Flying on Frying Oil

The ever-excellent Matt Levine points us to the amusing economic policies that connect the international jet-set to Malaysian street hawkers of fried noodles. The EU and the US have created strong economic incentives to create sustainable aviation fuel (SAF) and a good way to do this is to recycle used cooking oil (UCO). What could be better, right? Take a waste product and turn it into jet fuel! The EU and US policies, however, are so strong that all the EU and US used cooking oil cannot meet the demand. Here’s a great sentence, “Europe simply cannot collect enough used cooking oil to fly its planes.”

In the US, credits under the Inflation Reduction Act can account for up to $1.75 to $1.85 per gallon of SAF. Meanwhile cooking oil is subsidized in some parts of the world. The result?

It turns out that restaurants, street food stalls and home cooks in Malaysia — which is “among the world’s leading suppliers of both UCO and virgin palm oil” — will pay less for fresh cooking oil than the international market will pay for used cooking oil. Fresh cooking oil is more useful to cooks than used cooking oil (it tastes better), but it is less useful to refiners and airlines than used cooking oil (it doesn’t reduce their carbon impact). Also fresh cooking oil is subsidized by the government in Malaysia: “Subsidised cooking oil sells for RM2.50 per kg versus the UCO trading price of up to RM4.50 per kg.” So if you run a restaurant, you can buy fresh cooking oil for about $0.60 (USD), use it to fry food a few times, and then sell it to a refiner for $1, which is a nice little subsidy for the difficult, risky, low-margin business of running a restaurant.

The noodle hawkers in Kuala Lumpur are getting a nice little bump in profit but who is going stall to stall to check that the oil is in fact used? And what counts as used? One fry or two? Clever entrepreneurs have cut out the middleman. Virgin palm oil can be substituted for used cooking oil and voila! Sustainable aviation fuel is contributing to deforestation in Malaysia. Malaysia exports far more “used” cooking oil than oil that it uses. No surprise.

All of this illustrates a broader point: externalities suggest policy interventions may improve outcomes but markets are complex and politics is blunt. It’s easy to make things worse. If intervention is necessary, a uniform carbon tax beats a patchwork of production-specific subsidies. A price is a signal wrapped up in an incentive. Send everyone the same signal and the same incentive to ensure that the cheapest emissions are cut first and total costs are minimized.

Crucially, a carbon tax rewards any effective solution, even ones a planner would never think of–lighter planes and cleaner fuels sure but also operational tweaks like jet washes. In contrast, subsidies tether policy to specific technologies, like used cooking oil. That invites rent-seeking and inefficiency.

Tax carbon, not inputs. Avoid games with paperwork. One verification point at the fuel supply point is simpler than tracing global waste-oil chains. Don’t subsidize the fry oil and audit the street hawkers. Tax the emissions.

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