It is now widely recognized that often the most significant effects of environmental regulation are not on static behavior of firms, but on their investment decisions, and specifically on their incentives to research, develop and adopt new pollution reducing technology.

Researchers in the industrial organization literature, and to a lesser extent the environmental economics literature, look at the incentives of firms to adopt new technologies, both in general and under certain types of regulation. Limited empirical evidence exists on the adoption decision in response to regulation, and no evidence exists on adoption decisions within a tradeable permit market. In this paper I develop a model of the technology adoption decision in the presence of a tradeable permit market, and derive a econometrically testable duration model. The model predicts that firms will gradually adopt the technology in response to the regulation; permit buyers will delay their investment, relative to sellers, during the permit market; and firms with higher adjustment costs of investment will adopt more slowly.

The empirical part of the paper uses a unique data set from the United States lead phasedown which began in 1983. The regulation took the form of a permit market (1983 - 1987) followed by a performance standard. The adoption of c5/c6 isomerization technology was a major response to the increased severity of regulation. I estimate the technology adoption response, to the regulation of lead in gasoline, by 154 refineries over 16 years (1980 - 1995). I estimate how the timing of the adoption decision depends on the characteristics of each refinery. These characteristics affect their costs of adjustment and their valuation of the new technology. Using a sub-sample of 79 refineries I consider the relationship between trading in the permit market and the adoption decision. Preliminary results suggest a significant aggregate technology response; some degree of delay by buyers during the permit market; and a delay in investment by smaller refineries and smaller companies relative to larger refineries.