(FORTUNE Magazine) – THE SUMMER OF 1988 will be remembered as the time ''the earth spoke back,'' in the words of one of George Bush's speech writers. The heat and drought, the fouled beaches and burning forests, all seemed to chide us for turning the green earth brown. Since both presidential candidates discovered the environment as an issue and Congress is being prodded by angry voters, a burst of new laws and regulations can be expected under the next Administration. The question is whether we will get the right solutions to the right problems. Heightened concern about the environment is justified. Scientists have detected increasing evidence that chlorofluorocarbons and other chemicals are rising to the stratosphere and eating the ozone layer, which protects life from cancer-causing ultraviolet rays. Carbon dioxide and other gases have accumulated over decades of Industrial Age combustion and threaten to raise the earth's temperature through the greenhouse effect. Little wonder that the environmental movement has swelled in the Eighties, some organizations more than doubling their membership. A coalition of 18 major groups is preparing a ''green blueprint'' of policies to present to the new President and each of his Cabinet members. The next Administration will immediately confront major issues -- acid rain, ozone at ground level and the lack of it in the stratosphere, radon, a further cleanup of PCBs, polluted groundwater, lead in drinking water, and possible environmental damage from oil exploration in the Arctic National Wildlife Refuge. So serious are some of the dangers that many environmentalists are calling for a ''third wave'' of attacks on ecological problems. The first wave came at the turn of the century and was symbolized by Teddy Roosevelt's efforts to save the wilderness. The second arrived in 1962 with the publication of Rachel Carson's Silent Spring, about the effects of pesticides. Riding this wave, the legislation of the Sixties and Seventies went after highly conspicuous sources of pollution in the air, water, and ground with a mass of regulations, requirements, deadlines, and penalties. The cost has been high -- about $78 billion a year lately -- but the movement has won major victories. The pesticide DDT is banned, Lake Erie has come back to life, some 216,000 miles of polluted rivers are swimmable and fishable once more, airborne lead is almost gone, and some other major air pollutants have been reduced significantly. The third-wave attack demands a fresh, third-wave approach that learns from the errors of the past. Congress has been inclined to saddle the nation with laws that are expensive, prone to regulatory and legal hassles, tied to unrealistic goals, and locked into the wrong technologies. The burst of crowd- pleasing legislation passed just before the elections illustrated Congress's old bad habits -- bills to control medical wastes, ban the dumping of sewage sludge in the oceans, renew the Endangered Species Act, and impose new restrictions on pesticides. With a more commonsense, market-oriented strategy, the U.S. could get on with the cleanup without drowning the economy in unnecessary regulation and expense. William D. Ruckelshaus, head of the Environmental Protection Agency in the Nixon and Reagan Administrations, says the U.S. has taken the ''command and control'' approach about as far as it can go. Ruckelshaus, who now heads the country's second-largest waste disposal company, Browning-Ferris Industries, favors greater use of economic incentives wherever appropriate. So do two Senators who resist the congressional rush to regulate: Timothy Wirth, a Colorado Democrat, and John Heinz, a Pennsylvania Republican. In a newly released report they sponsored, they urge that the U.S. harness market forces ''by providing incentives for businesses and individuals to go beyond what regulators can require.'' The two Senators recommend an array of tradable credits and permits, taxes, swaps, refunds, and deposits to tackle 16 major environmental problems. Some of these ideas have been around for years. Since 1979, EPA regulations have permitted the trading of emission credits within an imaginary ''bubble'' over an industrial area. Credits earned in one place where a company cleans up more than the law requires can be applied to another place where permissible pollution levels are being exceeded. A corporation may trade the right to pollute among its own divisions or with another company. Armco, Du Pont, USX, and 3M have traded air pollution credits, and a small market for them has developed. But Congress has been cool to the whole idea and turned down a proposal to tax sulfur dioxide emissions to spur a cleanup of the electric power industry's coal-burning plants. While economists argued that the tax was the most cost-effective method of cutting emissions, environmentalists branded it a license to pollute. Today an increasingly sophisticated and diverse environmental movement sees an advantage in using incentives. Frederic Krupp, executive director of the Environmental Defense Fund, an adviser on the Heinz-Wirth report, sees ''a lot of room for creative approaches that put the economic signals where they should be.'' When it comes to methods, Krupp sounds amazingly like Harvey Alter, a chemist who is an environmental spokesman for the U.S. Chamber of Commerce. ''Instead of giving people a lot of regulations and forms,'' says Alter, ''give them goals and let them figure out how to get there. Congress + has the mistaken belief that you have to beat on people to get anything done.'' Here is a rundown on the nation's leading environmental issues and how they should be attacked:

