For Cleaner Skies, L.A. Considers Free-Market Pollution Solution

IN what would be a landmark move, regulators here this week will consider a revolutionary free-market approach to cleaning up smog that could change the way governments tackle air pollution in the future.

They will decide whether to go forward with a plan that would eventually set up a "smog exchange" under which businesses could buy and sell pollution credits like pork bellies.

The aim is to harness the financial incentives of the capitalist system to more effectively and cheaply rid the nation's dirtiest skies of pollutants.

If the method were approved and proved successful, it would likely influence pollution-control practices around the world. As the nation's premier smog-fighting laboratory, southern California has long been a trendsetter in fashioning new regulations and pushing the frontiers of pollution-control technology.

Failure, though, could severely set back the region's efforts to clean up its skies and delay further into the next century the time when Los Angeles will meet federal clean-air standards.

"This could have worldwide impact," says Larry Berg, a political scientist and member of the policy board of the South Coast Air Quality Management District (AQMD), the group that will vote on the market-incentives approach on Thursday. "It could be positive. It could be devastating."

Under the current system, regulators control emissions from factories, refineries, dry cleaners, and thousands of other businesses by specifying the equipment, material, and processes that must be used. Under the new approach, emission limits would be set but companies would be free to choose how to meet them.

A benchmark pollution level would be established for each business, represented by a certain number of credits or shares. Each year the permits would allow less pollution - 5 percent when it comes to hydrocarbons and 8 percent for nitrogen oxides (two main ingredients of smog).

To meet those levels, a company could either install new technology, close a plant, or purchase shares from another firm that had reduced emissions beyond its requirement. Thus, there would be an incentive for companies to clean up stacks: They could accumulate valuable shares.

Emissions trading isn't a new idea. The federal Clean Air Act allows pollution trading among utilities that produce sulfur dioxide, a source of acid rain. Several cities operate pollution "offset" programs in which a company wanting to build a new plant can make up for the pollution that would be created by buying smog rights from another business that had closed a facility or cut emissions.

The market system being considered here, however, would go way beyond this. It would institute smog trading among 2,700 firms that account for the vast majority of pollution in the four-county Los Angeles basin from sources other than automobiles. It would be the world's first mass market for pollution trading.

If the idea gets a favorable nod Thursday, which sources say is likely, the AQMD staff would begin drafting rules. Smog trading would begin in 1994, though the plan would have to be approved by the state and US Environmental Protection Agency.

Business people, environmental groups, labor interests, and others have been involved in the planning of the project, which is unusual in the clean-air movement. Big business, for instance, was one of the early boosters of the idea. It sees the system as a more flexible and cheaper way to meet air-quality guidelines, allowing them to experiment with new control equipment. By one estimate, the new approach could save the business community up to $1 billion a year in the cost of cleaning up the air.

But corporations do have concerns. They are worried about the initial pollution levels that would be set for each company. "I don't think the business community is going to oppose the program," says Robert Wyman, an attorney representing a group of oil, aerospace, and other companies. "But they want to study the issues."

Environmentalists have other problems, enforcement being a chief one. If a refinery could not meet its limit and bought pollution credits from three auto-body shops, regulators would have to verify there had been actual smog reductions, not just shuffled paper.

Labor groups fret that companies might be tempted to close down and sell their smog shares, adding to the problem of business flight from the region. To prevent this, air-quality staffers, are looking at discounting the value of the pollution credits of companies that do leave.

Still, most interest groups believe these problems can be worked out in the early stages. Which means a lot of work - and compromising - lies ahead if smog trading is to move from concept to reality.