Selling Air Pollution

The politics go in before the market goes on.

Markets are about freely buying and selling, not arguing with bureaucrats. Markets for the right to pollute--a still unusual but growing phenomenon--are different. Witness the drama in the main conference hall of Southern Califor-nia's South Coast Air Quality Management District's Diamond Bar headquarters on a warm, slightly smoggy November morning.

SCAQMD specialists rise one by one to the podium, facing a dense crowd. They hype their new "technology review"--a study of how local businesses could comply with the SCAQMD's proposed new demands to reduce volatile organic compound, or VOC, emissions in Southern California. Those demands are part of a planned extension of Southern California's RECLAIM (Regional Clean Air Incentives Market) program, one of the new breed of emissions-rights-trading programs. RECLAIM covers sulfur dioxide and nitrogen oxide emissions in Los Angeles, Riverside, Orange, and San Bernardino counties, and affects about 300 polluters. The program orders gradual emissions reductions until the year 2003--but with a twist: Instead of just reducing as commanded, polluters have the option to buy and sell the right to emit the pollutants.

When the bureaucrats finish their spiel, dozens of frustrated representatives of various small and large Southern California businesses stride up to the microphone--men and women, young and old, in business dress and flannel. They're independent consultants, small printers, employees of huge companies like Northrup Grumman, members of task forces and think tanks. All of them work in some way with paints and coatings--an unsexy subject, but the prime industrial sources of VOCs. All of them feel their livelihoods threatened by the SCAQMD's conclusions.

They explain--some patiently, some not--to the SCAQMD bureaucrats lined up before them that those bureaucrats are talking through their hat. Market or no market, no way, no how, can SCAQMD's proposed standards be met. When the meeting ends, most of them hang around, milling about and chatting. These people know each other well through the multi-year battle over what a VOC RECLAIM program might look like. I talk to some of them later.

Robert Wyman is a young lawyer representing the Regulatory Flexibility Group, a coalition of aerospace, chemical, entertainment, and automotive companies coping with air-quality regulatory hassles. He's a local point man on the issue, the man most likely to get buzzed by the Los Angeles Times for a quote on industry's position when a story on air-quality regs breaks. People underestimate the importance of the ...stuff...at issue with VOC reductions, Wyman says: paints, lacquers, and coatings for boats, planes, and furniture. Those substances are of more than cosmetic interest, especially in aerospace, one of California's biggest industries. "Coatings are the front line against corroding of metal," says Wyman. "They also include bonding primers that help parts stay together, so these substances affect the strength of the structure."

The SCAQMD assured its audience that plenty of low-VOC coating substances and methods are plausible; achieving the proposed reductions would be no problem. Wyman, like everyone else who spoke after the SCAQMD presentation, disagrees. "There are product performance requirements, sets of qualifications, salt spray tests, all these tests to make sure we can use these products and that they do what they need to do. We've found that no more than 50 percent of what's promised actually performs. Maybe even 20 percent. It's a sad performance rate. We have 20 years of experience trying to develop coatings to solve these problems, and we don't think it can be done. You can't replace 40 years of solvent technology in a day."

Millie Yamata, a prim, well-composed woman representing military aircraft maker Northrup Grumman at the meeting, agrees. Before her company can use a new coating, she says, "We need lots of lab development time. The whole process from a manufacturer's lab sample to the day we put it on a plane can be seven to eight years." The SCAQMD wants them in place in a couple of years.

Ed Laird was especially incensed with the SCAQMD's review. He runs a coating development company and also chairs the Small Business Coalition of California. He's been lobbying on this issue for five years, and fears it was all wasted time. While he's listed as a data source in the technology review, he insists SCAQMD never talked to him. SCAQMD is playing a dangerous game with the economic health of Southern California, he insists. "No company that uses any sort of paint, cleaner, solvent, or adhesive will come into this four-county area. It just wouldn't be wise."

And for all of the brouhaha, the proposed program, which would hit only those emitting over four tons of VOCs a year, would have affected only around 5 percent of the VOCs emitted in Southern California. A lot of the pollution comes from numerous tiny stationary sources. And much of it comes from cars.

Unfortunately, as L.A. environmental consultant John Bellheimer notes, people in California "don't like to realize that Pollution-R-Us. They like to think it's factories. They always say no when someone tries to curtail free driving. Pollution cutting is very dear to the public's heart as long as it doesn't hit home."

For now, those with grievances at that November meeting have won. In early January, SCAQMD announced it was abandoning its plans to extend RECLAIM to VOCs.

Business lobbying bureaucrats? Looks more like politics than markets. But this jockeying for advantage is a necessary prelude to any venture into "market" solutions to air pollution problems. Despite years of experience, no one's figured out how to take the politics out of the market in pollution allowance trading.

It wasn't supposed to be that way. Since the federal Clean Air Act of 1970 was passed (as much because of polluting industries' desire to make an end run around state regulation as from growing environmental consciousness), air-quality control mostly has worked through "command-and-control"--government telling polluters how to do things as well as what to do. Command-and-control has large bureaucratic costs, can stifle innovations, and doesn't encourage anyone to do any better than the law demands.

Efficiency-minded economists had been toying for years with what might be a better way: pollution-rights markets. Instead of ordering how, the government could just command how much and allow businesses to cut compliance costs--and potentially to profit--by trading licenses to pollute. Those ivory tower ideas have gotten some trial runs in the real world. The Environmental Protection Agency allowed trading in lead credits while phasing out lead from gasoline in the '80s. The EPA also allowed small-scale trading of emission rights for an assortment of pollutants--including sulfur dioxide, carbon monoxide, and nitrogen oxides--beginning in the mid-'70s. Because of the complicated bureaucratic nature of the program, those markets showed little life. Economist Robert Hahn, now of the American Enterprise Institute, concluded that the early programs caused negligible additional harm to the environment while still saving billions of dollars in total permitting and emission-control costs.

Emission-rights trading scored its biggest national success when Title IV of the Clean Air Act Amendments of 1990 created the largest-ever national pollution market. The market was among electric utilities, and the commodity was sulfur dioxide--targeted for its alleged role in causing acid rain.

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