ACID RAIN Lamentably, Congress shows no inclination to apply common sense to acid rain. Sulfur oxides, largely from coal-burning utilities in the Midwest, have been blamed for acid rain, which falls mostly in the East and in Canada. Scientists are still debating how much damage it is doing to trees and to lake and river life, and some see no emergency. A recent EPA study of 500 streams in the East found that 2.7% of their combined lengths was acidic. An interim report from the ten-year, $500 million National Acid Precipitation Assessment Program, which will complete its work in two years, says that acidity seems not to be getting worse. Proof of damage to forests turns out to be elusive. The death of trees in southern Appalachia was first attributed to acid rain. Now investigators blame it on an insect, the balsam woolly adelgid, though they think acid rain and ground-level ozone may have made the trees more vulnerable. If any business interest should be concerned about identifying acid rain damage, it is the paper industry. Yet Champion International and International Paper report no damage to forests they own in areas where the rain falls. The problem, in short, seems worrisome though not alarming. But Congress has stopped listening. Even conservative lawmakers are persuaded that the country wants action now. Newt Gingrich, a young Republican Congressman from Georgia, says, ''There's no question acid rain is a problem. Industry has lost that battle and is foolish to continue to fight it.'' Many members of Congress are itching to require utilities, mostly in the Midwest, to spend billions installing and running scrubbers to remove the offending sulfur dioxide. No matter that better, cheaper, clean coal-burning technologies are within reach. No matter that a major coal plant cleanup is already under way. Under the 1977 amendments to the Clean Air Act, scrubbers have been installed in 146 new generating units, and many older plants have switched to burning low-sulfur coal. As a result total sulfur oxides have dropped by 21%, even though the use of coal to generate electric power is up 44%. With no new laws, emissions will keep falling as modern plants come on line and old ones are scrapped. It surely makes sense to keep the emissions heading downward until more evidence is in. But Congress's get-tough faction wants a bill that would compel quick action to cut sulfur dioxide far more drastically -- by half within a decade or so. That would require the costly shoehorning of scrubbers into scores of old plants. MANDATING SCRUBBERS is an expensive, technically inferior solution. For every ton of sulfur they keep out of the smokestack by spraying furnace gases with a slurry of limestone and water, scrubbers produce two to seven tons of useless sludge that has to be dumped somewhere. Just to operate a scrubber consumes 3% to 5% of the generating plant's energy. Depending on the final form of the law Congress passes, the utilities would have to spend somewhere between $3.5 billion and $8 billion a year building and running scrubbers. This may be good news for Babcock & Wilcox, Combustion Engineering, Foster Wheeler, and other companies that supply the equipment, but not for utilities and their customers. American Electric Power, the biggest utility affected, claims that unless the costs are shared by other parts of the country, AEP's residential rates would increase 23% and industrial rates as much as 50% -- enough to drive marginal customers out of business. A third-wave solution for acid rain would not oblige utilities and other polluters to install scrubbers, but leave them free to choose the most effective and economic ways to meet air-quality standards. For example, with ''acid rain credits'' proposed by the Heinz-Wirth report, a utility wouldn't be forced to waste money grafting a scrubber onto an old plant. Instead, it could let the old plant live out its life undisturbed, earning the necessary credits to keep it going by reducing emissions more economically in a new plant, or buying the credits from another company that had clamped down on sulfur dioxide. If a cleanup were necessary, a utility could use whatever technology seemed best for the job -- scrubbers, fluidized-bed, coal gasification, or other methods developed by 16 companies that are receiving $537 million in grants this year from the Department of Energy. The companies are contributing $810 million of their own. Willis S. White Jr., AEP's chairman, says his company will start up a clean-burning demonstration plant in 1990 and can have a full- scale facility operating by 1995. Both will use a ''pressurized fluidized- bed'' system that burns coal suspended in blowing air and mixed with crushed % limestone. The result is a cleaner-burning and more efficient plant. While conventional coal facilities convert only 35% of coal to electricity, fluidized-bed plants can achieve efficiencies of 38% to 40%.

