Adam Smith Turns Green

Back in the days when environmentalism meant saving whales and wearing Earth Shoes, activists rarely met a regulation they didn't like. Was the local paper mill dumping chlorine into the river? Pass a law slashing allowable emissions and mandating the technology for achieving them. Were utilities spewing out sulfur dioxide, a cause of acid rain? Require each power plant to install scrubbers on its smokestacks. "Command-and-control" did make the nation's air and water cleaner, but it also made enemies in boardrooms and living rooms. Business lobbies hard against new regulations, and last fall almost every environmental referendum went down to defeat as voters equated green laws with a grab for the green in their wallets. Worse, traditional pollution control has begun to cost more and more even as it achieves less and less.

Enter an unusual coalition of free marketeers, politicians and environmentalists who believe there's a way to break the logjam. It goes by the name "market-based environmental incentives," and it means reforming markets so that it pays to clean up. It's "an attempt to put a green thumb on Adam Smith's invisible hand," says Sen. Tim Wirth of Colorado. Or as economists say, the goal is to make prices reflect the full social cost of goods, from a can of soda to a kilowatt of electricity. Today that is emphatically not the case. A homeowner who generates six bags of garbage pays the same fee for collection as someone who generates two; the amount of taxes someone pays for cleaning urban smog has nothing to do with whether she bicycles to work or steers her soot-belching station wagon down the freeway. Market-based environmentalism aims to correct these inequities.

The strategy took shape in "Project 88," a report presented to the incoming Bush administration by Wirth and the late Sen. John Heinz of Pennsylvania. Last year it became the basis for the new acid-rain provision of the Clean Air Act. Rather than making every power plant cut emissions of sulfur by the same amount, the act sets a national goal of 50 percent reduction. And it allows utilities to trade "acid-rain credits." For example, an old plant burning high-sulfur coal can, instead of laying out a fortune for scrubbers, pay a utility with newer equipment and low-sulfur coal to reduce its emissions by more than 50 percent. Result: the same sulfur reductions, but for $1 billion per year less.

Schemes like this make some environmentalists uneasy about allowing businesses to buy their way into compliance, but that's becoming a minority view. More than 100 bills in Congress propose a market approach to environmental problems. Last month Wirth unveiled Project 88-Round II, which details ways to use markets to fight global warming, waste and vanishing forests. Such policies "can do more for less," says Richard Morgenstern of the Environmental Protection Agency.

The biggest bang for the buck, yen or mark may come in global environmental threats, where the cost of solutions varies dramatically from country to country. For instance, Round II proposes tradable permits for carbon dioxide (CO2), the chief greenhouse gas. Under an international accord, every country might start with a requirement to reduce CO2 emissions by some number of tons, based on its population or gross national product. If Japan found it too expensive to, say, retool its already efficient factories so they required less oil, it could pay Poland to increase the efficiency of its plants. Since Cracow's factories are less efficient than Japan's, each ton of CO, reduced this way would cost the world economy much less than trying to squeeze more efficiency out of Tokyo, explains economist Robert Stavins of Harvard University, who directed Project 88. Similarly, if Ford found it too expensive to raise its fleet mileage, it could pay eastern European factories to do so: it's much cheaper to raise mileage from 10 miles per gallon to 30 than from 30 to 50.

Tradable permits may cut greenhouse gases better than the competing approach of taxing fossil fuels. "With a tax you never know how much of a decrease you'll get," says economist Dan Dudek of the Environmental Defense Fund, because no crystal ball tells policymakers how a price increase of, say, $5 per gallon of petrol will affect people's driving habits. In contrast, says Dudek, "permits let you accurately control the amount of carbon dioxide released." EDF was instrumental in selling President Bush on acid-rain permits.

Garbage offers an inviting target for green economists. Under Seattle's "pay as you throw" policy, which charges more for every barrel of nonrecyclable trash, residents now generate an average of slightly more than one can per week, down from 3.5. Yet as more people separate glass, plastic and newspapers for recycling, markets have become so glutted that the price of these materials has plummeted, forcing some communities to pay to have "recyclables" carted to a landfill. To create demand for old newsprint, Congress is considering a national target for recycled content. The cheapest way to achieve the goal would be tradable permits. If mills supplying the hypothetical Sunbelt News were near forests but far from a source of recycled newsprint, the News could pay the Rustbelt Gazette, whose mill is up to the rafters in used papers, to increase its recycled content above 40 percent.

Sometimes taxes offer the simplest way to change behavior. Germany, for instance, is considering a tax on packaging that would reflect disposal costs. This kind of green tax could serve as a wedge for revamping the tax system in a popular way. Taxing such "bads" as hazardous wastes could generate $130 billion a year in the United States, calculates the Worldwatch Institute. That could be used to reduce taxes on "goods," such as labor and savings.

For all its appeal, the market is not a panacea. If one rich polluter pays everyone else to take on his share of toxics reduction, the air or water around his factory could become a poison hot spot, endangering the health of local residents. And a "smog bazaar" in Los Angeles, which allows polluters who cut emissions from one source to increase it from another, sparks criticism of "a market in cancer permits." Still, politicians as well as environmentalists are deciding that the thou-shalt-not school of pollution control has run its course.