However, the process by which EPA provides incentives for private-sector investment and innovation is not without its challenges. Among them are

•   Overly Prescriptive Rules. Regulations that use a true performance standard for emissions and discharges can encourage innovation; rules that, in essence, base emission standards on the best current technology (without regular updating) can take away all private incentives for further investment in research and development. For example, the “categorical pretreatment standards” for industrial wastewater discharges locked into place standards based on technologies that were available at the time of promulgation, whereas the “best available control technology” requirements of the Clean Air Act are a “rolling” standard, expressed as performance-based emissions limits that can advance as technology improves. Economic research on innovation and environmental regulation finds that flexible policy instruments that provide rewards for continual environmental improvement and cost reduction tend to promote innovation whereas policies that mandate a specific behavior can deter innovation (Popp et al. 2010).

•   Defensive Rule-Making. In the current climate in which nearly every action taken by EPA is challenged, the rules that are issued may be written in a conservative fashion that hews tightly to narrow interpretations of the statutes or to past practice and thus may be less likely to encourage innovation once implemented.

•   Reliance Solely on Existing Testing Protocols. To meet toxicity-testing requirements, EPA often specifies testing protocols in detail, generally on the basis of the state of the art. That practice reduces the incentive to innovate in testing and assessment because of the difficulty of getting new approaches and results accepted.

There are several examples where EPA has been successful in leveraging private sector research. One example is in the Technology and Economic Assessment panels of the Montreal Protocol and the various research and development consortiums designed to find substitute chemicals and technologies for ozone depleting substances (EPA 2007, 2010a). Another example is the Green Lights program for energy efficient light bulbs, the Energy Star program for energy efficient appliances, and the Golden Carrot program for energy efficient refrigerators (EPA 1992; Feist et al. 1994; EPA 201 1d; Energy Star 2012). If those examples could be replicated in other situations, EPA would be able to mobilize more industry research and development and implementation to protect the environment.

Finding: EPA has recognized that innovation in environmental science, technology, and regulatory strategies will be essential if it is to continue to perform its mission in a robust and cost-effective manner. However, to date, the agency’s approach has been modest in scale and insufficiently systematic.

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