OZONE This form of oxygen plays a beneficial role in the stratosphere, shielding life from the ultraviolet rays of the sun. The Senate has ratified an international treaty committing industrial countries to a 50% reduction in the use of ozone-depleting chlorofluorocarbons by 1998. The problem may be worsening, and the EPA recently recommended a total phase-out -- probably a good move. CFCs are used in refrigerants, air conditioners, and foam plastic insulation. While substitutes are already being found, they need to be tested for cost and effectiveness. Ozone at ground level is a different story, an environmental bad guy. Here Congress is in a mood to move rashly, with unrealistic new rules. When sunlight and heat react with gasoline fumes and other volatile organic compounds, ozone forms. If the air is stagnant, as it was during last summer's heat wave, smog hangs close to the ground and ozone readings rocket. Ozone can temporarily cause coughs and chest pains even among healthy people, and long- term exposure is suspected of causing permanent damage to the lining of the lungs, but the evidence is still inconclusive. The 1977 Clean Air Act set unrealistic deadlines for cleaning up ground- level ozone, thereby laying the groundwork for political farce. Despite general improvement in air quality, most major U.S. urban areas are failing to meet the standards called for in the law. This can happen if readings at only one monitoring station in a metropolitan area exceed the EPA limit: 12 one- hundredths of a part per million for one hour a year three years in a row. After repeatedly postponing the Clean Air Act's date for compliance, Congress let it stand when the latest deadline came August 30. SOME 100 URBAN AREAS are now violating the air standards, and the EPA is obliged by law to take action. In 14 cities with the worst violations, the agency plans to block any new industrial plants that would emit more than 100 tons of ozone-forming pollutants a year; that would rule out some fairly modest-size factories. But there's little incentive for anyone to comply with the targets, and the EPA's enforcement is likely to be halfhearted because the agency is short-handed, the targets are hard to attain, and in any case Congress could well come up with new goals. Congress's proposed answer is to slap another round of restrictions on a highly visible source of ozone: the automobile. Bills that have been introduced would demand a slash in emissions of as much as 60% by the early 1990s. Pollution from cars, however, has already been reduced drastically. Today's new vehicles spew out 96% less hydrocarbons than their counterparts of the late 1960s, as well as 76% less nitrogen oxides and 96% less carbon monoxide. The contribution of all vehicles to ozone is now down to 29% of the total and will reach 20% by 1990, under the rules now in effect, as new cars replace old ones. The auto industry claims, with some justification, that the technology does not exist to cut emissions as deeply as Congress is considering. But the emission of ozone-causing pollutants could be reduced at more reasonable cost by other provisions before Congress. The lawmakers or the EPA may require that gasoline be made less volatile to reduce evaporation, mandate fume-trapping sleeves on gas hoses and nozzles as California has done for years, and require autos to be equipped with carbon canisters to trap fumes during fueling. It would also make sense to crack down on ozone emanating from various other sources, such as solvent plants, paint shops, and small dry-cleaning establishments still exempt from present rules.

