simple solutions for such externalities. First, the respective company can set up a contract with all affected people. This requires clear information on who is affected as well as how much damage is caused by the polluter. The second solution applies to cases where the number of possibly affected people is large and diverse: tax the pollution. This method is used for instance to compensate for the external effects of driving a car. It is virtually impossible for anyone to make a contract with all other people that might suffer from a slightly reduced air quality. However, by simply taxing gas motorists have an incentive to improve fuel efficiency and the society as a whole can be compensated for air pollution by respective uses of tax revenues.

All that said, what about nuclear power plants?

In theory this is just another case of externalities that the government should price into the costs of energy production. However, the external effect of a nuclear power plant is hard to estimate. Without any accident we can reckon the costs imposed on third parties to be negligible. But for sure there is a small chance of facing another Chernobyl / Fukushima. Even though the risk is minuscule we have to deal with it (as the two mentioned catastrophes taught us). The trouble however is that the costs imposed on third parties in case of a disaster are beyond everything a single private company or insurance firm can bear. Thus it is not feasible to oblige the operator of a nuclear power station to make provisions for the worst case (Just remind yourself of the BP disaster last year). The potential damage of a nuclear power station is simply too large to allow the operation of the same. This becomes clear if you realize that even 25 years after Chernobyl, sparsely populated Ukraine still spends about five percent of its GDP on preventing further leak of radiation (not to mention the lost output due to the prohibited area).

So, just pull the plug?

Well, no matter how you look at it, Germany is simply not in a position to shut down all their atomic plants within a short time frame. German governments of the past sixty years have spent literally hundreds of billions of Deutschmarks / Euros on subsidies to energy suppliers. This created an incentive to put more emphasis on the technique and led to a whopping twenty-five percent share of nuclear power in the total energy production. This share is among the highest in the world and very similar to the Japanese one. Now the shit has his the fan and Germany is stuck in a situation where atomic power will remain a necessary source of electricity for the next ten years at least.

It was the red-green coalition led by chancellor Gerhard Schroeder that realized the problem about a decade ago. They decided to successively lower the importance of nuclear power by subjecting the technique to a deadline for about 2021. This was to give private energy companies both a clear legal framework for the future as well as an incentive to develop alternative techniques. From an economic point of view, this was a remarkably wise decision (let aside subsidies for solar, that’s a different kettle of fish).

However, both the Christian democrats and the liberal party spoiled the whole project. They offered electric firms a different deal by suggesting to prolong the residual term. This changed the incentive of Eon & Co. to not invest in new technologies but in a return of a CDU-led federal government. Lobbying (i.e. spending a couple of millions on election support) was simply superior to investing billions of Euros in future technologies.

To cut the long story short, they succeeded in fall 2009 and just one year later the newly elected CDU-FDP government prolonged residual terms for most of the nuclear power plants in Germany. Half a year later, the Japan disaster has elucidated everyone that this was a preposterous decision. Consequently, chancellor Merkel changed sides within a few days, now supports quick closures of old reactors and withdrew the prolonged residual terms.

Basically, we’re back to the 2002 compromise. Unfortunately a couple of scars will remain:

  • Private businesses wasted a good chunk of money on preposterous lobbying.
  • In addition, they have invested less in alternative technologies than they would have if CDU/FDP did not offer the prolonged residual terms.
  • Changing the whole legal framework twice within a few months further damages the reputation of German law. Companies will reconsider long-term investments in Germany as a result of what happened.

The upside is that lobbyism did not pay off and the CDU-FDP coalition got the punishment they deserved for last year’s despicable compromise. With more than half a dozen elections ahead in 2011, Merkel and Co. will face substantial losses as a result of their miserable policies so far.

I am not saying that other parties would have done a better job. But quoting Cora Stephan’s recent book title, Merkel was a mistake. Rarely before, any government has done so little and so much crap within its first one and half years. It’s a shame they needed a nuclear catastrophe to realize their mistakes.

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