Want to buy a Hummer but don’t want to add pollution to the atmosphere? Or maybe you have an old 4×4 and you’d like to be sure that its exhaust doesn’t make the environment worse. Do I have an aftermarket add-on for you!

Try the “economics approach” to reducing air pollution: Make a deal with a neighbor, cutting emissions and making everyone happier.

Let’s start with a hypothetical barter arrangement. I want to buy a Hummer, but I feel guilty because a Hummer dumps 18,000 pounds of CO2 into the atmosphere each year. One of my neighbors wants to buy a Honda Civic, but would be just as happy with a Civic hybrid if it weren’t for the extra cost. The regular Civic sends 6,300 pounds of CO2 out the tail pipe annually compared to the hybrid’s 5,000 pounds. If I give my neighbor cash to make up the price difference between the regular and hybrid Civic, he’s just as happy and I feel less guilty because I’ve arranged to wipe out 1,300 pounds of pollutants.

All I need do to completely eliminate my guilt is to make the same deal with 14 neighbors. Everyone gets the car they want – most importantly me – and zero net pollution has been added to the atmosphere.

Does this barter version of the “economics approach” sound like it was thought up by someone with a few screws loose? Where am I going to find 14 neighbors to make this kind of deal? And this deal would cost me 40 to 50 grand, which is about what the Hummer costs. I’m kidding myself if I think anyone is going to put up this sort of money – certainly I’m not.

In fact, nothing I’ve said is impractical. Using the magic of markets instead of barter, a company named TerraPass has put the economics approach into practice. You pay TerraPass a fee proportional to your car’s CO2 emission. The company keeps some of the fee for operational costs and some as a profit margin. The rest is used to pay for a pollution reducing investment, such as subsidizing equipment to clean up an industrial plant.

There are two reasons why the TerraPass business makes sense. The first is that while finding 14 neighbors to strike a deal is as unlikely as it sounds, it’s not hard to pool fees from hundreds of new car buyers to make a single industrial investment.

The second reason the market method makes sense is that it’s far cheaper to cut industrial emissions of CO2 than it is to cut automobile emissions. Small cars and hybrids produce less CO2 than a Hummer or a 4×4, but not so much less that buying a cleaner car is a cost effective way to clean up pollution. It’s a lot cheaper to reduce CO2 in the atmosphere by investing in wind-generated electricity or, believe it or not, by cleaning up cow manure ponds on large farms!

The numbers are quite striking. The annual cost of eliminating a Hummer’s worth of CO2 is $80, including TerraPass’s overhead and profit margin. On a Hummer, that’s probably the cheapest aftermarket product available. Cleaning up after a Civic hybrid costs $30.

TerraPass is in business to make a profit. Whether it’s a money maker or not, the company has found a great way to send a pair of messages about economics and the environment. Erasing the contribution of auto emissions to global warming isn’t all that expensive, but tinkering with auto technology or trying to persuade consumers to buy teeny cars isn’t the efficient way to do it. For those who are into the environment and into efficiency, a TerraPass might well be the right way to go.

Dick Startz is Castor Professor of Economics and Davis Distinguished Scholar at the University of Washington. He can be reached at econcol@u.washington.edu.