GLOBAL WARMING The heat wave that gripped much of the U.S. last summer created new unease about the potentially biggest environmental threat of all. A blunt statement by Dr. James Hansen, director of the Goddard Institute for Space Studies in New York, that the earth's temperature is already rising because of the greenhouse effect had an electric effect on policymakers. Congress appropriated $43 million to study global warming, and Republican Senator Robert Stafford of Vermont, an environmental enthusiast who is retiring from Congress, put in a bill that would encourage the phase-out of electricity from fossil sources by the year 2050. Some scientists feel Hansen is jumping the gun. It may have been hot in much of the U.S. last summer, but it was cold and wet in Europe, and much of South America had a colder-than-average winter. However a new EPA study reports a wide scientific consensus that sometime in the next century the earth's average temperature will rise between 1.8 and 3.6 degrees Fahrenheit. That's because as its economy expands, the world burns ever increasing amounts of fossil fuels, whose unavoidable byproduct, carbon dioxide, is considered the chief culprit in the greenhouse effect. By trapping heat in the earth's atmosphere that would otherwise be radiated out to space, the accumulation of carbon dioxide, methane, and other gases will probably upset the careful balance of forces that makes the earth so hospitable to life. An increase of a few degrees could have drastic effects on ocean levels, rainfall, vegetation, agriculture, and our way of life. The global warming problem, says John Adams, executive director of the Natural Resources Defense Council, ''overrides everything else. If we don't solve it, it doesn't matter what else we do.'' Parts of the world are making progress in holding down fossil fuel consumption. Since 1973, when a steep rise in OPEC's oil price jolted Americans into insulating homes and buying fuel-efficient cars, U.S. energy use has barely increased, even though the economy has grown 45% in inflation- adjusted terms. West Germany and Japan do even better: They use half as much energy per unit of GNP as the U.S. does. Further headway could be made if solar energy were substituted for fossil fuels, but for some time to come it will be too expensive for widespread use. Greater hope lies in convincing the public that nuclear power can be safe if new reactors are built using the latest fault-tolerant designs (FORTUNE, August 1). The persuasive process is beginning: Some environmentalists are coming around to the view that atomic power, which creates neither acid rain nor carbon dioxide, may have to be reconsidered. The measures some politicians and environmentalists are talking about could change our way of life. During his presidential campaign, Michael Dukakis supported a 50-mile-per-gallon goal for automobiles. To get the average American into such a car would take an act of God rather than an act of Congress. His choice today would be restricted to a Honda Civic CRX HF or a midget GM import from Japan called the Geo Metro. The Heinz-Wirth report proposes a less draconian standard of 38 miles per gallon by the end of the century, vs. the average 26 mpg mandated by current law, to be realized through incentives rather than by fiat. Revenues from a tax on gas guzzlers would pay for rebates to purchasers of gas sippers. The idea is worth consideration. Electric utilities, eager to avoid building expensive new generating plants, have already discovered the value of incentives. Southern California Edison contributes $50 to $75 to the cost of a refrigerator if it is at least 20% more efficient than California law requires and has given away 500,000 highly efficient light bulbs to low-income customers since the early 1980s. Panasonic and Philips of the Netherlands developed the energy-saving lamps, which are small fluorescent bulbs that screw into incandescent bulb sockets. They use only 15 watts, but glow as brightly as regular bulbs using 60 to 75 watts. They sell for $10 to $15 each, but last nine times as long or more.

