Efficient Markets Will Reduce Cost Of Pollution Cuts

ECONOMISTS have long dreamed about using market-based approaches to clean up the environment.

With the Environmental Protection Agency's blessing, the Chicago Board of Trade (CBOT) is making that idea a reality by creating a market to handle the trading of pollution permits.

The 1990 amendments to the Clean Air Act mandated that sulfur dioxide (SO2) emissions from electric utilities be cut by 50 percent. In the market-based system being instituted, utilities will buy rights to release specified quantities of SO2. Regulators control the amount of pollution by limiting the number of permits. Prices of the permits are to be set by market trading.

In September, the CBOT was chosen by the EPA to run its pollution-permit auctions. The first is scheduled for March.

In addition, the CBOT intends to create an electronic trading system to facilitate cash sales of the permits between businesses. CBOT started to build the third link in the market - futures and options trading - earlier this year when the Commodity Futures Trading Commission granted permission for such an exchange.

The CBOT handles commodities ranging from pork bellies to options based on treasury bills. It is the world's largest futures exchange.