Externalities and Internalized Costs

In the previous lesson of this course, we introduced the idea of externalities--the effects that a transaction has on parties that are external to the transaction and not integrated into the cost. We can think of externalities as the "side effects" that commercial activity has on other parties in a way that isn't reflected in the cost of the goods or services.

For the nuclear industry, major negative externalities have to do with the hazards of radioactive waste and the potential use of nuclear fuel for warfare, though it also has the positive externality of having near-zero lifecycle greenhouse gas emissions.

Campaign on Greenpeace International website with link for activists to e-mail targeted banks (BNP Paribas and HSBC) directly

Credit: Greenpeace International

Cost of Disaster

In the immediate aftermath of the March 2011, Fukushima nuclear disaster in Japan, the Washington Post ran an editorial by Anne Applebaum entitled, "If the Japanese can't build a safe reactor, who can?" Without using the word "externality," the author describes these "costs to others" well,

But as we are about to learn in Japan, the true costs of nuclear power are never reflected even in the very high price of plant construction. Inevitably, the enormous costs of nuclear waste disposal fall to taxpayers, not the nuclear industry. The costs of cleanup, even in the wake of a relatively small accident, are eventually borne by government, too. Health-care costs will also be paid by society at large, one way or another. If there is true nuclear catastrophe in Japan, the entire world will pay the price.

I hope that this will never, ever happen. I feel nothing but admiration for the Japanese nuclear engineers who have been battling catastrophe for several days. If anyone can prevent a disaster, the Japanese can do it. But I also hope that a near-miss prompts people around the world to think twice about the true "price" of nuclear energy, and that it stops the nuclear renaissance dead in its tracks.

One could argue however, that to be fair, if these external costs are to be included in the price of nuclear energy, then similarly the costs of externalities, including global climate change from greenhouse gas emissions, should be included in the price of fossil-fuel energy sources. How do the risks compare? These arguments juxtapose the extreme externalities of nuclear generation: the risks of catastrophe from a nuclear accident versus the benefits of emissions-free electricity generation. This juxtaposition is at the heart of the nuclear discussion today among those concerned with climate change and the environment. Opinion is very much split on the matter.

Patrick Moore, for example, who 40 years ago helped found Greenpeace as an anti-nuclear group, had a change of heart ten years ago, after he left Greenpeace. In a post -Fukushima NPR interview, he explained that nuclear plants can produce dependable power 24-7 and don't produce greenhouse gases, so they can replace the coal-fired power plants that spew so much climate change pollution. And, they have a great safety record compared with other sources of electricity. "In the United States, for example — 104 nuclear reactors operating now for 50 years — no member of the public has ever been harmed by them," he says. "You can't say that about oil or gas or coal."

Nuclear Proliferation and Terrorism

Not mentioned in the exchange above is the risk of nuclear proliferation and terrorism. This externality was addressed in a 2010 Department of Energy Report to Congress, Nuclear Energy Research and Development Roadmap (Amazon Kindle). The report included four R&D objectives, one of which is "Understand and minimize the risks of nuclear proliferation and terrorism." This objective (page vii) is described,

It is important to assure that the benefits of nuclear power can be obtained in a manner that limits nuclear proliferation and security risks. These risks include the related but distinctly separate possibilities that nations may attempt to use nuclear technologies in pursuit of a nuclear weapon and that terrorists might seek to steal material that could be used in a nuclear explosive device. Addressing these concerns requires an integrated approach that incorporates the simultaneous development of nuclear technologies, including safeguards and security technologies and systems, and the maintenance and strengthening of non-proliferation frameworks and protocols. Technological advances can only provide part of an effective response to proliferation risks, as institutional measures such as export controls and safeguards are also essential to addressing proliferation concerns. These activities must be informed by robust assessments developed for understanding, limiting, and managing the risks of nation-state proliferation and physical security for nuclear technologies. NE [DOE Office of Nuclear Energy] will focus on assessments required to inform domestic fuel cycle technology and system option development. These analyses would complement those assessments performed by the National Nuclear Security Administration (NNSA) to evaluate nation state proliferation and the international nonproliferation regime. NE will work with other organizations including the NNSA, the Department of State, the NRC, and others in further defining, implementing and executing this integrated approach.

US Department of Energy. (2010). Nuclear Energy Research and Development Roadmap. Retrieved November 2022.

A nonmarket action was taken/changed in January 2016 when the U.S., the European Union, plus China and Russia negotiated and lifted sanctions on Iran after it agreed to largely dismantle its nuclear program. This has a direct link to the externality of terrorism, and though opinions on the deal are mixed, it has had an impact on various aspects of world markets.