The Environment: Wish List in La-La Land

The EPA sits perched like a giant atop the San Gabriel Mountains overlooking Los Angeles, sniffing the air disapprovingly and tapping the billy club of Clean Air Act sanctions in the palm of its hand. For two decades, the South Coast Air Quality Management District has faced the task of meeting federal and state air quality standards for an area covering 13,350 square miles. Angelenos have mostly ignored AQMD officials. But now, those officials are saying smugly, if you don't start listening to us, you'll have to deal with Mr. EPA.

With Washington threatening to impose its own measures if Los Angeles doesn't, the AQMD in March approved a master plan for cleaning up the air. It is being watched closely in cities and states across the nation.

The first stage of the plan alone proposes 120 measures to control emissions. Using lighter fluid on your backyard barbecue during "summer smog episode days" will be an air crime. Only radial tires will be allowed. No more gas-engine lawn mowers or chain saws. Underarm deodorant: banned.

The plan itself, of course, speaks in no such straightforward terms. It proposes "requiring reformulation of [underarm] products with less reactive components" or that "all non-utility internal combustion engines not used for emergency standby be phased out and replaced with electric motors."

The main focus of the plan, though, is vehicle pollutants. It calls for $44 billion or so in new transit and highway facilities, converting most vehicles to solar power or methanol fuel, forcing businesses to locate in residential areas, limiting the number of family cars, and putting 60 percent of the workers in the four-county area on alternative schedules: nine-day, 80-hour or four-day, 40-hour work weeks. The AQMD has made no small Plan.

Some of the technologies required to effect it, admits the AQMD, "may not exist yet." And critics say that many of the measures will not improve the air nearly as much as the AQMD hopes and might even cause more damage. No one really knows, for example, the environmental effects of substituting methanol, which yields the byproduct formaldehyde, for petroleum.

The good news is that the plan will never become law in its present form. Many of the measures await approval from all sorts of governmental entities, from local zoning boards to regulatory agencies such as the FAA. The usual lobbyists will turn out in force to oppose them.

The bad news is that while not all of it will become law, parts of the plan surely will. And the AQMD's approach to cleaning up the air is fundamentally and systemically flawed. The underlying assumption is that regulators can assess overall air quality in the Los Angeles basin; can understand the interactions and operations of everyone and everything that pollutes; can design alternatives to virtually everything in society from gardening to manufacturing, from cosmetics to transportation, taking into consideration the aggregate air pollution effects of these alternatives; and can impose, monitor, and enforce each of their dictates. Even without consideration of cost-effectiveness or least-cost solutions, this is a Herculean task.

Fortunately, there is an alternative to such command-and-control approaches. Most people share the goal of improving air quality and are willing to pay to achieve it—despite the hue and cry from critics about how much the plan will cost (pro and con estimates range from $3.9 billion to $12.8 billion annually). The problem with the plan is not that it will cost but that it gives area residents little choice about how to go about achieving cleaner air.

Admittedly, in the absence of regulation, people do not freely incorporate pollution control measures into their lifestyles. Any move to stop treating the air basin as a "free good" is going to cost. But instead of requiring specific technologies or prohibiting particular processes, the AQMD would do far better to establish practical, enforceable air-quality levels and let people search for the least-cost means to achieve them. Under a variety of emission pricing schemes, all types of emissions—residential, commercial, industrial, and agricultural—could be reduced by encouraging "markets" in air quality.

The basic idea behind such markets is to improve air quality by charging polluters for the costs they impose and compensating people who make investments in antipollution equipment and processes. When we have a financial incentive to care about the level of pollution we generate, we will undertake measures to reduce our "pollution bills," just as skyrocketing oil prices induced voluntary conservation.

Suppose, for example, that the AQMD simply required all industries to reduce emissions by 5 percent by some date (varying percentages could be established for sulfur and nitrogen oxides, carbon monoxides, hydrocarbons, and so on). Companies that have already invested in pollution control could be exempted from the first phase. Alternatively, on a sliding scale, the worst offenders could be required to reduce emissions more than less-polluting companies. Polluters would pay for emissions above the specified level.

Rather than dictating each technology or process that every industry must use, such an approach would allow individual firms to decide the least-cost, most convenient ways to reduce air pollution. The polluters, who know more about their own production technology than most regulators, could choose the level of emissions they will produce while taking into consideration the efficiency of alternative processes.

There are other ways, too, to use the pricing mechanism to control pollution. In an emissions trading scheme, polluters who go over the limit can purchase "emission reduction credits" from companies whose pollution levels are below the standards. For example, if Arco has developed a new process that cuts its release of hydrocarbons below the mandated level, it could sell those rights to DuPont if DuPont has not managed to meet the level.

Current EPA regulations allow for such trades, and they are even being used to reduce the aggregate pollution levels in a basin. With each trade, some pollution rights are "retired." To exercise 100 pollution rights, for example, a company must purchase 110 rights and retire 10. Overall pollution in the area is the better for it.

Several companies have emerged to broker trades in air rights. They locate buyers and sellers, appraise the market value (hydrocarbon offsets in the Los Angeles area, for example, currently sell for $500–$1,500 per pound per day), assess the cost of producing an emission credit by installing pollution control, act as liaisons with regulatory agencies, and so on. Since 1976, over 2,000 emission credits have been traded.

Emission charges and emission trading have tremendous advantages over the command-and-control approach. They certainly offer impressive efficiency by "assigning" the task of pollution reduction to the firms that can do it at least cost. If a charge of $100/ton is implemented, for example, all firms that can reduce emissions by investing less than $100 per ton will do so. Those that can cut emissions at least cost will be the ones that reduce pollution—something no regulator has sufficient information to achieve.

Pollution from vehicles can be addressed in much the same way. As car owners we are accustomed to paying license plate fees, insurance fees, and so on, but we are not yet paying the pollution costs of our driving habits.

The AQMD proposes to deal with the problem by commanding specific behavior: businesses must relocate and workers must change their schedules so that commuting will be reduced; families must get by with fewer cars; etc.

Instead, the regulators charged with cleaning up the air over Los Angeles could establish specified levels of emissions for each business and household based on the number of people of driving age. Those exceeding the limits would have to purchase emission credits from others. This way, those who are adding to the congestion and air pollution would pay extra, and there would be financial incentives for consumers to purchase less-polluting vehicles and for industry to supply them. As the population rises, the AQMD could tighten the exchange rate for credits.

Alternatively, if the volume of traffic is contributing to pollution, the AQMD could go for a number of other measures that would let people choose how to adjust. Instead of trying to change the jobs/housing balance by forcing businesses to locate in residential areas, it could press for the repeal of zoning laws that currently keep them out. Instead of making workers change their schedules, it could get local governments to deregulate taxis, van pools, and shuttle services. Instead of mandating a limit on the number of registered cars in the basin, it could see that highways are converted to toll roads and rush-hour access priced as a scarce resource, giving people incentives to drive less and use less-polluting public transportation.

The proposed Air Quality Management Plan continues the government tradition of setting unrealistic goals for environmental quality and imposing inflexible, top-down mechanisms for achieving them. Past federal legislation set the water pollution goal of "zero discharge" into the nation's waterways. And it has remained just that—a statement of goals. Similarly, the AQMD plan seeks to put the Los Angeles basin in compliance with federal clean-air standards by 2007—using control measures whose emission reductions are highly speculative and whose true costs are yet to be revealed. This plan, too, is likely to become just a statement of goals on the environmental wish list.

Jo Kwong is a research associate at Capitol Research Center in Washington, D.C. She recently completed a study of the AQMD proposal for the Reason Foundation.