(FORTUNE Magazine) – TWENTY YEARS ago, the Potomac River was full of slime and muck, so polluted that not even kids dared swim in it -- and so embarrassing to Washington politicos that they agreed to spend $5 billion cleaning up the river and its tributaries. Today much of the Potomac is clear, and it is once again a favorite spot for fishing, boating, and swimming. Since Earth Day 1970, when Americans first began to think green, there have been many victories like that: Miles of polluted rivers and streams have been brought back to life, the number of cities with adequate sewage treatment plants has more than doubled, ocean dumping of sewage sludge has ceased, and major air pollutants have been considerably reduced (see chart). But the pricetag for the 20-year cleanup has been a hefty $1.2 trillion, and there remains much unfinished business. The Clean Air Act of 1990 targeted a whole new list of environmental scourges -- everything from acid rain to stratospheric ozone depletion. This new wave of attacks on airborne pollutants will cost about $25 billion a year. The U.S. currently spends $122 billion a year on the environment, a figure expected to rise to nearly $180 billion annually, or about 2.8% of the GDP, by the year 2000. Despite all the other problems crying out for attention, Americans continue to strongly support spending money to protect the environment. According to a 1992 Roper survey, nearly two-thirds of those polled believe economic growth and environmental protection can go hand in hand, but if compromises between the two cannot be found, they clearly side with the environment. Americans say they are willing to divert money from other federal programs and make personal financial sacrifices to improve the environment. William G. Rosenberg, an assistant administrator of the Environmental Protection Agency, puts the spending in perspective: ''The $25 billion a year we will spend for the Clean Air Act breaks down to about 24 cents a day per person. We spend on average 63 cents per person a day for alcoholic beverages and 43 cents for cigarettes.'' Described that way, the Clean Air Act sounds like a bargain. But the fact is that in an era of tight budgets, there simply is not enough money to cure every environmental ailment. Even environmental activists are concluding that cleanup efforts need to be ranked in order of importance and funded accordingly. Take acid rain and ozone depletion. Most scientists agree that acid rain poses only a minor danger to rivers and lakes and no serious threat to human health. By contrast, the number of skin cancer deaths due to ozone depletion could rise from 500 a year currently to 100,000 by 2050. Yet Eileen Clausen, the EPA's director of atmospheric programs, figures the U.S. will spend about $1 billion annually for the next eight years to fight ozone depletion, and perhaps $4 billion a year ''forever'' to reduce acid rain. Later in this story, FORTUNE discusses five of the U.S.'s environmental problems and ranks them according to their importance. Many economists believe, like the general populace, that environmentalism and economic growth can be made compatible. Even the disparate forces that have always clashed on green issues -- tenacious pro- and anti- environmentalists, defiant industry, and a Congress that vacillates between overreaction and inaction -- have lately begun to reconcile to develop flexible market-based solutions to pollution control. ''We conservatives were late waking up,'' says John Shanahan of the Heritage Foundation, a conservative Washington think tank. ''But we finally understand that the environment is an integral part of the economy.'' The first experiment with market-driven environmentalism is the 1990 Clean Air Act. In that legislation, the traditional command-and-contro l approach, in which government dictates what equipment or processes industry should use to meet pollution standards, has been relaxed. Instead, to reduce, say, the sulfur dioxide emissions that cause acid rain, affected industries -- mostly utilities -- will choose their own strategies. Furthermore, the utilities will be issued credits when they reduce emissions below the target. The credits can be sold to slowpokes that may be working on a new technology or that may need extra time to build an environmentally friendly plant. Eventually, the credits may be traded, like soybeans, on the Chicago Board of Trade. The CBOT would let individuals stake money on the rise or fall in value of pollution rights, just as investors now speculate on stocks. Says Rosenberg of the EPA: ''This will be a bona fide private market that will make it cheaper and easier to reduce acid rain.'' Another piece of evidence that the environment may get cleaner when companies can call more of their own shots is the success of the chemical industry's voluntary program to reduce toxic air pollutants below the standards set by the 1990 Clean Air Act. Nine of the nation's biggest polluters, including Du Pont and Monsanto, signed on with the understanding that they could use the technology of their choice. Their decision was not altruistic; it was, among other things, good PR. In 1987 the EPA began requiring large companies to disclose publicly the amount of toxic chemicals they emit. Around the same time, the Chemical Manufacturers Association conducted a survey to determine how the public viewed various industries. ''We were chagrined to find ourselves at the bottom, along with tobacco and nuclear energy companies,'' says Mort Mullins, a vice president at the CMA. The following year Monsanto CEO Richard Mahoney committed about $100 million to reducing air pollution an average of 90% at Monsanto's plants around the world by the end of 1992. The company, which is close to reaching its target, now regards waste reduction as a way to measure efficiency and achieve a competitive advantage in the marketplace. For example, when Mahoney directed his chemists to reduce waste from the herbicide Roundup, the scientists ; stumbled upon a new process that cuts pollution 90% while reducing costs 5%. What follows is a list of five of America's environmental problems -- ranked from most to least serious -- and some solutions for what to do about them.

