Attention has been drawn to the observation that environmental benefits under the current regulatory approaches are diminishing with respect to increased pollution control costs. Regulators have begun to appreciate that while environmental gains can still be achieved under the current command and control system, the most significant environmental gains have already been made, and an alternative regulatory approach might be warranted for continued environmental improvement. This study found that regulatory initiatives that seek to address business incentives and disincentives may yield better environmental outcomes. Internal characteristics such as corporate environmental directives, waste audit and environmental performance tracking systems and linkage of compensation to environmental performance are evident in firms that have attempted to adapt to regulatory pressures. These characteristics, according to organizational models, are posited to improve the environmental performance of firms as environmental issues are linked to key business decisions. This study was conducted by surveying firms in the forest products industry. Certain firms were found to exhibit specific internal characteristics indicative of good environmental performance. The study attempts to identify the implication this finding has on regulators in terms of policy design and implementation. The study suggests that the optimum regulatory strategy is a hybrid of a command and control approach and a market-based approach which blends the compliance assurance of the command and control approach to address motivating firm behavior with the flexibility of the market-based approach to provide firms incentives to improve environmental performance. The study concludes that the value of such a hybrid approach which attempts to address firm incentives and disincentives related to their environmental practices will result in improved environmental performance. / Graduation date: 1998