Brazil imposes a tax on atomic energy to promote atomic energy

Brazil is about to place a 10% tax on the gross revenue generated by the sale of nuclear electricity.

This is a strange idea. As a revenue-raising device, it is improbable. Nuclear energy is not cheap: there are no ex ante rents to seize. Post hoc, it is possible to grab value from the financiers — capital expenditures are what drive up nuclear’s costs — but that would serve only to disincentivize reactor construction.

As a disincentive, however, a 10% revenue tax is a lousy one. First, most of the costs can be passed on to consumers: electricity demand is not very elastic. Second, regulators can prevent those costs from being passed on, but regulators can also stop nuclear power plants from being built. Heck, almost any policy uncertainty can stop a nuclear power plant from being built. In short, using a tax to disincentivize reactors is either ineffective or unnecessary.

So, why?

The key feature to note is that the revenue from the tax will go to local governments, not the federal authorities. It is actually a way to build local support for reactors.With the tax, localities will have some skin in the game.

In fact, that was how they did things in Japan.

In 1974, Japan created a special purpose tax on electricity. The government funneled most of the revenue into Electric Power Sites Account, which went to local governments that allowed power plants to be built in their jurisdictions. Most of those plants, not surprisingly, turned out to be nuclear. Between 1997 and 2007, 68.4% of Electric Power Sites Account grants went to nuclear power plants, against 27.3% for thermal power and 3.9% for hydroelectric.

To give an example, seven Tepco-owned nuclear re­ac­tors in Kashiwazaki City in Niigata Prefecture in western Honshu generated cumulative amounting to ¥113.3 billion from 1978 to 2009; the combination of central grants and sub­sidies (plus direct taxes on Tepco)], accounted for 34.5% of Kashiwazaki City’s revenue.

The Japanese designed the system to reduce local opposition to new plants. The government front-loaded the subsidies so that most of them went to the local government between the start of construction and five years after beginning operation. That gave localities strong incentives to approve new plants in order to prevent a decline in public revenue.

By 2011, parts of the Japanese business press were calling the subsidy system a “drug” for local governments and plant neighbors. Of course, that was the intent! It took the Fukushima disaster to change public opinion.

It remains to be seen if Brazil will be as successful in creating a constituency for nuclear power. There are a lot of differences between the two nations, not least of which that Brazil plans five new reactors over the next decade (at best!) while Japan rolled out 35 over the ten years following the 1974 law. But it could work. As long as regulators let utilities pass on the cost of the tax — not a certainty in Brazil — then a tax on nuclear power designed to promote nuclear will be an ingenious step in the never-ending battle against NIMBY.

Comments

[shah8]

Where will the nukes be? Which local governments would benefit?

[Noel Maurer]

Current plans are one more in Rio (under construction) while two more sites are in final approval: one in northern Minas, the other along the border between Bahia and Pernambuco. The exact location has not yet been fixed.

[Ask Chesapeake]

This makes sense, after a fashion. If local governments get more money from atomic energy, they may be more eager to build more energy plants.