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the flexibility to choose lower cost methods of abatement. Technologystandards may also lock in the use of pollution control technologies thatare unnecessarily costly in the face of changing conditions.Incentives to Innovate Under the Three ApproachesAlthough incentive-based regulation may thus be preferable toregulation by performance or technology standards from the perspectiveof the short-term, static cost of achieving given environmental objectives,evaluation of the relative cost-effectiveness of the three approaches overlonger horizons is more complex. Achieving ambitious environmentalgoals in a growing economy will require advances in technology (Box 5-5).The evolution of pollution control costs over time is affected by innovation,and the three approaches differ in the incentives they offer potentialinnovators. Innovation may be particularly important when environmentalregulation is relatively new, because then there are often unexploredavenues of research and significant learning-by-doing effects.An important criticism of technology standards is that they may providelittle incentive to search for more cost-effective ways to reduceemissions. A technology standard provides an incentive to developcheaper new technologies only if those technologies can meet mandatedtargets and win regulatory approval. Performance standards, in contrast,provide an incentive to find lower cost ways of reducing emissions,at least to the level of the standard. However, they may give littleincentive to search for new methods to reduce emissions below theBox 5-5.—Recent Trends in Air QualityEnvironmental regulation has sharply reduced emissions of anumber of important pollutants over the past several decades.Emissions of five of six major air pollutants (the exception beingnitrogen oxides) have fallen substantially since passage of the1970 Clean Air Act Amendments (Chart 5-1). The EPA’s phaseoutof lead additives in gasoline has been largely responsiblefor the spectacular fall in lead emissions since the 1970s: leademissions in 1997 were less than 2 percent of 1970 emissions.These improvements occurred during a period of considerableeconomic growth. From 1970 to 1997, real GDP expanded by 114percent, so that emissions per unit of GDP have fallen dramaticallysince 1970. In certain sectors the reduction in pollution per unit ofoutput has been especially striking. Vehicular emissions of volatileorganic compounds per mile traveled have fallen by 81 percent,and emissions of carbon monoxide by 73 percent, since 1970.These impressive reductions could not have taken place withoutsubstantial innovation in new processes and products as well astheir widespread adoption.196