Will carbon tax on fossil fuel based power generation make the nuclear energy more competitive than electricity produced from fossil fuels?
Carbon tax will increase electricity price from fossil fuels due to large carbon emissions, as compared to almost nil from nuclear. Higher carbon tax will reduce competitiveness of fossil fuels.
The CATO Institute paper “Would a Carbon Tax Rejuvenate Nuclear Energy” published in the Fall of 2022 (https://www.cato.org/regulation/fall-2022/would-carbon-tax-rejuvenate-nuclear-energy#nuclear-plant-costs) makes a good attempt to explain this important issue in detail but in simple terms – so worth reading it.
Before we dwell into this question, let us do a crash course on carbon tax.
We as rationale consumers respond to price signals and value a commodity or service according to its price. Same concept can be applied effectively to reduce pollution by attaching a price tag to the carbon dioxide (or any GHG) emissions a commodity or service produce.
Carbon pricing puts a monetary value on the external costs (eg social impact cost) of the carbon dioxide emissions. It provides a mechanism for a fair comparison of fossil fuels against cleaner / renewable energy sources: it makes more polluting fuels, products and services more expensive and makes those responsible pay for emissions.
Carbon tax and emission trading system (ETS, or “cap and trade” system) are two main mechanisms to put a price on carbon. The former is a tax or levy applied directly to the production of carbon emissions, whereas the latter defines the cap on pollution and allows manufacturers / emitters to trade the emission permits or allowances or credits (and hence the carbon price changes over time in the market).
Many countries have adopted either or both of these carbon pricing instruments. The charts show the carbon price coverage by country (even if any one of the relevant sectors is covered). The carts show data upto 2020 when around 16%-18% of global CO2 emissions were covered by either carbon tax or ETS. In 2021, this coverage increased significantly to 25% as China started its ETS.
Impact of carbon tax
Nuclear is considered the safest and cleanest source of energy. Looking at the emissions nuclear supply chain generate, cost of nuclear energy would not be affected by a carbon tax in absolute terms. However, the cost of other sources of energy which produce carbon emissions would be increased relative to the nuclear.
Based on current/proposed carbon tax ($70 per ton in the US), the simple answer to the question we raised is “yes” when comparing against coal (because coal power plant cost is also high) but “no” against natural gas. The “overnight construction cost” (OCC), that is the construction cost excluding financing cost, is so high for nuclear that offsetting by carbon tax will not make nuclear energy competitive – unless nuclear capital cost is reduced significantly (by one-third?) or carbon tax is exorbitantly high ($200 per ton?) by the current standard.
Why does nuclear power plant have high capital cost?
The paper dwells into why nuclear has so high capital cost: why Moore’s law and learning curve don’t apply to the development of nuclear energy with the increase in nuclear generation capacity and more learning? Are high costs due to cost over-runs and delays (which may arise from the following factors as well), management (of labour productivity, construction management, problems with manufacturing plant components and supply chains, and a low level of design completion at the outset of construction), or regulations (too many, stringent and unstable).
Unlike the West, however, evidence from Asia suggests that countries like China, South Korea, and Japan have managed to at least contain nuclear capital costs, if not reduce them over time.
What can be learned from Asia? A lot and the CATO paper provides some clues, which are not repeated here. However, as the following chart shows, the nuclear is back in fashion after the peak in 1990s in the Western world and many countries, especially from Asia, have commenced their nuclear programs.
If nuclear is so expensive, why countries go for nuclear?
Why would a country need nuclear energy when we have significantly cheaper natural gas, solar and wind? There could be many reasons but this is not the subject of CATO Institute’s paper!
Energy security (and price) concerns are pushing countries around the world to explore new energy sources. Each power generation technology or fuel has its own challenges:
– Modern renewable energy sources (solar and wind) are clean and competitive but are intermittent (and location sensitive).
– Hydroelectric has site limitations (and generally have long construction periods and high costs).
– Natural gas / LNG are currently being supply constrained (especially in Europe following Russian invasion of Ukraine) as well as getting very expensive.
– Coal is the dirtiest of all (and also currently expensive like other fuels).
Nuclear is the safest and cleanest (like solar and wind) as well as reliable (unlike solar and wind) but also has long construction period and high cost (more than hydro). Many countries go for nuclear (despite being expensive) to diversify their energy sources, though some countries such as Germany phased it out following Fukushima nuclear disaster in 2011. However, perhaps most importantly, to become a source of choice, nuclear has to improve its credentials significantly on schedule and cost over-runs / uncertainties.
See my LinkedIn posts on nuclear energy, its share in world’s electricity generation, and recent trends at: