U.S. coal-fired power plants with patents pertaining to FGD devices to assess the impact of innovation before and after the 1990 Clean Air Act (CAA), which instituted permit trading for sulfur dioxide (SO2). Before this act, new plants were required to install flue gas desulfurization capacity capable of removing 90 percent of SO2. As a result, the innovations that occurred before the 1990 CAA focused on reducing the cost of FGD units, rather than on improving their environmental performance. After passage of the act, the focus of innovation became improving the ability of FGD units to remove SO2 from a plant's emissions.

Figure 1 While economists often favor using broad-based policies, such as a carbon tax or tradable permits, to address externalities, policy makers often use more narrowly focusedof Environmental Economics and Management, 55(2), 2008, pp. 142–62. ↩ 11. D. Acemoglu, U. Akcigit, D. Hanley, W. Kerr, "Transition to Clean Technology," NBER Working Paper No. 20743 , December 2014, and forthcoming in the Journal of Political Economy. ↩ 12. D. Popp, "Using Scientific Publications to Evaluate Government R&D Spending: The Case of Energy," NBER Working Paper No. 21415 , July 2015. ↩ 13. D. Popp, "International Innovation and Diffusion of Air Pollution Control Technologies: The Effects of NOX and SO2 Regulation in the U.S., Japan, and Germany," NBER Working Paper No. 10643 , July 2004 and the Journal of Environmental Economics and Management, 61(1), 2011, pp. 16–35. ↩ 14. M. Lovely and D. Popp, "Trade, Technology, and the Environment: Does Access to Technology Promote Environmental Regulation,"