A DOZEN YEARS ago, when I first lived in the US, the great environmental terror was not global warming, but acid rain. Sulphur dioxide pollution from industrial smokestacks and nitrogen oxide, mainly from vehicle exhaust, was combining with moisture in the atmosphere to form acids that killed lakes and forests and threatened human health. I read so many warnings about acid rain that I took to wearing a hat in inclement weather, convinced that my hair was falling out due to gradual chemical erosion.

But then, almost overnight, those looming clouds of acid rain cleared. The tales of acidulous devastation stopped. I gave up wearing my hat.

The solution to the acid rain problem turned out to hinge, in large part, on the simple and cheap application of a free market in pollution.

In 1995, the world’s first emissions trading floor opened in Chicago. The idea was revolutionary. The amount of sulphur that each factory could belch out was capped, and each plant was issued with a permit to pollute up to a given level, with the total pollution set at a fraction of existing levels. Those plants that emitted more than their allocation either had to cut emissions, or buy permits from companies with allowances to spare. Market forces thus conspired to reward those who reduced pollution, and penalise those who produced it. The price of the permits rose from $100 a tonne to $800 a tonne, and in the space of a decade, US sulphur emissions halved from 18 million tonnes a year to just nine million. The savings in healthcare costs alone are estimated at $22 billion a year. My hair, however, continued to fall out.

And which US president presided over this singularly imaginative and highly effective approach to combating atmospheric pollution? Step forward George Bush Sr, the unsung acid rain-man.

George W. Bush finished off his father’s war in Iraq. If only he would follow his father’s example in the battle over climate change, the world might be able to take on the challenge of global warming as effectively as it has tackled acid rain. At the G8 summit next week Mr Bush has a opportunity to put America’s weight behind a world system for trading in permits to emit carbon dioxide, the chief gas contributing to global warming. That way, we might just be able to trade our way out of environmental disaster.

The principle of carbon trading is the same as that for sulphur emissions, and the mathematics are compelling. Companies are allotted a fixed carbon allowance, which may be bought and sold: heavy polluters that exceed their levels can buy additional permits from those with a surplus. The outcome is that the emission reduction target is met, but at a much lower cost than would be incurred by requiring each entity to achieve the target on their own. The market mechanism thus rewards good behaviour, by making it cheaper to do the right thing.

Several carbon trading schemes are already under way. The EU carbon market successfully launched earlier this year, and other countries are considering joining the European system, including Switzerland, Norway, Canada and Japan. Even California (a world away from the rest of America in terms of environmental responsibility) may join in. BP has had a carbon trading system between group companies up and running for seven years: in a three-year period, emissions were cut by one fifth. Similarly, a group of multinationals has voluntarily formed to trade privately on the Chicago Climate Exchange.

The global emissions trade is potentially enormous, given the 25 billion tonnes of carbon pumped into the atmosphere every year, and some analysts predict that a few decades from now, carbon trading could be the biggest financial market in the world, dwarfing gold, oil and cash equities.

There is even talk of applying the principles of international carbon trading to the domestic economy. In theory, each individual could be issued with a carbon quota: those who wished to exceed their allotment by driving multiple four-wheel-drive cars or using a helicopter to get to the golf course would have to buy supplementary emissions permits from those who do not use up their quota.

But long before such a radical move, there needs to be global acceptance of the idea that energy conservation and reduced carbon emissions can be bought and sold. By far the largest polluter, of course, is the US, and without American participation the prospect of a genuinely global, properly regulated carbon-trading market seems distant. President Bush remains adamantly opposed to capping emissions, arguing that this would impede the US economy. Ironically, US corporations believe that they could make big money in a global carbon-trading system, but until the US regulates emissions and issues pollution permits, they have nothing to buy or sell.

Mr Bush should embrace global curbs on emissions now, because if these do not come during his presidency, they will most assuredly come after it. Already there are signs of a change of mood in the US, in both political and corporate circles. This year more than 150 American cities have signed agreements to meet emission-cutting targets, and a growing number of corporate chiefs, most recently Jeffrey Immelt, CEO of General Electric, have called for domestic control of CO² emissions. Last week the US Senate considered two different bills containing proposals, supported by several prominent Republicans, for a US carbon-trading scheme.

Would this be as prohibitively expensive and economically damaging to cut emissions as the White House claims? The Economist estimates that copying the system of controls already in place in Canada would cost 0.5 per cent of US GDP by 2025, which seems a mighty small price for a planet.

President Bush told The Times this week: “Greenhouse gases are creating a long-term problem that we have got to deal with.” But in the short term, many companies are unlikely to accept green energy technology without some form of compulsion: by far the most market-friendly way to achieve this is by allowing good environmental behaviour to be traded on the open market.

Mr Bush also spoke of his desire, next week at Gleneagles, to take a walk with Laura in the Scotch mist. He might reflect, as he does so, that one of the reasons he is not walking in Scotch acid is due to a pioneering act of environmental capitalism back in his father’s day.

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