The Unintended Consequences of Safety Regulation

At the turn of the 21st century, biofuels appeared to be a solution to mounting concerns over greenhouse gas emissions, climate change, skyrocketing fuel prices, and dependence on foreign energy. When Congress passed the Energy Policy Act (EP Act) in 2005 with a renewable fuel standard (RFS) provision mandating that producers add ethanol to gasoline, it is unlikely that lawmakers thought the act would increase hunger and social unrest in the world’s poorest countries. However, unintended consequences frequently accompany even the most well-intentioned policies.

Lawmakers specifically intended for the RFS provision to address both environmental and energy issues.[1] Ethanol is a cleaner fuel with lower carbon emissions than gasoline.[2] It is often added to gasoline as an oxygenate, allowing gasoline to burn more completely and thereby reducing carbon emissions. The EP Act simply ramped up the already increasing use of ethanol as a fuel additive with the hope of reducing greenhouse gas emissions. The law’s proponents expected higher ethanol use to offset rising oil prices by filling at least some of the domestic demand for fuel.[3] Further, because most ethanol in the United States comes from domestically produced corn, policy advocates hoped the act would make the country less dependent on imported oil. As an added bonus, the policy would benefit US farmers. At the time, the policy seemed perfect.

As the Environmental Protection Agency (EPA) implemented the policy and further ramped it up in 2007[4], scholars and environmentalists began to question its environmental and energy benefits.[5] Producing ethanol from corn or other crops consumes energy. For ethanol to be a viable fuel source, it should, on the balance, produce more energy than it consumes. Experts, however, disagree about whether this is the case.[6] Beyond ethanol’s questionable viability as a fuel, the negative environmental impacts of corn production undermine ethanol’s benefits. Corn farming leads to greater soil erosion than the farming of other crops. Higher pesticide and fertilizer use in corn farming compared to the farming of other crops increases water pollution. In addition, ethanol production leads to air pollution and greenhouse gas emissions, offsetting some of the environmental gains from its use as a fuel.[7]

Perhaps the most unexpected consequence of the policy has been its impact on worldwide food prices. The US fuels industry relied heavily on corn ethanol to comply with the RFS requirements. The resulting demand drastically increased the price for corn globally, not just domestically.[8] Since corn is a food staple across Latin America, higher corn prices effectively reduced purchasing power for lower-income households across the region. Also, as corn prices skyrocketed, farmers switched to corn production from production of other cereals, which reduced the latter’s supply. At the same time, consumers substituted less expensive rice and wheat for corn. This substitution increased demand and prices for wheat and rice, staple foods across many regions in Africa and Asia. Overall, the RFS program led to higher prices for staple foods all over the world.[9] By some estimates, up to “70–75 percent [of the] increase in food prices was due to biofuels and the related consequences of low grain stocks, large land use shifts, speculative activity and export bans.”[10] The spike in food prices, coupled with the global economic crisis, halted and even reversed the long-time trend in reducing malnutrition.[11] The number of undernourished in the developing world, which had been declining steadily since the 1970s, experienced a sharp increase between 2006 and 2009. In addition, the spike in food prices may have triggered political instability and food riots in lower-income countries, resulting in dozens of fatalities.[12]

As the ethanol mandate demonstrates, policies attempting to reduce risk in one area often increase risks elsewhere. In some cases, the increases in countervailing risks may even exceed the reduction in targeted risks, leading to a policy that does more harm than good.[13] However, while the negative regulatory consequences are usually unintended, they are by no means unforeseeable. Agencies could minimize or avoid them through more careful analysis of proposed regulations before they became law.

While many studies point to the potential negative outcomes of risk trade-offs,[14] no studies measure the extent to which regulators face such trade-offs. Yet, there are reasons to believe that risk trade-offs in safety regulation will only become more common.[15] Given the nation’s progress in tackling the most prominent environmental and health risks, future risk-reduction efforts will face diminishing returns. As the target risks shrink, the importance of countervailing risks will only grow. Furthermore, as safety regulation addresses increasingly complex systems and technologies, the potential for risk trade-offs arising in regulation will increase as well.

Unintended consequences of safety regulation are not always negative. A regulation reducing a target risk may also reduce another risk, increasing the regulation’s benefits. In fact, agencies already account for ancillary benefits[16] in their analyses to strengthen their case for regulation.[17] However, as I explain later in this paper, agencies have strong incentives to overlook countervailing risks. Thus, it is important to address agencies’ regulatory incentives to examine potential risk trade-offs.

In this study, I examine how risk trade-offs undermine safety regulations. In section II, I provide a brief background on the most common types of risk trade-offs in regulatory policy and give specific examples for each trade-off type. In section III, I examine the reasons behind the agencies’ failure to conduct better analysis. Finally, in section IV, I suggest potential policies to minimize or prevent an increase in countervailing risks.

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