(FORTUNE Magazine) – THIS YEAR'S RECIPIENTS OF THE MacArthur Fellowships, the "genius grants" announced last month, include a symphony conductor, an urban revitalization specialist, a rare-book preservationist, a fisherman--and a 62-year-old mechanical engineer from Arlington, Va., named Michael Walsh. A onetime official of the Environmental Protection Agency, Walsh specializes in the regulation of air pollution caused by motor vehicles. He has been cited for his work since the 1980s as a consultant in improving public health and the global environment. Since leaving government, Walsh has worked on smog control with such clients as the governments of Brazil, China, and Mexico, and views issues like air quality with an unusual global perspective. He spoke with FORTUNE's Stuart F. Brown.

How bad is the world's emissions problem?

In most big cities there are serious air-pollution problems, and vehicles are at least a major contributor. It's gotten a lot better in the U.S., and it's gotten somewhat better in Europe, but it's gotten a lot worse where most of the world's people live: China, India, and Brazil. I'd say there's an eight- to ten-year gap for the rapidly industrializing countries, and there's a forever gap for the Africas of the world.

What's the best way to clean up pollution?

The first thing is a good bus rapid-transit system for urban areas so people don't have to drive to work every day. You can see progress in places like Bogotá, which has a terrific bus system. Second, people in developing countries who can afford to buy cars can also afford the price difference for clean ones. And these countries have to invest in refinery equipment to get the sulfur out of their fuel [otherwise it would poison the catalytic converters used to clean engine exhausts].

All of the cars in Brazil, Mexico, and India now have modern catalysts, and most have high-precision fuel injectors. So they've gotten through the first wave of technology, and they're now trying to sort out what to adopt next.

What progress is China making?

I made my first trip to China in 1985 when it was really in the infancy of its vehicle industry. Year after year they are getting much, much smarter. Today there are emissions engineers in China who are as capable as anyone in Ann Arbor [where the EPA does its emissions testing]. The Chinese now have environmental-engineering programs at universities.

The top-down Chinese system is certainly decisive. In 1997 the government made the decision to take the lead out of gasoline, and within two years it was done for the entire country. In 1999 the city of Beijing adopted the Euro I emission standards, the ones that Europe had in 1992. Starting that year it went from old-style carburetors to fuel injection and catalytic converters. They just did it. And in 2000 the entire country did it. Now the entire country is at Euro II emission standards, which are equivalent to the U.S. standards in 1996.

Why such fast progress?

China is a very complicated place, but many of the leaders are technical people. They are engineers and scientists. So they face problems in a technical way. They don't have to have the same kind of debates you do in a democracy. When somebody in power makes a decision, things happen.

Is the U.S. still in the vanguard of emission regulation?

Yes. The U.S. Tier II car standards, which take effect in 2006, are the toughest in the world, as are the 2007--10 truck standards and the off-road-vehicle standards that the EPA adopted about two years ago. Where we lag is with regard to reducing greenhouse-gas emissions, especially CO2.

U.S. automakers are suing the state of California, claiming it doesn't have the authority to regulate CO2 emissions. What do you think of that?

In the absence of any leadership at the national level, the California program is our only hope from two standpoints. First, we really do have a greenhouse-gas problem. It's not credible any longer to say that we don't or that our vehicle emissions aren't contributing to it. The second point is that the California program is good industrial policy. If we continue to be the dinosaurs of the industrial world, the GMs and Fords will continue to lose market share. If California prevails in court, a number of states will latch on to their program. Once you get ten or 12 states, that's enough to turn the entire country.

Will diesel cars become as popular in the U.S. as they have been in Europe?

Fuel costs a lot more in Europe because of much higher taxes, so people are already looking for fuel-efficient vehicles like diesels. And a number of European countries tax diesel at a lower rate than gasoline. On average about 50% of the new cars across Europe are diesel now. In Austria it's closer to 70%. The tax differential explains the diesel's varying popularity. In Britain gasoline and diesel are taxed about the same, and the diesel population is 25% or 30%.

In the U.S., diesel and gasoline are at about the same price, and they are taxed the same. I think the new diesels have some prospects here. I don't see us getting to a 50% diesel car fleet, but people who drive a lot will want them if gas prices stay above $3 per gallon. I'm confident that the carmakers are going to be able to meet the latest diesel emission standards and we will start to see new diesels by 2007 or 2008. Manufacturers are waiting for very-low-sulfur fuel that will let the new particulate filters and special diesel catalytic converters work properly. That should be available by the third quarter of 2006.

What about biofuels like ethanol?

With the new energy bill, the EPA has a mandate to carry out a dozen or more biofuels studies. Similar things are going on in Europe. It's a mixed bag. It depends on how you make it and what you make it from. The Brazilians have shown they can make ethanol from sugar cane in a way that is a net energy saver. But a lot of what's happening is just trying to find a way to subsidize farmers. France gives very big tax breaks to biofuels and doesn't pay a lot of attention to the real environmental consequences. There are things that you have to worry about: pesticide runoff and nitrogen oxide greenhouse-gas emissions from nitrogen fertilizer used to grow the crops. So you have to do a life-cycle analysis to really understand it.

What about fuel cells and hydrogen?

We need to work hard on fuel cells because it's one of the potential pathways to cleaner transportation. And hydrogen as an energy carrier needs to be kept in play. But today neither is here. The fuel cell may turn out to be something that just doesn't work. The tough part is making the hydrogen. If we had a lot of nuclear electricity, that would be the way to make it without also making CO2. But if you can solve a few problems, the potential is so great that you just have to keep them in play.

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