George H.W. Bush understood that markets and the environment weren’t enemies

Former President George H.W. Bush, who died on Nov. 30, was admirable for many reasons, from his skillful leadership through the end of the Cold War to his personal warmth and courtesy. As an environmental economist, I believe his approach to conservation also deserves attention.

Bush majored in economics at Yale and was a skilled politician. He believed that market-based solutions could protect the environment at lower cost than the command-and-control strategy that was more typical in the 1970s and 1980s.

Under that approach, regulators ordered each polluter to install the same equipment to reduce emissions. This could be cost-effective if all polluters used the same technology, but in modern economies, firms rarely have similar management or the same operating equipment. Bush was willing to test the idea that setting pollution reduction targets and letting regulated firms decide how best to achieve them could lead to better outcomes.

Markets for clean air

In June 1989, Bush proposed what would become his most important environmental achievement: the Clean Air Act Amendments of 1990. This sweeping legislation used a market-based approach to halve sulfur dioxide emissions from coal-fired power plants, which reacted in the air to produce harmful acid rain.

This pollution was generated mainly by coal-fired electric utilities in the Midwest, but winds carried it into New England and mid-Atlantic states, where it damaged forests, rivers and lakes. States where the pollution was produced had little incentive to regulate it because the costs were borne by others far away. In a 2011 study, Nobel Laureate William Nordhaus and others estimated that coal-fired power plants generated social costs – including acid rain – that could equal or exceed the value of the electricity they produced.

President Bush followed the advice of economists who recommended introducing a national market where utilities could buy and sell the right to pollute. This approach made sense for mitigating acid rain because utilities differed with respect to their cost of reducing emissions. Utilities in states such as Ohio had much higher emissions, and a greater scope of emissions reductions possibilities if they were required to cut them.

President George Bush presents a pen he used to sign the Clean Air Act Amendments to EPA Administrator William Reilly, left, Nov. 16, 1990 as Energy Secretary James Watkins looks on. AP Photo/Charles Tasnadi
Under the legislation, each utility would receive an allotment of permits, proportional to its past emissions, that allowed it to release a fixed amount of pollution. The total number of permits was set at a level that would reduce national emissions by 10 million tons relative to the 1980 level, phasing down over time. Each company could use its permits to cover its emissions, or sell any permits it did not use at the market price. If a utility could reduce its emissions for less than the going market price for a permit, it could make those reductions by whatever means it chose, then sell the permit and keep the difference.

This approach encouraged utilities to hire environmental engineers to update their production processes and find cleaner strategies, such as switching to lower-sulfur coal. It created dynamic innovation investment to discover new strategies for producing power while creating fewer emissions.

The legislation passed the Senate 89 to 10 and the House 401 to 25. Such bipartisan support for environmental regulation is rarely seen today. “Every city in America should have clean air,” President Bush said as he signed it. “With this legislation I firmly believe we will.” And studies show that he was right: The program successfully reduced sulfur dioxide emissions at a lower cost than the command-and-control method.