But Richard Sandor, an executive managing director of Kidder, Peabody & Company, notes that the freedom to buy and sell allowances will not yield the maximum possible benefits unless utilities have an easy way to exchange them at a price that reflects the lowest possible cost of removing sulfur from the air. That is where the Chicago Board of Trade's initiative fits in. Trading to Start in 1993

Under the plan, the exchange will begin trading "cash forward" contracts in 1993 -- simple agreements to deliver allowances after they are issued in 1995. It will also ask the Commodity Futures Trading Commission for permission to establish a continuing "futures" market, permitting anyone to gamble on emissions rights in standardized 25-ton allotments up to three years in advance.

A utility might, for example, buy 100 contracts due in 1997, thereby nailing down the right to spew an extra 2,500 tons of sulfur dioxide that year. The seller might be another utility that is planning to close down an old coal plant in 1997. Or it might be a mutual fund run by a brokerage house, whose manager thinks the price of allowances will fall, and is prepared to risk clients' money on the bet.

Mr. Sandor estimates that contracts will initially trade at about $400 a ton and will fluctuate with factors ranging from the demand for electricity to the state of scrubber technology. The price could not rise above $2,000 because utilities always have the option of exceeding their legal emissions and paying a fine of $2,000 a ton.

Not everyone is convinced that the plan will work smoothly. John Palmisano, the president of Aer-X, a Wash ington firm that is a pioneer in the private trading of local pollution allowances for smog-creating chemicals, says he thinks the market will be hard to establish. Most of the exchanges in sulfur allowances, he suspects, will be made directly between utilities, in large blocks. He worries, moreover, that some state regulators will balk at allowing utilities to participate in a national market for pollution rights.

The volume of trading may be light by the standards of the Board of Trade, acknowledges Mr. Sandor, who drafted the proposal along with Philip Senechal, chief executive of the Bellefonte Lime Corporation in Bellefonte, Pa. On a typical day, futures representing 200,000 bushels of corn and 150,000 bushels of soybeans are traded on the exchange.

But computerized trading could be used to match buyers and sellers at low cost. And in any case, notes Jim Thompson, the former Governor of Illinois who, along with Mr. Sandor, served as co-chairman of the exchange committee analyzing emissions allowances, noted that "the Board of Trade has social benefits as well as members' profits in mind."