Seeking Fairness for All Polluters

Katy Wolf seems to be an indulgent sort.

If the economists want to portray the South Coast Air Quality Management District’s proposed “smog market” as an exercise in pure supply and demand, who is she to rain on their parade?

If they want to believe that as early as a year from now, the invisible hand of the marketplace will have completely replaced the existing “command and control” regulatory system as the mechanism for reducing air pollution in the Los Angeles Basin, she can live with that.

That is, she can live with it just as long as she can be sure that her clients--mainly small and medium-size businesses--won’t be sacrificed to a quest for textbook-style market efficiency.

Wolf is a chemical physicist at the West Los Angeles-based Institute for Research and Technical Assistance, a nonprofit organization that advises companies ranging from wood furniture manufacturers to printed circuit-board makers on how to reduce pollution and stay in business at the same time.

She is also enough of a politician to be confident that she can persuade the AQMD to see things her way, making sure everyone is treated fairly.

Earlier this month, the AQMD gave its staff the go-ahead to develop the Regional Clean Air Incentives Market (RECLAIM).

Under the proposal, about 2,800 businesses, which together account for 86% of L.A.’s air pollution, will be allocated a certain number of credits based on their historical contribution to the region’s smog.

The more tons of volatile organic compounds, for example, that your plant spews into the atmosphere, the more chips--or pollution credits--you start the game with.

The credits will then be traded like pork bellies. The only difference is that the amount of pollutants that each credit represents will be shrunk yearly so that the total amount of allowable pollution is gradually reduced and the air is cleaned up. By design, as the amount of allowable pollution dwindles, the price of a credit is forced upward: supply and demand.

The idea is that rather than tell a firm exactly how to go about reducing its pollution--say, what brand of filter or scrubber to buy--you just let the market set a price on the company’s right to pollute.

As the credits shrink in pollution value and get more expensive, the theory goes, it will make more economic sense at some point to clean up your act than to keep buying rights to pollute.

The companies that reach that threshold first and reduce their emissions will become sellers of credits; the ones that have trouble cutting emissions will become buyers.

Market efficiency will thus deliver cleaner air to us at the lowest possible price to society.

Terrific, Katy Wolf says. Sounds great.

Just one problem: “The economists seem to relegate to a footnote the distributional effects,” she says.

On balance, the market may produce lower-cost pollution reduction than a government regulatory system, but the pain will be distributed disproportionately in the real world.

In the real world, many companies will be up against an air pollution double-bind, according to Wolf.

Consider the case of a metal fabricating company that now uses a degreaser whose main ingredient is 1-1-1 trichloroethylene--a major culprit in the destruction of the Earth’s ozone layer and banned as of Dec. 31, 1995.

Unfortunately, the best alternative degreaser is hydrocarbon-based and contributes to the Los Angeles smog problem.

The latter chemical is subject to the AQMD’s market plan, but the former is not.

Therefore, the company--historically an ozone-depleter, rather than a smog-producer--would get zero pollution credits and will have to pay cash for the mandatory transfer from 1-1-1 trichloroethylene to hydrocarbons.

Depending on the price of pollution credits, such a transfer could bankrupt the company.

The whole key to whether you rise or fall in this brave new marketplace will be how many chips you’re allotted when the game begins. Wolf wants to see to it that ozone-depleters being forced into the smog market because of the federal ban are given at least some credit for the destruction they’ve caused, even if it isn’t the correct kind of destruction.

Lest you think that the main victims are a motley collection of firms that produce car bumpers and maple bed stands, Wolf asserts that the biggest loser under the market system as proposed may be the aerospace industry, which doesn’t need more trouble.

Wolf proposes granting such companies--her clients and any other industries that stand to be unfairly slapped by the invisible hand of the market--proportional credits in the smog market.

This, of course, brings government back into the whole business. Let’s just not tell the economists.