State and local governments are implementing many innovative activities to improve environmental performance and to lower the cost of compliance. These activities include regulatory experiments and voluntary programs in partnership with many different stakeholders and in a wide range of environmental approaches and activities. State and local pollution prevention (P2) voluntary programs, technical assistance activities, and state P2 planning laws are helping businesses save money and reduce the amount of pollution that they generate. Innovative facility and multimedia permitting and inspection programs are also being implemented to improve environmental performance and/or reduce the regulatory burden on industry. EPA and the states have jointly developed the National Environmental Performance Partnership System (NEPPS), which allows for more state priority setting and innovation in implementing EPA delegated programs. States have also started developing initiatives to promote regulatory innovation by encouraging and rewarding exceptional environmental management and environmental leadership, such as exploring the regulatory implications of ISO 14000. Regional, state, and local government sustainable community, ecosystem management, watershed management, and other place-based management approaches are another type of innovative approach designed to improve environmental performance. Such state and local activities are helping to transform U.S. environmental policy. A byproduct of such activities is a fledgling two-track regulatory system, where more proactive and environmentally responsible businesses receive preferred treatment from regulators because they have demonstrated their commitment to the environment. This paper briefly overviews some of these innovative activities and explores how these activities are helping to create a two-track regulatory system. It concludes by briefly discussing whether such state and local activities can help facilitate an evolution beyond our current command and control regulatory system.