-- AIR POLLUTION. There are still hundreds of pollutants in our air that harm human health and degrade the environment. The 1990 Clean Air Act targets 189 produced by vehicles and industry, the two major sources of air pollution. The aim is to reduce airborne emissions by 56 billion pounds in ten years, to about half of current levels. But some pollutants -- ground-level ozone, say -- deserve more attention than others. Ground-level ozone, which can cause permanent lung damage, has been one of the most difficult pollutants to reduce. Ozone is a blessing high in the stratosphere, where it shields earthlings from the ultraviolet rays of the sun. But it is a demon on the ground, where it is the main component in urban smog. When heat reacts with the volatile organic compounds found in gasoline, the result is ground-level ozone. The 1990 act requires that these compounds -- chiefly hydrocarbons and nitrogen oxides -- be reduced 35% and 60%, respectively, by 1998. States with severe smog -- California, New York, and Illinois among them -- will be given more time to comply. The Clean Air Act also mandates that cleaner gasoline be sold in the nine smoggiest cities by 1995. Gasoline reformulated to meet the new standards -- which call for, among other things, reducing the amount of benzene, a known carcinogen, by 35% -- will cost about 5 cents a gallon more.

-- DAMAGE TO STRATOSPHERIC OZONE. Chlorofluorocarbons (CFCs) were discovered by General Motors in 1928; the fact that they destroy ozone in the stratosphere became apparent when a large ozone hole was discovered over Antarctica in 1985. Widely used as solvents, refrigerants, and fire retardants, CFCs are gradually eating away the shield that protects us against the sun's ultraviolet rays. A 1987 agreement called the Montreal Protocol mandated a 50% reduction in CFCs by 1999. But environmentalists, including Democratic vice presidential candidate Al Gore -- who considers stratospheric ozone a public health emergency -- wanted quicker action. It turns out they got it from a most unlikely source. Last winter the National Aeronautics and Space Administration forecast a possible ozone hole over New England, near President Bush's vacation home in Kennebunkport, Maine. % Coincidentally or not, Bush, who until then had opposed a Senate proposal to quickly phase out the production of CFCs, did an about-face. He directed CFC manufacturers, including big companies like Du Pont and Allied-Signal, to cease all production by 1995. The CFC manufacturers at first balked at the phase-out. But now, says Eileen Clausen of the EPA, they are diligently working to find substitutes.

-- GARBAGE. Despite the nation's efforts to recycle, piles of solid waste just get higher -- and so do garbage bills. Taxpayers now spend $30 billion annually for municipal trash collections. By the year 2000 the cost may be $75 billion. In 1988 the EPA set a goal of cutting the total waste stream 25% by 1992. In fact, says Allen Hershkowitz, chief scientist at the Natural Resources Defense Council, ''the amount of waste has actually increased 13% since 1988.'' As an incentive to produce less garbage, Hershkowitz and others propose that local governments adopt a ''polluter pay'' policy. That means a family generating ten bags of garbage a week would pay ten times more than the neighbor who puts out only one trash bag. It's not a bad idea. To spur the demand side of recycling, environmentalists say, U.S. manufacturers should begin to refocus on recycling their own waste, perhaps encouraged by tax incentives. Among the OECD nations, the U.S. ranks last in the recycling of glass and 15th in paper. Overall, the U.S. reuses just one- third as much as Germany and Japan. By law, German manufacturers are responsible for cleaning up the garbage they produce. BMW, for example, makes plastics for its autos from old BMWs that have been junked. Within the next five years, the company expects that 90% of the components in each new car will be recyclable. Says Hershkowitz: ''The U.S. needs to shift the economic framework so that taxpayers no longer subsidize industry waste'' -- including the excessive packaging of everything from cosmetics to compact disks. Senator Max Baucus, a Montana Democrat who sits on the Environment and Public Works Committee, introduced a bill to this effect last spring. It was demolished on the floor, but Baucus says he will keep pushing the idea.

