Economists love to tell each other stories about perverse incentives. The “cobra effect” is a favourite. 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. The cobra story is probably an urban myth — or a policy wonk’s version of one — but there is more evidence of a very similar scheme for Hanoi’s rats in the early 1900s. Rat tails brought a bounty from the colonial government, and soon enough the city was crawling with tailless rats who had had their valuable tails clipped before being released to breed.
It’s easy to dismiss such policy blunders as a thing of the past, but 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.