By Valerie Scheer
The conclusion drawn from the New Orleans case has far-reaching consequences. Privatization of gains and socialization of losses encourages risk-taking. Citizens with houses in low-lying areas enjoy the benefits of living near a beach and in a familiar neighborhood, but all tax-payers shoulder the costs of rebuilding their houses after a flood.
Broadly speaking, the government has the following options to respond:
1. Buy the land and prohibit further construction
2. Require mandatory insurance coverage
3. Do nothing and continue to pay for reconstruction whenever homes are damaged by natural disasters
None of these being ideal, I looked for potential guidance from similar situations where gains are privatized but costs socialized. Two analogies came to mind: the bank bailout during the financial crisis and the bailout of energy companies operating nuclear power plants, e.g. Tepco after the Fukushima disaster.
Nuclear power is sometimes criticized for being artificially cheap, because its price doesn’t account for several crucial factors: firstly, the costs of waste disposal and asset retirement, and secondly, the potential costs of nuclear accidents, since no insurance coverage is offered. Ultimately, this means when disaster strikes, all tax-payers are accountable.1
Neglecting these factors means energy companies can sell nuclear power at highly competitive rates and enjoy high profits, i.e. the gains are privatized (assuming most savings are kept by energy companies and not passed on to consumers). However, a share of the neglected costs gets shouldered by tax-payers, and in case of a catastrophic event, these costs can reach billions of dollars (see government stock purchase after Fukushima ). Most countries would support its companies in a crisis to secure a stable energy supply. Thus, losses get socialized.
Again, potential solutions boil down to the three options described above:
Unfortunately, the biggest users of nuclear energy have no single agreed-upon plan of action. Germany announced after the Fukushima disaster that it will accelerate the phase out of nuclear energy production (option 1). Japan seemed to be leaning towards nationalization (option 2) but progress has stalled. Although Tepco was nationalized in 2012 and the former Minister of Trade and Industry Edano argued for nationalization of all nuclear power plants , in September 2012, Prime Minister Noda put this plan on hold, along with the proposed nuclear phase-out by 2040 . Similarly, France, China and the US didn’t change their ‘do nothing’ approach and are only upgrading the safety standards for nuclear power plants (option 3).
There seems to be no single appropriate solution for such situations. With nuclear energy, different nations take different approaches based on their values, risk-assessments, and influence of stakeholders. While Chancellor Merkel said her views on nuclear safety changed after a new risk-assessment, indicating higher probabilities of accidents, many other leaders didn’t share her views. Similarly, no universal solution exists to high-risk zone housing. Freedom of choice with regards to location has to be balanced with the burden placed on tax-payers.
However, it is clear that governments should base their risk-assessments on recommendations made by scientists rather than powerful lobby groups. Japan’s change of policy should be worth critical examination. In cases like New Orleans, the government has to take into account every point of view, balancing the needs of tax payers, residents, and real estate developers in a fair manner.
1 In the US for example each nuclear site is required to purchase $0.3 billion cover from private insurers. Additionally, a second insurance layer is jointly provided by all US reactor operators combined providing up to $10 billion. By comparison, costs from Fukushima amount to at least $137 bn