SEWAGE Fouled beaches aroused public indignation even more last summer than the weather. Congress reacted hastily by passing a bill on medical waste. It directs the EPA to set up yet another bureaucratic system for segregating, labeling, and tracking the stuff, with criminal and civil penalties for those who mess up the paperwork. In the final days, Congress also passed a bill banning the dumping of sewage sludge in the ocean by 1991. Revolting though it was, the quantity of used hypodermic syringes and other medical throwaways that wound up on Eastern beaches was trivial. Charles Ehler, director of oceanography at the National Oceanic and Atmospheric Administration, sees medical waste as a ''relatively benign environmental problem'' and describes ocean dumping as ''a very small contributor'' to ocean pollution. Most of the sludge, dumped 106 miles off the coast of New York, disperses in the ocean. Little is known about its effects on sea creatures, but it may make them more susceptible to disease. The real marine pollution problem, Ehler says, is the runoff of agricultural chemicals, filth that washes off city streets, and particularly the discharge of insufficiently treated sewage. In an infrastructure program second only to the interstate highway system in scope, the U.S. has spent $113 billion since 1972 to build and upgrade 15,000 sewage treatment plants. But many towns and cities lack adequate treatment facilities. Furthermore, older cities such as New York and Chicago have common storm and sanitary sewer lines. Heavy rains pour off the streets and temporarily overwhelm the sewage treatment plants. Hundreds of millions of gallons of untreated sewage pour into rivers and coastal waters, shutting down beaches and shellfish beds. During the Reagan Administration the construction of new treatment plants was slowed because of federal budget cuts. It should be accelerated again.

HAZARDOUS WASTES U.S. policy on hazardous wastes illustrates how misguided the command and control approach can be. Superfund, the multibillion-dollar program to clean up toxic wastes from bygone years, has become so tied up in regulations and litigation that after eight years only 40 sites have been sanitized. It pays companies more to sue each other or the government over who should pay than to clean up. So far 1,175 sites have been identified as requiring immediate attention, and estimates of what the job will cost run from $100 billion to $500 billion. ''There's mounting evidence that Superfund isn't working,'' says Joel Hirschhorn, the waste expert at the Office of Technology Assessment. The toxic waste cleanup doesn't lend itself to the incentive approach, but Hirschhorn and others think Superfund would show more results if the EPA were better manned and managed and more receptive to new technology. THE NOXIOUS substances that industry brews today are better handled, for the laws are stricter on what can be poured into rivers or dumped somewhere else, and the economics of disposal make market-oriented solutions feasible. The sheer cost of getting rid of a ton of hazardous waste has climbed from $10 before legislation was passed in 1980 to as much as $500 today, when the stuff has to be incinerated or buried in double-lined landfills. These prices, plus growth in the solid-waste business, make it likely that Browning-Ferris and its main competitor, Waste Management of Oak Brook, Illinois, will continue to earn a return of better than 20% on shareholders' equity. The expense also gives corporations an incentive to reduce or recycle wastes. For example, 3M, the most publicized practitioner of waste control, scrubs metal circuits with pumice instead of acids, thereby eliminating the need to get rid of 20 tons a year of nasty stuff. Where economics don't favor such practices, the incentives idea could be carried a step further. The Heinz-Wirth report favors a kind of deposit and refund system for hazardous wastes, akin to that used for beverage containers in many states. Industries that generated toxic substances could get a refund only if they returned them for proper burial or recycling.

ORDINARY GARBAGE Municipal trash is piling up -- literally. The U.S. produces twice as much per capita as any other country and puts 80% of it in landfills. Because it is increasingly difficult to find dump sites, the EPA has signaled a new approach: to reduce the volume of garbage that goes to landfills by 45% in four years, by incinerating 20% and recycling or otherwise keeping another 25% out of the waste stream. Environmentalists consider the recycling goal minimal, citing Japanese cities that handle twice as much of their wastes that way (FORTUNE, April 11). Some places are ahead of the EPA's timetable. New Jersey, using the command approach, has ordered all its counties to submit plans to set aside 25% of their household and commercial trash for separate pickup and recycling. About one-quarter of the state's population already sorts its garbage. Seattle is trying the carrot. Containers of recyclable cans, bottles, newspapers, and junk mail have been collected separately at no charge since February. But citizens have to pay $13.55 a month to have one can a week of ordinary garbage picked up, and $5 for each additional can. By fall, 55% of Seattle's households had begun separating recyclable trash to reduce charges, and the tonnage is exceeding expectations. Rather than dumping its sewage sludge in Puget Sound, as it used to, Seattle now sells it as a nutrient-rich commercial fertilizer.

