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Pollution Credits Go to Auction in Test Of Clean-Air Law

The Chicago Board of Trade will act as the middleman in a free-market approach to controlling air pollution

ON Monday, the Chicago Board of Trade begins auctioning a strange commodity: air pollution.

Technically, what's being sold are emission credits owned by electric utility companies.

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By holding a series of these auctions, federal regulators hope to jump-start a new market where utilities buy and sell the right to discharge pollutants that cause acid rain.

It's all part of a new market-oriented environmentalism that is gaining popularity among regulators, industry, and even some environmentalists.

"Emissions trading as a concept is a very useful one," says Joseph Goffman, senior attorney with the Environmental Defense Fund and coauthor of the original proposal for trading acid-rain emissions.

"We are just starting to recognize what an incredibly powerful tool this is," says Mary Gade, director of the Illinois Environmental Protection Agency. She is one of several state regulators interested in adapting the idea to control other pollutants.

The new program will work this way: Under 1990 amendments to the Clean Air Act, the United States Environmental Protection Agency (EPA) has set a national limit on utilities' sulfur-dioxide emissions. Unlike a traditional regulatory approach, where each power plant might have to meet a specific pollution-control standard, this system gives utilities enormous flexibility to find the cheapest solution.

Suppose, under the new clean-air law, that Utility A and Utility B each have to cut sulfur-dioxide emissions by 100 tons. It costs utility A $500 to cut each ton of emissions. It costs Utility B $2,000 a ton. Under the program, Utility A could overcompensate, cut its emissions by 200 tons, and sell its 100-ton credit surplus to Utility B. The nation still gets the desired cut in emissions, but in a more cost-effective manner.

The US EPA is using the Chicago Board of Trade to hold the auctions and, later, administer the trading of emission-credit contracts. Board of Trade Chairman Patrick Arbor is upbeat about the possibilities.

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"I don't think that that's the end of our innovation," Mr. Arbor says. "There's a whole area of social problems that might better be addressed through the private market" than strict public regulation, he adds.

Although some credits have already been sold between utilities, it may take time for the market to gather momentum. "I think it's going to take off slowly," Mr. Goffman says.

Whether it succeeds depends on how communities react. The program could lose credibility if particular communities ignore the overall benefits of the system and focus instead on their local utility buying "the right to pollute," Goffman says. "The single biggest obstacle is public confidence."

On the other hand, a number of communities are looking to adapt the idea to control their own pollution problems. The Los Angeles area is furthest along.

By July, the South Coast Air Quality Management District expects to have adopted trading rules for nitrous oxide and sulfur oxide emissions. A few months later, it plans to have rules for hydrocarbons as well. All three are major contributors to air pollution. The district plans to start the trading program early next year.

"The time had come to utilize market strategies," says Bob Wyman, an attorney representing a local industry coalition. Local regulators already had clamped down on the biggest and most obvious fixed sources of pollution. But clamping down on the legions of smaller emitters would have overwhelmed regulators, he says.

Under the new system, print shops, wood-furniture manufacturers, and others will have an established emission limit, which will decrease every year. The new system will encourage them to find innovative ways to curb pollution. If they make big gains, they will be able to sell surplus credits to companies that have been less innovative.

Other regions of the country are paying close attention to the Los Angeles program.

"We've been working with them to tap into some of their experience," Ms. Gade says. Midwestern industry has reacted favorably and environmentalists, though cautious, are also looking at the idea, she adds. "I don't think we're going to have tremendous resistance to moving forward on this."

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