Ecological Capitalism : The profit motive could be more powerful than an edict in the war against environmental pollution.

It has cost the United States about a trillion dollars during the past two decades to find out that Washington doesn’t know how to make effective environmental policy. Today, everyone seems to be calling for a new approach based on “market incentives.” But how much of the rhetoric will be translated into policy?

In proposing amendments to the Clean Air Act, for example, President Bush stressed that harnessing the market could achieve air quality goals more rapidly and cost effectively than the “command-and-control” approach. Unfortunately, the President’s concepts are limited to certain sulfur emissions caused by burning coal and to tailpipe emissions, which could create a market among major automobile manufacturers and oil refiners to reduce auto pollution.

Yet even these timid proposals are likely to be removed by Congress by the time that the legislation reaches the President’s desk, and he may well be justified in vetoing it. Because taxpayers will eventually absorb all of the costs of the Clean Air Act, any policy must incorporate the most cost-effective methods of environmental protection. To do less is to violate the public’s trust.

If a market system makes sense, why hasn’t it caught on? The excuse often given is lack of precise knowledge about how much pollution each firm emits. Yet a command-and-control approach is equally dependent upon accurate information. In fact, the major flaw in many environmental programs, such as the Clean Water Act or the expensive and ineffective Superfund program for cleaning toxic dump sites, is that inaccurate and incomplete information makes accountability impossible.

What stands in the way of adopting a market approach is not just that Washington bureaucrats like to keep their jobs. Nor is it just that present environmental programs have become huge public works boondoggles that politicians use to dispense political favors. A chief roadblock is that many polluters profit because the present system discourages new competition. Potential competitors are usually required to install whatever pollution-control devices government dictates, regardless of cost, while exemptions are built in for older plants. Thus, many existing firms actually prefer tough regulations.

Since the current system improves environmental quality only slowly and at great cost, if at all, momentum is finally building for the idea of pollution markets. But how would a market system really work?

The present system has created cartels for pollution rights that cannot be transferred to others, so polluters have no reason to reduce emissions until forced to do so. But a market approach would create transferable property rights, which would encourage firms to exceed government standards, not merely meet them, and to develop new technologies to replace aging equipment. Companies could buy, sell and trade the right to pollute. While government would continue to set deadlines for complying with national emission limits, it wouldn’t tell firms how to do it.

Those achieving greater reductions than the minimum required could earn “credits” that they could sell either to existing firms unable to comply with the regulations or to new firms entering the market. If factory A, for example, could find a way to pollute less than it is allowed, it could profit by selling some (but not all) of its remaining allotment to factory B.

Such an approach would achieve, or exceed, environmental goals with far less economic damage. It would stimulate the most efficient combination of pollution controls within the limits established. Jobs and production lines could be saved at credit-buying firms. Credit-selling firms would be rewarded for their efficiency. If they could get credits that they could sell to others, many firms would find it profitable to develop new procedures and equipment that would not only do a better job of reducing pollution but also of accommodating diverse needs.

For example, two dry cleaners operating in the same neighborhood may use similar equipment, but if one operates at 75% of capacity for 20 hours a day, it may require different emissions-control technology from that of a competitor operating at 95% capacity for only 10 hours a day. Inflexible command-and-control policies treat both firms alike.

Estimates are that the program of tradeable refinery permits, introduced in 1982 to reduce lead emissions from automobile fuels, has reduced airborne lead by about 98% and produced more than $200 million in savings.

The principle should be applied in other areas, such as water conservation. Subsidized water sales from federal projects to irrigated farming districts have created dependency on inexpensive water. For less than $20, agricultural interests can get the same volume of water for which a municipality may have to pay hundreds of dollars. If farmers were allowed to market water supplies to other users, they would have an incentive to conserve. Since farming claims as much as 80% of the water consumed in the Western states, less is available for fishing, drinking or industrial purposes. Some states, including California, are developing new methods to permit water trades, with encouraging results. One big test will soon take place in Southern California.

In the Metropolitan Water District of Southern California, spanning from north of Los Angeles to the Mexican border, are some 300 cities, more than 14 million people and five of the 10 fastest-growing counties in America. Through a board of directors representing its member agencies, the MWD contracts with municipalities to supply water. Recently, the MWD and the Imperial Irrigation District, which provides irrigation water for about half a million farmland acres in the Imperial Valley, completed an agreement calling for the MWD to pay for improvements in the water distribution system. The water saved will be made available to municipalities.

The next step is to show politicians and bureaucrats that a market system would relieve them of the pressure to exempt heavy polluters in powerful congressional districts from environmental regulations. If the market would act, politicians wouldn’t have to.

DR,