Nuclear accidents liability and a grave natural disaster of an exceptional character

ABSTRACT

This article argues that the exclusion of a defense based on a ‘grave natural disaster of an exceptional character’ following the 1997 amendments to the 1963 Vienna Convention on Civil Liability for Nuclear Damage is counterproductive. For this, we model the absolute liability rule in the event of a nuclear accident and analyse the impact of this amendment in an environment where for certain states of nature the damage exceeds the operator's liability ceiling, thus inducing a problem of moral hazard. While the socially optimal safety level remains unattainable even with a defense, we show that the level can be significantly improved by intelligently defining the critical design basis.

KEYWORDS:

• Risk management
• uncertainty modelling
• nuclear safety
• moral hazard
• limited liability

JEL CLASSIFICATIONS:

• D81
• D82
• D86

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Provided that the installation State allows such a limitation.

2 The 5 US million dollars were intended as a lower limit. The exact limitation always depended on the legislation of the installation State.

3 SDRs are units of account used by the International Monetary Fund (IMF). Although it is not a currency per se, there is an exchange rate for currencies. For example, the value 23.032022 of 1 SDR is 1.38 US dollars, so the 300 million SDR limitation equals 414 US million dollars.

4 Alluding to the moral hazard problem as the underlying cause of the Fukushima accident was motivated by Ramseyer (2012). More generally, the author points out that moral hazard essentially exits in all privately owned nuclear power companies because the operator's liability is capped by the value of its net assets.

5 While Japan is not a signatory to the 1963 Vienna Convention, we use the Fukushima accident as an example because it fits the structure of our model. It should be noted, however, that in 2015 Japan signed the 1997 Convention on Supplementary Compensation for Nuclear Accidents, which is based on the same general principles as the Vienna Convention, particularly with respect to absolute liability and limitation of liability, see (Gioia 2007).

6 The literature distinguishes between the height of waves which is measured close to the coast and the run-up heights which refers to the vertical height of the tsunami above sea level at its furthest point inland.

7 See (Kitamura 2016).

8 This was by no means the only problem. For example, in order to facilitate access to the seawater used for cooling, TEPCO decided during the construction phase to reduce a 35-metre cliff, where the reactors were to be located, to only ten metres in height. TEPCO concealed inspection results which had found that key components of the nuclear power plant were likely to ‘completely fail’ during an earthquake, etc. In short, if TEPCO had followed best practices, the Fukushima accident would not have happened, see e.g. Acton and Hibbs (2012), National Diet of Japan Fukushima Nuclear Accident Independent Investigation Commission (2012), and United States Nuclear Regulatory Commission (2011).

9 According to Calabresi's classification of costs associated with accidents, three types of costs can be distinguished; primary, secondary and tertiary costs. Secondary costs include all the costs associated with economic disruptions that would result from failures to compensate victims, and tertiary costs refer to the costs of administrative costs related to the treatment of accidents; see (Calabresi 1970).

10 Of course, in reality, nuclear operators are faced with many other regulations. Nevertheless, due to the presence of moral hazard, the residual risk of nuclear accidents is partially controlled by civil liability, as underlined by the 1963 Vienna Convention.

11 See footnote 4 and Ramseyer (2012).

12 Liability rules have a second important function of compensating victims. In this regard, a liability insurance could be very useful by increasing the ability to compensate victims while spreading the risk. Although the question is important, it falls outside the scope of our analysis which is focussed on aligning incentives.

13 Note that $a^A\left(W\right)<a^{\ast }$ also follows directly from Lemma 4.1 and from the fact that $\mathrm{TC}\left(\cdot \right)$ is strictly convex.

14 Although in reality such constellations seem unlikely in the case of the nuclear industry due to the sheer magnitude of potential damage and bankruptcy constraints on the part of the operator.

15 A statistical empirical analysis of the concentration of radio-cesium 134-Cesium and 137-Cesium in the soil of the Fukushima region after the accident at the Dai-chi nuclear power plant in 2011 was carried out by Bilici, Bilici, and Külahcı (2020). The study concluded that Weibull distributions with respective parameters $\rho =0.8204$ and $\lambda =21,544.02$ and $\rho =0.8410$ and $\lambda =24,752.7$ best matched the data, see (Bilici, Bilici, and Külahcı 2020, Table 4 p. 1059). For the example, we used the concentration of radio-cesium 137-Cesium. For these parameters, $E\left[ϵ\right]=27111.6$ and ϵ does not satisfy the normalization.

16 For estimates of the run-up heights around Fukushima, see (Kitamura 2016).

17 The Institute of Radiology Protection and Nuclear Safety (IRSN) estimated in 2007 that the potential cost of a nuclear accident at Dampierre linked to contamination of soil and aquatic environments by 137-Cesium would be between 760 billion euros and 5,800 billion euros. For the sake of the example, we just used the middle point of this interval. Moreover, Jacques Repussard, Director General of IRSN, underlined in a press release that ‘the Fukushima nuclear disaster will eventually cost a thousand billion euros’, see (Businessinsider 2013).

18 Note that $c\left(a^{\ast }\right)\approx 0.42$ billion euros and, therefore, slightly below the estimate for French Cour des Comptes.

19 For instance, the current capitalization of EDF is approximately 30 billion euros.

20 Also note that insuring potential liability payment is also not an option as it creates an additional moral hazard.