Unintended Consequences and Diminishing Returns
I've previously highlighted Southern California's success at cleaning up its air. Yesterday's New York Times included a fascinating and lengthy article on the subject. It goes into some detail on how L.A.'s historic problem with ozone pollution was brought under control, while describing a new, growing problem with roots in a classic unintended consequence. However, there are a couple of points worth adding, relating to useful lessons and possible future consequences.

Somehow, the impact of pollution abatement on gasoline prices in Southern California escaped mention, even though it was a clear harbinger of subsequent price spikes elsewhere. Starting in the 1980s, the specifications for gasoline sold in the South Coast Air Quality Basin became much more restrictive than in the rest of California or in other states. This effectively turned Southern California into a remote island. Fortunately, the island was normally self-sufficient, with a large concentration of oil refineries.

Whenever a local refinery problem restricted gasoline supplies, though, obtaining replacement supplies elsewhere entailed extra cost and time lags for blending and shipping the so-called "L.A. Spec" gas. As a result, pump prices jumped by 5-15 cents per gallon--on a much lower base than today's--depending on the magnitude and duration of the outage. I experienced this firsthand a number of times, as Texaco's lead products trader for the West Coast in the mid-to-late 1980s. In fact, this was the beginning of the Balkanization of gasoline specifications that has contributed to supply disruptions and price excursions in other locations, including the price spikes in the Midwest a few years ago. The whole country could be facing this on a larger scale next year, as companies like Valero voluntarily phase out the use of MTBE, as a consequence of the failure of the Energy Bill to provide litigation protection for the industry.

Even though Angelenos have willingly paid this premium for cleaner air, control of auto emissions in the region is approaching a point of diminishing returns. Short of eliminating these emissions altogether--something that is still years or decades away--pollution from cars may be overshadowed by the particulate emissions of the diesel engines associated with L.A.'s burgeoning foreign trade. As imports from China and the rest of Asia have grown, more and more ships, trains and trucks have converged on the freight nexus of Southern California's ports. The article makes clear that addressing this source of pollution will be tricky, for many reasons.

Regulators will face particular challenges in reducing the sulfur of the fuel that ships burn. Bunker fuel, as it is called, is the final residue of the oil refining process. It contains very complex hydrocarbon molecules and impurities and is the most expensive fraction of the barrel to clean up further. In fact, hundreds of thousands of barrels per day of this material have vanished from the market in the last 30 years, as refiners turned it into more valuable products like gasoline and diesel, using various conversion processes. Faced with a choice between removing most of the sulfur from this fuel, or turning it into gasoline, some refiners will opt for the latter, even if this means massive investments. So whether it's cleaned up or transformed into something else, the fuel that shipping companies will buy in the future will become more expensive. That extra cost will eventually find its way into the price of the goods we import.

Finally, even after thirty years, I'll never forget the first time I drove to L.A. from Northern California. The smog was so bad that you could taste it, and after a couple of days my car had acquired a layer of shiny, metallic-looking dust. I subsequently spent 10 years in L.A., off and on, and by the time I left in the early 90s, there were many more clear days than smoggy ones. That was a tremendous achievement, involving the efforts of state and local regulators, citizens, and industry--even if the latter sometimes had to be dragged kicking and screaming. But as the Times article suggests, replicating this success with a different pollutant will require new thinking and novel strategies for dealing with another set of stakeholders. The risks of getting this wrong could be even larger than they were with ozone.