Why India's policy on N-liability reduces the potential of the civil nuclear deal with US
India's stubbornness on nuclear liability seems to have the purpose of punishing foreign vendors rather than achieving a pragmatic system.
There has been a lot of discussion about civil nuclear liability in India over the past four years. The new law promulgated by the government in 2010 as one of the requirements for making the Indo-US nuclear deal operational two years earlier has proven to be controversial and been the subject of much scrutiny. Nuclear vendors, both foreign and domestic, have been dismayed at the unorthodox stipulations of India's Civil Liability for Nuclear Damage Act (CLNDA) and have generally stayed away from the country's potentially lucrative market, scuttling what had promised to be a nuclear renaissance in 2008. The most offending clause - and there are a couple - is that in case of an accident, nuclear operators shall have recourse to legal measures against their suppliers. This goes against nearly six decades of internationally accepted practice of making the operator solely responsible for all liabilities.
Proponents of India's new interpretation of nuclear liability have argued that the present insurance regime makes little sense and goes against the entire body of tort law. No other industrial insurance system allows suppliers immunity from legislation even in case of fault. Nuclear vendors have so far enjoyed a risk-free ride that serves as an indirect subsidy to the entire industry. Some of this support is, no doubt, built on the experience of the Union Carbide tragedy in Bhopal in 1984 that killed about 4,000 people and injured over 550,000 according to government estimates. The horrific accident, followed by bitter legal battles and what many see as insufficient compensation, has left many Indians wary of foreign corporations and their technology.
There are, of course, reasons for the unusual evolution of nuclear liability. They begin in 1954, when the United States decided that the private sector may be invited into the nuclear energy market. Until then, there were no civilian nuclear reactors and all military facilities would be the responsibility of the government under various environmental and tort laws. Initially, there was reluctance to enter into the market because of the substantial risk involved and the difficulty of calculating insurance premiums for such low-probability yet high-risk events. The Price-Anderson Nuclear Industries Indemnity Act (1957) simplified these issues by investing all liability in the nuclear operator, capping compensation limits, and including a no-fault condition. This was seen as an equitable distribution of risk and benefit between supplier, operator, and consumer.
Economic channelling of liability to the operator was efficient; if multiple vendors all had to take out insurance against a potential nuclear accident, not only would it raise the price of components but also lock down larger financial assets. Furthermore, smaller suppliers would hesitate to take on risk that could be orders of magnitude more than the value of their contract. Similarly, the public is guaranteed compensation without delay because of a no-fault liability - if legal disputes arose over who is liable for damages, victims may spend years waiting for the courts to decide on the case. The operator is also afforded some level of protection by capping damages. Thus, the benefits to each party in the nuclear concord are not insignificant. Though not a consideration when the Price-Anderson mechanism was formulated, it can additionally be argued today that nuclear power serves a public good by offering bountiful and reliable low-carbon energy.
Economic efficiency is not necessarily the prime consideration in policy-making but in the case of the nuclear industry, it might be the sensible yardstick. The notion is certainly not novel - governments frequently interfere in the market to prevent, break up, or regulate monopolies. For example, power distribution is a critical part of modern infrastructure; however, it would be foolish for companies to duplicate power lines simply to remain loyal to a strict textual reading of free market theory. Consequently, governments usually award a regulated monopoly to power distribution companies, thereby achieving economic efficiency and consumer protection as well as infrastructure development.
In India, of course, the traditional course of action has been for the government to have a powerful presence in business. However, recent legal amendments have opened the door to consider regulated monopolies in India. The Monopolies and Restrictive Trade Practices Act (1969) was replaced by the Competition Act (2002). In a significant departure from the former, the latter does not categorically disallow monopolies but concerns itself with merely the effect on the market in terms of consumer benefits and potential competitors. Clearly, Delhi has shown that it is not averse to economic efficiency if it is in the general interest of the public; the international nuclear liability norm is similarly another case of economic efficiency.
It is not that India's decision makers do not understand economics. The real fear for politicians is the astronomical cost of a nuclear accident, however rare. The insurance pool established by the Price-Anderson Act has grown to approximately $14 billion today. This is by far the richest insurance pool available for awarding damages arising from a nuclear accident. Yet even the Price-Anderson nuclear insurance pool pales before some of the estimated costs of a nuclear cleanup. Fukushima, for example, where not a single death was caused by radiation, is still predicted to cost Japanese taxpayers around $100 billion. Nuclear suppliers have deeper pockets than nuclear operators, particularly in India, where the only legal operator is an autonomous government agency. Leaning on the vendor, as the Indian legislation does, will help defray the cost that the state as the guarantor of last resort will have to ultimately pay.
This strategy has not borne fruit - all international vendors have shunned the Indian market despite its potential. The only exception, the Russian state-owned Rosatom, has renegotiated its contract and drastically hiked the price of their reactors. While the cost of the first two reactors at Kudankulam was Rs 17,270 crores, the third and fourth reactors will cost India Rs 39,747 crores - more than double the original price when economies of scale should have actually lowered the price. Moreover, it is unlikely that suppliers will budge from their positions for the global precedent that would set. The cost of this impasse hurts India not just in the price per reactor but also environmentally and economically. The public interest would be better served were Delhi to accede to the standard international interpretation of nuclear liability.
This is not to delegitimise India's fears of the cost of an improbable nuclear mishap. Rather, the solution must be found elsewhere. One possibility is to allow private sector entry into the nuclear power industry, allowing some of the costs of a nuclear accident to be borne by industry. In congruence with privatisation, a nuclear insurance pool may be set up that all operators would contribute to depending upon the number of reactors they own. A greater amount of reactors will create a bigger pool and if India were to modestly aim at even half of its electricity to be derived from nuclear power, substantial funds could be accumulated. In addition, suppliers can be called upon to contribute to the pool as well in the form of a small annual licensing fee per reactor. As long as they are not exposed to liability, most suppliers should accept this modest proposal.
An unpopular but required measure is to also assess how many of the safety precautions are psychological and how many are truly needed. To take just one example, evacuating a zone 50 km in radius always sounds better than clearing out an area 20 km in radius. However, how much is necessary is a decision scientists can make better than others; nuclear power plants already come with exclusion zones and evacuation beyond that should be dictated only by necessity.
If Delhi truly wanted to worry about liability, there are other aspects it can look at. For instance, its neighbours have shown increasing interest in nuclear power; Pakistan is acquiring reactors from China, Bangladesh has inked an agreement with Russia, and Sri Lanka is considering joining the nuclear club as well. If an accident were to occur at any of these sites, the trans-boundary implications could be severe. None of these states are party to any of the international liability conventions yet and responsibility for any accident will fall on each state for its own domain. Expanding Indian's national nuclear pool to these countries is one solution but the sheer number of reactors India will have means that the Indian share in any compensation would be disproportionate. Nonetheless, this is an important conversation South Asia needs to have.
India's stubbornness on nuclear liability seems to have the purpose of punishing foreign vendors rather than achieving a pragmatic system. For all its interest in holding suppliers liable for damages, one wonders why Delhi has not asked coal and oil companies to compensate the over 100,000 deaths per annum and millions afflicted by respiratory illnesses. India is wrong on supplier liability and it takes political courage to walk back a mistake. But that is what this government must do.
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