Simplifying the Regulation of Small Nuclear Reactors
If the Chernobyl and Three Mile Island nuclear power accidents hadn’t occurred, how much electricity would be generated each year using nuclear power? Regulations were triggered by these shocks and these regulations have slowed the growth of clean nuclear power and nuclear power innovation. My 2007 paper on rare disasters as regulatory catalysts explores this point.
Few PHD students enter this field because they don’t expect that there is demand for their services. This ugly Catch 22 creates a self-fulfilling prophesy. Nuclear power would be safer if more talent enters the field but young people don’t enter the field because nuclear power is perceived to be risky.
There are environmental consequences of this “nuclear talent trap”. The U.S would produce less greenhouse gas and PM2.5 per unit of power generation and our financial sector and tech sector would devote more effort to developing nuclear power blueprints if we reduce nuclear power entry barriers.
How do we exit this ugly equilibrium?
I propose that for Small Nuclear Reactors (each SNR generates enough power to serve roughly 250,000 households per year) that they be exempt from onerous regulations but they must post a $ bond similar to what Lucas Davis proposes in his Hamilton Project proposal. Here Grok describes the current regulations that SNRs face. These regulations lower the probability that SNRs enter the industry and this benefits larger, incumbent nuclear power generators.
Of course, we want SNRs to locate in areas where if there is a disaster less economic damage takes place (Coasian logic) and we want the owner of the SNR to invest in precautions to lower the risk of disaster (Ehrlich and Becker 1972 JPE).
What incentives would achieve this goal?
There is a latent production function of nuclear power plant disaster. The more effort that a power plant takes to reduce this risk offers costs and benefits. How safe is safe?
Here are three papers worth thinking about;
Feinstein, Jonathan S. "The safety regulation of US nuclear power plants: Violations, inspections, and abnormal occurrences." Journal of Political Economy 97, no. 1 (1989): 115-154.
Ringleb, Al H., and Steven N. Wiggins. "Liability and large-scale, long-term hazards." In Economics and Liability for Environmental Problems, pp. 427-448. Routledge, 2018.
Davis, Lucas. "Modernizing bonding requirements for natural gas producers." The Hamilton Project, Brookings Institution, Washington, DC (2012).
The Feinstein paper is now an old paper focused on the empirics of monitoring. With real time sensors, the owner of the SNR will know that the regulator will know if abnormal levels of radioactive activity are taking place at the SNR. There can be parametric triggers so that the SNR is fined and part of the $ posted bond is lost if the SNR’s daily activity exceeds a threshold. The rest of the $ bond could be lost if a true disaster occurs.
These credible expected penalties will act as an incentive encouraging the SNRs to proceed carefully.
The Ringleb JPE paper documents that the industrial organization of the SNR matters. There is less moral hazard by for profit firms if they can’t use bankruptcy to escape their debts and liabilities.
The Lucas Davis paper offers an optimistic and constructive path forward.
Economist Lucas Davis (2012) offers a cleaner path in his Hamilton Project paper on modernizing bonding requirements for natural gas producers. Instead of ever-tighter prescriptive rules, require operators to post financial bonds (or buy insurance) calibrated to the scale of potential harms. This forces firms to internalize expected accident costs upfront. Profit-maximizing operators will then choose the optimal level of self-protection—exactly the Becker-Ehrlich equilibrium—without regulators guessing “how safe is safe enough.”
Why it works for nuclear:
Nuclear already has the Price-Anderson Act’s mandated insurance layer; Davis’s logic suggests expanding/ modernizing bonding for decommissioning, waste, and catastrophic risk to reflect today’s lower baseline risk and newer reactor designs.
Evidence from Davis’s own nuclear research (e.g., deregulation improved operating efficiency post-1990s) shows that when operators face stronger market incentives, performance improves.
Regulation triggered by rare shocks has slowed the growth of the cleanest, safest large-scale electricity source we have. A bonding regime lets the market—not bureaucrats reacting to headlines—solve the self-protection problem.
If SNRs face $ bond regulations, how will they finance these? Such firms could turn to the catastrophic bond market and sell bonds that pay a risk premium to investors. Established SNR Firms would pay a lower risk premium because they have a track record. If carbon credits continue to be valued commodities, SNRs could receive a flow of $ payments from carbon credit buyers. Those who gain from local PM2.5 reductions brought about by cleaner power could (in theory) offer the SNR a payment stream.
I have proposed new rules of the game that foster green power competition while reducing regulatory over-reach and at the same time create incentives for firms to explore new strategies to reduce population risk exposure. This is the adaptation process at play because government has switched to pro-growth rules.
I haven’t spent much time on the site selection issue of where SNRs would be built and would the reactor be placed under-ground to further reduce risk. Local land use zoning would play a role here concerning which communities and areas would welcome the SNRs. They would likely be more likely to be placed on unincorporated land.
UPDATE How would the $ bond be set? A risk neutral regulator would calculate the expected harm ( a function of probability of disaster multiplied by victims affected and damage per victim). Locations might compete on this $ bond price. Poorer places would be more likely to set a lower $ bond price. Would Coasians object? Environmentalists who prioritize low GHG emissions might cross-subsidize paying the bond price to encourage nuclear power entry. Markets over mandates!!