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Black swans and climate change

Aurelie Basha - 25th March 2011

The unfolding nuclear crisis in Japan has immediate and terrible consequences for the people near the plants and for the country’s electricity grid more generally. But it has also radically changed the calculation of risk, and therefore the costs, of nuclear energy around the world at a time when climate change negotiations rely on investment in precisely this kind of energy. As early indications point to countries already turning away from nuclear energy, the climate change negotiations may face one of their greatest tests yet.

An earlier blog post by Natalie Beinisch on this site spoke about risk and the fact that the calculation of risk has always been an imperfect science that is shaped by unforeseen events. Nassim Taleb calls these events “black swans” – in essence, unlikely events that fundamentally shift our way of looking at a problem (or what he calls “low probability, high impact events”). This is what has happened in Japan for the nuclear industry as a whole: the coupled effect of a magnitude 9.0 earthquake and the ensuing tsunami in northeast Japan has dramatically changed the calculation of risk for nuclear energy around the world.

Even allowing for the fact that the probability of a similar event happening again is minute, what has changed is the “soft costs” (what economists called “negative externalities”) of nuclear energy. The debate about nuclear energy has never been about the raw calculation of costs and benefits but has always incorporated these externalities, namely public resistance and anxiety over nuclear accidents. With a new accident in a country seen as at the vanguard of safety issues, the overall cost of nuclear energy has become far more expensive.

An FT report last week suggested that China and India are already cutting back some of their investments in nuclear energy in response to events in Japan. This is likely to happen in other countries too even if they loom less large on international energy markets. These investments were specifically tied to the climate change negotiations agenda, as a fast and cheap way to reduce greenhouse gas emissions on a larger scale than solar energy, for instance, where China also invests heavily.

The idea of leapfrogging dirty stages of development, with nuclear energy as a central part of a clean energy basket, has been at the center of these negotiations because many developing countries are still heavily reliant on coal. Countries like China (69% of its energy needs are met by coal), Poland (94%) but also South Africa (78%) and many of its neighbors have resisted climate change efforts precisely because their economic development has relied on domestic coal reserves and its resulting carbon emissions.

In line with the climate change agenda as it has evolved from Kyoto to Copenhagen and most recently to Cancun, each of these countries had committed to accelerating their investments in nuclear energy specifically as a way of shifting away from coal. The latest negotiations in Cancun had also improved the funding mechanisms for developed countries to finance the transfer of technologies, which include carbon storage and capture but also financing in alternative energies.

In the immediate aftermath of the nuclear situation in Japan, investment markets seemed to experience a surge in interest in other alternative energies, primarily solar and wind. It will be interesting to see what the policy decisions will be in the long-term. Ultimately, a more expensive nuclear option may lead to more solar energy. But it may also be a case of both options (nuclear and solar) becoming prohibitively expensive, leading countries instead back to coal.

This will also be a test for the climate change agenda itself. It’s not clear yet whether these negotiations have produced enough externalities of their own, creating enough binding constraints or peer pressure (where the cost reneging on commitments would be high) to offset the lingering feeling in many developed countries that they are being cheated by the developed countries who caused the problem in the first place.