Environmental performance standards and the adoption of technology

This paper examines the argument that environmental performance standards offer a relative disincentive for the adoption of cleaner technologies, and it shows that this relative disincentive exists when regulators cannot credibly commit to a stringent environmental standard. The relative disincentive is alleviated if the firms are sufficiently heterogeneous in the adoption costs, if the regulator engages the firm repeatedly, or if the regulator can combine an environmental performance standard with another instrument, such as a subsidy to the adoption of a cleaner technology or fines for non-compliance.