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Taking a Free-Market Tack on Environment : It's worth a try but with some modifications

May 26, 1991

Southern California's largest smog-control agency is trying to decide whether modified free-market economics can get the region's air as clean as strict controls.

Testing a free-market approach makes sense, because strict regulation seems to meet tougher resistance with every new rule. But it must be modified because--unlike a true market in which ventures can prosper, go bankrupt or just hang on--we can't afford to fail or muddle through in the case of clean air.

Free-market theory already is being tested on other problems, like traffic congestion, that traditional government approaches so far find intractable. So making it worth an industry's while to find a way better than regulation to clean up the air is worth trying.

Leaders of the South Coast Air Quality Management District seem to agree. But just as important, they also seem to understand the first rule of wing-walking: Never let go of anything until you have a firm grip on something else.

Thus the district will keep refining its clean air goals under a regulatory approach that has produced, if not clean air, at least less dirty air since the 1960s. At the same time, its market-incentives advisory board will search for a new "modified market" formula for clean air.

Testing a new approach, in fact, will not be the most important aspect of the program. As outlined recently by Times writer Judy Pasternak, the most important thing will be what the district tests. Nothing is likely to work short of the most precise formula that economists can construct.

That could take years, but the AQMD and the industries that are anxious for market incentives to be put in place have no real choice but to invest the time it takes to produce a plan with the best chance of working. Most bankruptcies in a truly free market result from bad planning; creating a market in smog probably is no exception.

Cleanup costs are one big reason that the district is willing to think seriously about what would be the nation's largest test of market-oriented environmental rules.

Controlling the first 90% of air pollution has always been relatively less expensive than controlling the last 10%. That seems never to change, no matter how clean the air.

Southern California is finally making serious headway against smog, but factories, refineries and other so-called stationary sources under AQMD's rules squirm and balk at the last 10% of cleanup costs. For some years now, industrial and commercial polluters have argued that they could do the required cleanup for less money if they were free of the district's cumbersome regulations.

How the market should apply to clean air is far from resolved, but one aspect would be a Smog Exchange modeled after a Stock Exchange. Buying and selling would be in smog shares that represented a company's right to release a certain number of pounds or tons of pollutant a year.

Companies that cut their emissions could sell shares to companies that perhaps could not afford to install pollution controls. The air would be cleaned up by reducing the tonnage allowed for each share by, for example, 5% a year.

Next week, the air quality district will move closer to translating theory into practice, a move that provides an example of how difficult parts of the exercise can be. Its advisory board will be asked, among other things, to explain precisely how market incentives could produce smog reductions equal to, or better than, those currently required by regulation. The district also wants to know how smog reductions would be verified and how pollution limits on share-holders would be enforced.

Finding a path with a gentler slope that will lead to cleaner air will not be easy, and may not even be possible. But the rewards could be immense, so the air district must keep looking.

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