-- Environmentalism began as a sort of counterculture movement in the 1960s, then was embraced more eagerly by the Democrats than by the Republicans. Now it may have become truly national and nonpartisan. Young voters, in particular, are displaying a much larger willingness to value and pay for clean air and clean water. Maybe, with luck, the country will also look for the cheapest, least burdensome ways of tackling its environmental problems.

BOX: THE JOB A-HEAD- DO'S & DON'TS

Acid rain: Keep reducing sulfur oxides gradually; avoid expensive new clampdown until evidence justifies it. Ground-level ozone: Put new curbs on gas stations and other small sources; avoid drastic new restrictions on auto emissions. Global warming: Continue using fossil fuels more efficiently; encourage nuclear power. Water pollution: Speed construction of sewage treatment plants. Toxic waste: Use incentives to reduce volume. Garbage: Step up recycling; burn or bury the rest under strict controls.

BOX: MR. CLEAN TALKS ABOUT PICKING UP THE GARBAGE

William D. Ruckelshaus, 56, has served as Mr. Clean in two Administrations. Under President Nixon he became the first head of the new Environmental Protection Agency in 1970. President Reagan called him back to set the EPA on its feet in 1983 after scandals at the top had destroyed its effectiveness and morale. Respected by many environmental activists as well as corporate executives, Ruckelshaus has been an environmental lawyer, consultant, and venture capitalist. He recently became chief executive of Browning-Ferris Industries of Houston, the second-largest waste disposal company in the U.S. In an interview he talked about the latest phase of the cleanup.

On beach pollution: Usually when environmental laws are passed as a result of a crisis, we end up with laws that are flawed. One reaction in the East has been to call a halt to ocean dumping of sludge, even though the sludge has nothing to do with the pollution on the beaches. If you don't dispose of the sludge at sea, you must bury it on land or burn it.

On finding waste burial sites: Every time recently we've tried to locate a place, we run into serious public resistance. People respond to the First Law of Garbage, which is everybody wants you to pick it up, and nobody wants you to put it down. But in the state of Washington, where a firm I was formerly with solicited bids from communities on the location of a hazardous-waste facility, eight have asked for continuing discussions. We told them we are in business to make a return and would share that with them.

On recycling: We can recycle a much higher percentage of household garbage than we now do, which is something like 10%.

On acid rain: I think the evidence of damage is strong enough that it makes sense to keep the levels of sulfur oxides and nitrogen oxides heading downward, as an insurance policy. You can do that at relatively modest cost. But if you're going to talk about bringing them down 50% with scrubbers, the cost is huge.

On the EPA: The environmentalists beat up on it. Congress beats up on it. The Administration usually ignores it. In a curious way, the strongest supporters of a forceful EPA are the industries it regulates. They want government to set reasonable standards, and they want the public to know they are being enforced.

CHART: THE PROGRESS TO DATE

AIR POLLUTION Change in emissions 1970-86

Particulates down 64% Carbon monoxide down 38% Volatile organic compounds down 29% Sulfur oxides down 25% Nitrogen oxides up 06%

WATER POLLUTION Change since early 1970s

Ocean dumping of industrial waste down 94% Cities without adequate sewage treatment down 80% Miles of river unfit for swimming down 44% Ocean dumping of sewage sludge up 60%

CREDIT: SOURCES: ENVIRONMENTAL PROTECTION AGENCY, ASSOC. OF STATE AND INTERSTATE WATER POLLUTION CONTROL ADMINISTRATORS CAPTION: NO CAPTION DESCRIPTION: Color.