Tim Harford on unintended consequences

In the Financial Times last month, Tim Harford (who is always an interesting read) had a good piece on unintended consequences (paywalled, but available ungated on his website). It covers a number of examples of unintended consequences, including the (possibly apocryphal) 'cobra effect':

It describes an attempt by the British Raj to rid Delhi of its cobras by paying a bounty for each cobra skin, thus encouraging a thriving cobra-farming industry.

However, Harford devotes more attention to a more recent example that is definitely not an urban myth, where:

...the Straits Times and Climate Home News recently reported on a striking scheme in Melaka, Malaysia, where locals were selling cooking oil that would eventually be used to supply European producers of aviation fuel. The underlying idea of turning a waste product, used cooking oil, into something that can be blended into aviation fuel seems as appealing as getting the cobras out of Delhi. Cooking oil starts tasting bad after being used for frying three to five times, but as an input to aviation fuel, used oil is perfectly good.

At this point two intriguing forces intersect: European governments are demanding that airlines use more biofuels from sustainable sources — used cooking oil being one — while the Malaysian government subsidises cooking oil. This means that in Malaysia buying fresh oil is cheap and selling used oil is lucrative. If you run a food stall or restaurant in Malaysia, you can buy subsidised fresh oil, fry food a few times, then sell the waste oil at a profit. It’s a nice side-hustle.

The trouble is, writes financial journalist Matt Levine, “If you don’t run a restaurant, you can buy fresh cooking oil for $0.60, not use it to fry food any times, and then say, ‘Oh, yeah we totally used this oil,’ and sell it to a refiner for $1.” That seems a simpler and more scalable way to proceed. It certainly cuts out the precarious, time-consuming hassle of actually running a restaurant. It is hard to know how much fresh oil is being resold this way, but fraudsters have both the motive and the opportunity. Climate Home news notes that Malaysia collects an astonishing volume of “used” cooking oil: more per person than anywhere else, and two and a half times as much as second-placed Singapore.

You can real the original stories on this on the Straits Times and Climate Home News. Incentives matter, and it is incentives that can create unintended consequences. When a policy like this goes wrong, it is often a failure to consider the incentives.

However, just because the consequences are unintended, that doesn't mean that they need be unanticipated. Policies should be subjected to a careful consideration of the incentive effects that they create, and importantly, how entrepreneurial folks might try to game the policy. Software developers have a practice of 'red teaming' new software (like generative AI tools) to test whether they can be hacked or used for no good. Perhaps governments need to start red teaming policy?