Now, One Company's Poison Is Another's Cash

With more than a hint of understatement, Paul M. Ashline calls it "a teeny-weeny deal." Thanks to a shift to burning low-sulfur coal in its generating plants, Wisconsin Power & Light Co. will emit fewer pollutants than allowed under federal clean-air laws that go into effect in 1995. So in May, it sold two other utilities some of its excess right to pollute, which will let them emit up to 35,000 more tons of sulfur dioxide than they could otherwise. The buyers, Duquesne Light Co. and the Tennessee Valley Authority (TVA), get breathing room before having to cut their emissions. And Wisconsin Power gets up to $14 million.

A gathering horde of would-be salespeople is hailing this deal as the first step toward a huge market in so-called pollution credits. The "for sale" sign is currently restricted to sulfur dioxide, but there's already talk of peddling other air toxics such as mercury, chromium, and arsenic. "It's the opening gambit," says Richard L. Sandor, executive managing director of Kidder, Peabody & Co. He's also chairman of the Chicago Board of Trade committee that will set up futures trading in SO credits in 1993. No one knows how big the market will get, but at least one $100 million deal is in the works. And Sandor thinks sales of emissions credits will reach into the billions one day.

ONE WAY OUT. The impetus for all this is the Clean Air Act. Under 1990 amendments to it, U.S. utilities must cut annual SO emissions from the 20 million tons spewed out in the mid-1980s to 8.9 million tons by the year 2000. To reach that goal, beginning in 1995 the law imposes strict limits on how much utilities can pollute. There's a way out, however. Utilities that emit less than the allowed levels--say, because they have installed scrubbers or switched to low-sulfur coal--get credits they can peddle. Noncomplying utilities can avoid fines by purchasing these credits, which allow them to exceed the restrictions by a given amount. Utilities may choose this option if they don't want to install costly scrubbers or switch to low-sulfur coal right away. "It buys flexibility," says Joseph E. Shefchek, WP&L's director of environmental affairs and research.

In the Wisconsin deals, Duquesne Light in Pittsburgh will buy the right to emit up to 25,000 tons of SO, and the TVA gets rights to 10,000 tons. Based on what it would otherwise cost to comply with the standards, the utilities negotiated a price of $250 to $400 a ton. That means the combined total is worth as much as $14 million to WP&L.

Dealmakers such as Ashline say that's just the beginning. He's vice-president of business development at Pure Air, a partnership of Air Products & Chemicals Inc. and Mitsubishi Heavy Industries Ltd. Pure Air installs and operates scrubbers for utilities, then guarantees to find a buyer for their pollution credits. With a needy utility already lined up, Pure Air hopes to strike a deal to put scrubbers on two power plants owned by Commonwealth Edison Co. of Illinois. The scrubbers generate 250,000 tons of credits--worth about $100 million.

Such numbers should quickly expand the emissions-credit market. So should the Chicago Board of Trade's decision to sell SO futures alongside those for soy beans and U.S. Treasury bonds. And SO is just one of several pollutants that could become commodities. California's South Coast Air Quality Management District plans to allow trading in emissions of hydrocarbons, nitrogen oxides, and sulfur oxides by 1994. Meanwhile, the U.S. Environmental Protection Agency is under pressure from environmental groups to restrict other air toxics. Robert McIlvaine, who heads an air-quality market research and consulting firm in Northbrook, Ill., feels it's just a matter of time before emissions trading involves other substances (table).

HOW BIG? These markets could evolve slowly. For one thing, notes Robert N. Stavins, an economist at Harvard University's John F. Kennedy School of Government, utilities are highly regulated. So it may take years for state utility commissions to sort out how to pass on the benefits of buying and selling emissions credits--and whether they should go to ratepayers, shareholders, or both. Beyond that, emissions credits may never stimulate the volume of trading other commodities do, since purchasers buy them to use rather than for speculation. Visions of a huge market with active trading are exaggerated, says John B. Henry, president of Clean Air Capital Markets, the Washington firm that put together the WP&L deals. "The number of transactions will be in the dozens and hundreds, not the thousands."

Still, there's wide agreement that market-based approaches--instead of regulation--may be the best way to motivate environmental protection. As an economist, Kidder Peabody's Sandor learned early the doctrine of "free goods"--the concept that air and water are in such great supply that they carry no price. But increasingly that view seems outdated. At least, Sandor notes, air isn't so plentiful that companies and people can continue to pollute it without paying for the privilege. "It's like going to a buffet," he adds. "You overeat if there's no price." The new emissions credits are the first of what may be many attempts to set that price.

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