-- HAZARDOUS WASTE. Since 1980, the government program to mop up toxic spills has devoured almost $12 billion; even so, fewer than 10% of the 1,245 most dangerous sites have been eliminated. A large percentage of those billions was frittered away on litigation to determine who should pay; meanwhile, the ! estimated costs of completing the Superfund project -- polluters contribute to the fund to pay for cleanup efforts contracted for by the EPA -- range from $200 billion to $600 billion. William Reilly, the EPA's progressive chief, acknowledges the flood of wasteful litigation and gross mismanagement of funds by government contractors. Last year, for instance, EPA investigators reported that some contractors spent nearly 30% of their Superfund receipts on perks like office plants and parties. One promising solution to Superfund would be to privatize more of the cleanup. Bernard J. Reilly, Du Pont's corporate counsel, made that recommendation before a congressional panel in August. He compared the progress at two Superfund sites in southern New Jersey. ''One landfill is being cleaned up by a chemical industry group at one-third the cost of the EPA-managed site,'' he said. Mullins of the Chemical Manufacturers Association notes that the EPA's handling of Superfund is in direct contrast with the way the agency has approached toxic air emissions and acid rain. If market-based solutions were applied to Superfund, he argues, costs would decline. ''We are treated like defendants in a court proceeding,'' says Mullins. ''Our companies want to be partners with the EPA on Superfund and bring our technical and risk assessment expertise to the process. The EPA should save its enforcement weapons for parties who don't cooperate.''

-- ACID RAIN. When sulfur dioxide, a byproduct of the burning of fossil fuels, particularly coal, enters the atmosphere and meets with a thunderhead, acid rain is formed. Pure star power, and lots of media attention, catapulted it into the spotlight. President Bush, under pressure from Canada's Prime Minister Brian Mulroney, personally crusaded for legislation to control it. Mulroney complained that because prevailing winds carry sulfur dioxide north into Canada, acid rain is even more of a problem there than in the U.S. The real question is not ''Whose acid rain is it, anyway?'' but ''Does it matter?'' Acid rain has been a controversial issue for years, because scientific evidence of the damage it does is inconclusive. It is true that acid rain can damage forests, corrode monuments, foul lakes, and threaten the life of aquatic species. But according to a study sponsored by Congress, only 2.7% of all the miles of streams surveyed were actually acidic. Many environmentalists believe the $4 billion a year spent to reduce sulfur dioxide emissions could be better spent on just about any other problem. The outcome of this year's presidential election seems certain to have a profound impact on environmental policy. Bush campaigned as an environmentalist in 1988, and critics say that during his first two years in office he pretty much lived up to his claim, mainly by supporting the Clean Air Act. Since then, however, he has backed the efforts of Vice President Dan Quayle's Council on Competitiveness to weaken the act. In a June Gallup poll, only 29% of the public supported Bush's environmental record. On the other hand, Al Gore, at least, is an unabashed environmental activist. That plays well with the public, but it's not enough for Democrats to have their hearts in the right places. Their toughest job -- indeed, the toughest job for any politician dealing with the environment in the Nineties -- will be cannily allocating scarce public resources to where they can do the most good, while harnessing market incentives to take care of as much of the rest as possible.

BOX: INSIGHTS

-- The Clean Air Act of 1990 will cost 24 cents per person per day. We spend 63 cents per day per person for alcoholic beverages and 43 cents for cigarettes. -- Environmentalists and former foes agree on market-based incentives to curb pollution. -- Forget the small stuff: Most scientists say acid rain poses no serious threat to human health.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: ENVIRONMENTAL PROTECTION AGENCY CAPTION: AIR EMISSIONS