Market-based environmentalism.

The Progressive Policy Institute detects an emerging consensus

You wouldn't know it listening to this year's presidential campaign, but there is a new consensus emerging about how the U.S. can achieve both a clean environment and a growing economy. Support is building across party and ideological lines for a set of market-based approaches to environmental protection that hold the potential to cut business compliance costs, reduce regulatory bureaucracy, spur innovation on clean technologies, make the nation's tax system more pro-growth, and even improve public attitudes toward government.

The basic notion covers a range of specific ideas: "green taxes" that tax emissions; tradable permits that create a market for pollution control; and "deposit refund" systems, long used for returnable bottles, which also can be applied to hazardous substances, such as lead-acid batteries. All aim to incorporate environmental concerns into the daily, decentralized decisions of firms and individuals -- by giving them a direct financial incentive to conserve resources, reduce their output of wastes, or to dispose of wastes in environmentally sound ways.

While the nation's first generation of environmental laws stressed clean-up of dirty sites and "end-of-pipe" industrial regulations, the emphasis in the next generation of environmental policy will be more on preventing pollution before it happens. Market-based policies accomplish that goal by making polluters pay for the real cost of their pollution. In the parlance of economics, they "internalize the externality."

Market-based environmental policy isn't a new idea. Economists have pushed it for decades, and it has been applied on some past challenges, such as the phase-out of leaded gasoline. But these approaches have come of age in the last few years and now are being applied to some of our biggest environmental problems:

* Air pollution. The centerpiece of the 1990 Clean Air Act amendments enacted by Congress and President Bush was a system of tradable pollution permits aimed at encouraging the greatest reductions in air emissions by those electric utilities who can do so least expensively.

* Solid waste. Many cities, like Seattle, have addressed their rising solid waste costs by adopting "pay per toss" systems that bill households more if they put out more trash for pick-up, rather than charging a flat monthly fee, which effectively subsidizes big dumpers and non-recyclers.

* Cleaner, more fuel efficient cars. One approach, dubbed "cash for clunkers," pays a bounty to people who scrap older, dirtier cars; firms under the regulatory gun to reduce their air emissions can pay for a sufficient number of bounties as a cheaper way of meeting their targets. L.A.'s Unocal helped pioneer this idea, and California is considering it as state policy. Maryland recently adopted a "feebate" approach that pays a bonus to purchasers of high-mileage cars, funded by a tax on purchasers of low-mileage cars.

Such approaches offer a cheaper way to meet our environmental goals, and are especially attractive at a time when economic growth is moribund and the nation's environmental compliance efforts cost us $130 billion annually. The Bush administration estimates that its tradable permit system for controlling air pollution may reduce compliance costs by $1 billion annually. Market-based approaches can save the public sector money as well. When the town of Perkasie, Pennsylvania started pay-per-toss billing on trash pick-up, its trash volume and costs fell by about half.

Green taxes also spur clean innovation. Many existing regulations tell firms exactly how much pollution they can emit, or specify what kind of pollution abatement technology they must use. Such "command and control" regulations can stifle innovation: once firms come into compliance, they have little reason to reduce emissions further. Demand for new and better abatement equipment falls accordingly. This dynamic may help explain why U.S. environmental firms were so under-represented at the trade show at the Earth Summit in Rio de Janeiro in June, and why foreign firms now supply so many of the pollution control devices used in the U.S.

By contrast, both pollution taxes and tradable credit systems give firms a constant incentive to find production methods and technologies that control pollution more cheaply. The result is rising domestic demand for more innovative technologies. That can help expand a sector that already accounts millions of U.S. jobs, and can help our suppliers of environmental products and services sharpen their competitive edge in a global market that is estimated at $300 billion a year and growing fast.

Green taxes can help tilt the US. tax system toward productivity. Taxing pollution raises money, which can then be used to lower taxes on productive factors, such as labor and capital. A recent study for the U.S. Environmental Protection Agency concluded that if the U.S. adopted a carbon tax (to help combat global warming) but then returned the resulting revenues in the form of lower payroll and capital taxes, it could help the economy: "substituting carbon taxes for other distorting taxes |e.g., payroll, income, and capital gains taxes~ could potentially improve economic efficiency beyond the gains from reducing CO2 emissions, and could have beneficial macroeconomic as well as long-run growth impacts."

Market oriented environmental policies may even help change the public's attitude toward government in subtle ways. Recently, I asked one of my neighbors if he participates in our county's curbside recycling program. "No," he responded, "Why would I waste my time doing something for the government?" I imagine he'd feel differently under a pay-for-toss system. Then, any effort he put into recycling would lower his own trash bill. The county would probably see recycling increase, and it would be fueled not just by altruism, but also self-interest.

If market-based approaches can help environmentalists, firms, and communities, why haven't they been adopted more widely before now? Part of the answer lies with the history of the environmental movement. As environmental experts Robert Stavins and Bradley Whitehead note in a recent Progressive Policy Institute study on green taxes, "many of the environmental efforts of the 1970s and early 1980s viewed 'the market' as the villain in the 'pollution tragedy.'" Many in the movement were loath to embrace any approach based on markets and geared to address the needs of their adversaries in business. Some activists have criticized market-based systems such as tradable pollution permits as an immoral "license to pollute."

There are other sources of resistance to market-driven environmental policies: environmental bureaucrats who resist change away from command and control regulations they helped create; lobbyists on both sides of the issue whose influence might decline if environmental policy shifted away from the technical and legal specifications they've mastered; politicians who run from policies that involve taxes or fees of any kind; and some business leaders who seemed more enthusiastic about market-based approaches when such ideas had little chance of being adopted.

Now, however, the political dynamics are changing. A new breed of market-oriented environmental activists has gained influence in the movement. A clear sign of this trend came when the Environmental Defense Fund, and later the Natural Resources Defense Council, stepped out of the ranks of environmental groups to support the tradable permit system President Bush proposed for the Clean Air Act.

That change has been complemented by the rise of market-oriented leaders in the Democratic Party, personified by Gov. Bill Clinton. Clinton was one of the first governors to call for a market-oriented "least cost planning" approach that looks to investments in conservation as an alternative to construction of new power plants. In his presidential campaign, he has repeatedly stressed the need for market-based environmental policies -- from the cash-for-clunkers idea to market-based recycling incentives. In one speech, he concluded: "it is time for a new era in environmental protection which uses the market to help us get our environment back on track -- to recognize that Adam Smith's invisible hand can have a green thumb."

This is a welcome development, and it reveals there is far more consensus than all this year's rhetoric about "environmental extremism" would suggest. In fact, both camps now support the notion of integrating "green" concerns with business concerns, and both the economy and the environment are likely to end up healthier as a result.

Jeremy D. Rosner is Vice President for Domestic Policy Institute, the think tank of the Domestic Leadership Council in Washington.