It’s not just a good idea, it’s the Law!

10 08 2012

It’s a law most people have never heard of, yet controls their life more than any other.  The law is unbending, unwavering, and merciless.  Why do people put up with it?  It’s human nature.  This horrific law, that runs our lives, is the Law of Unintended Consequences.

Every act, every decision, every choice we make has consequences.  Some of them are planned, some are beneficial, and some are unintended.  The unintended consequences generally result from the reaction of a third party reacting to a decision we make.  Say, for example, people like bacon.  People buy more bacon.  Bacon becomes a fixture in popular culture.  Bacon starts showing up in unusual places, like Burger King milkshakes.  A Burger King milkshake is an unintended consequence of the popularity of bacon.

Other consequences are not so benign as bacon-flavored milkshakes.  Economists are familiar with the Tragedy of the Commons, which I consider a sub-species of the Law of Unintended Consequences.  But of all the people who should be the most familiar with the Law, the ones who seem to be the most intentionally obtuse are bureaucrats.  For some reason, most bureaucrats seem to think that the Balm of Good Intentions will dispel the Law of Unintended Consequences.  Time and again, the real world rears up and confounds the best intentions of the nattering classes.

Today’s prime example comes from UN and their carbon-trading scheme.  Briefly, the UN awards carbon-credits for destruction of GHGs that can be purchased by companies to offset their own emissions.  In theory, emissions go down due to destruction of GHGs.

In practice, not so much.  The New York Times reports that firms in Asia have ramped UP production of GHGs for the purposes of selling the credits they get for destroying them.  And, in a move that should surprise no-one, they chose the most destructive GHG, in order to maximize the credits. (CO2 = 1 credit, HFC-22 = 11,700 credits).

So far, no surprises.  Every economics student know that people react to incentives.  When you incentivise an activity, you get more of the activity.  The Times describes the issue, and then quotes one of the NGO bureaucrats who helped create the scheme:

“I was a climate negotiator, and no one had this in mind,” said David Doniger of the Natural Resources Defense Council. “It turns out you get nearly 100 times more from credits than it costs to do it. It turned the economics of the business on its head.”

The breathtaking ignorance of the drafters of this boggles the mind.  Who would have thought that if you make it more lucrative to create something for the purpose of destroying it, people would start doing that?  Now there’s a scramble to correct the problem, which will, of course, lead to more unintended consequences, and the cycle continues.

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