Executive Summary Regulatory impact assessment is formally required by the U.S. and many other nations in order to help governments weigh the costs and benefits of proposed regulations, particularly as they compare to those of alternative actions and other government priorities. 1 One of the "best practices" of regulatory impact assessments, as established by the OECD, is to use estimates of costs that are grounded in economic theory. Economic theory indicates that changes in compliance costs

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... ould be expected over time as a result of factors related to technological innovation. But many U.S. regulatory impact assessments have traditionally employed a practice that is in conflict with this expectation: they take current estimates of the costs of complying with a proposed regulation and project that those costs will remain unchanged over the full time period that the regulation would be in effect. There are a number of indications in the literature that ignoring technological change is an important explanatory factor underlying the often-observed tendency for regulatory impact assessments to seriously over-estimate the costs of compliance with new environmental, health, safety, and energy efficiency regulations. The regulatory reform movement has described the appropriate modeling of technological change as an element of "an ideal cost-benefit analysis," and in February 2011, this issue was raised by the U.S. government agency tasked with establishing and enforcing best practices in regulatory impact assessments -the Office of Information and Regulatory Affairs (OIRA) in the Executive Office of Management and Budget. At that time, OIRA called for federal agencies "to use the best available techniques to quantify anticipated present and future benefits and costs as accurately as possible," which include "identifying changing future compliance costs that might result from technological innovation or anticipated behavioral changes." OIRA, the OECD, and the academic literature do not currently specify the "best available techniques" for accounting for innovation in regulatory impact assessments, however. This report seeks to inform this discussion by focusing on the most widely available technique, which is a learning curve-based cost adjustment method. In vehicle regulation, the Environmental Protection Agency (EPA) and the National Highway Transportation Safety Administration (NHTSA) apply a component-based learning curve approach that the EPA began developing in the 1970s. In energy efficiency regulation for appliances and other products, the Department of Energy (DOE) has applied a whole-product learning curve-based price adjustment approach since 2011. This report: (1) provides an overview of some of the major findings of the academic literature on learning curves in order to inform an assessment of a "best" approach to a learning curve-based regulatory impact assessment cost adjustment technique; (2) describes the EPA-NHTSA and DOE approaches to this technique; and (3) assesses these approaches against the criteria of alignment with economic theory and of administrative sustainability (i.e., fit with existing laws and institutional arrangements, including standard models and relationships between regulators and regulated industries). In the assessment part of the report, we also provide a first-order analysis of the prediction accuracy of the learning curve technique.