IN what would be the most ambitious free-market experiment of its kind, authorities here are considering setting up a "smog exchange" to try to clean up the nation's dirtiest skies. Businesses would be allowed to spew a certain level of pollutants and could buy or sell smog shares depending on whether they were ahead or behind in meeting their limits. The right to pollute would become a commodity like soybean futures.
The move would mark a dramatic departure from conventional efforts to control smog by regulating individual pollutants.
It would provide a far-reaching test of the ability of market incentives to curb pollution - a prospect that excites big business, worries some environmentalists, and has the rest of the country watching to see what the nation's premier laboratory for smog-busting will do.
"This goes to the heart of clean-air policy in this country," says Larry Berg, a political scientist and member of the board of the South Coast Air Quality Management District (AQMD), the local authority studying the concept.
Emissions trading is an idea that has been around for years but is only beginning to emerge. The federal Clean Air Act passed last year includes a program allowing pollution trading among utilities that produce sulfur dioxide, a source of acid rain.
Several cities operate pollution "offset" programs. Under these, a firm wanting to build a new plant is required to reduce smog in an area to make up for pollution the expansion would create. It can do this by buying smog rights from another company that has closed or cut emissions.
The market being considered by the AQMD would go way beyond this. It would institute smog trading among as many as 24,000 factories, refineries, bakeries, and other facilities that produce nitrogen oxides and hydrocarbons - two key components of smog - in the four-county Los Angeles basin.
It would be the world's first mass market for pollution trading.
A special committee appointed by the AQMD has been studying the idea for months. It is expected to make a recommendation to the AQMD board around the end of the year.
If adopted - and AQMD officials say it has a good chance - the agency would scrap nearly all the regulations it has been devising for these polluters for the next 20 years to help meet federal air-quality standards.
Until the trading concept is approved, however - something that would require a nod from both the state and US Environmental Protection Agency - AQMD will continue to work on its conventional rules. EPA officials, who are interested in market-based approaches to reducing smog, have been cautiously optimistic about the new approach so far.
UNDER the trading scheme, the agency would establish a benchmark level of pollution that each company could emit, represented by a certain number of shares. Each year the firms would have to reduce their nitrogen-oxide emissions by 5 percent and hydrocarbons by about 7 percent.
To do this, they could either install new technology, close a plant, or purchase shares from another company that had reduced emissions beyond its requirement.
Big business considers the current regulatory approach too costly: Estimates of complying with the AQMD's present 20-year plan run from $4.9 billion to $10 billion a year.
Instead of mandating a technology or process, such as the current rules do, emissions trading would allow companies to choose how to meet limits. There would be a financial incentive for them to clean up stacks, since they could accumulate valuable shares by surpassing prescribed limits.
"It would make it profitable for them to reduce emissions," says Robert Wyman, an attorney representing a group of oil, aerospace, and other companies that favor the idea.
Yet there is concern about what emissions trading would mean for small businesses. They might be tempted to sell shares and close down, or they may not have the financial resources to compete with big companies in buying pollution rights. To avoid this, AQMD is looking at establishing a "smog bank" that would offer pollutions rights to small firms at reduced rates.
Environmentalists are divided about the idea. While some believe in the concept of market incentives to control pollution, they want to see how AQMD fashions the program before going along. One enticing aspect: Environmentalists could buy up smog shares and keep them out of circulation to help lessen pollution.
"This is either the revolutionary system that is going to clean up the air in Los Angeles, or it is the savings and loan fiasco of environmental regulation," says Tim Little of the Coalition for Clean Air.
Critics wonder whether emissions trading can be enforced. If a refinery could not meet its limit and bought pollution rights from three auto-body shops, regulators would have to verify there had been actual smog reductions, not just shuffled paper.
There are other problems, too. Ozone-forming gases released by a bakery may not be as damaging as ones from a plating plant. Thus, says Dr. William Carter, a chemist and member of an AQMD advisory board, trades can't be based solely on the amount of pollutants given off.
Management District officials believe they can devise a workable market but acknowledge enforcement is the Achilles' heel. Jack Broadbent, AQMD program manager for market-incentives development, calls it the "overriding consideration," though the agency will also evaluate the plan based on cost, impact on jobs, and other factors.
While emissions trading might reduce overall smog, a factory that buys rights to pollute could endanger the health of residents in a local area. Mr. Broadbent says "threshold" levels may have to be established to avoid local pollution "hot spots."
All of this underscores the complexity of shaping a market in dirty air - at least one politically acceptable.
As a dubious Larry Berg puts it: "We better get to the bottom of all this before we move forward."