This paper reviews and discusses the debate over the effectiveness of environmental regulation in promoting industrial Technological Environmental Innovation (TEI). Using the innovation-friendly regulatory principles adapted from Porter and van der Linde (1995a, 1995b), this paper demonstrates how properly designed and implemented environmental regulation (TEI promoting regulation) has played a critical role in promoting TEI in the transport industry in California and Hong Kong. In both cases, it has shown that stringent environmental regulations that send clear and strong signals for future environmental performance requirements are critical in promoting TEIs in the public transport industries. Unlike traditional command-and-control regulations, TEI promoting regulations are strongly supported by incentive and capability-enhancing measures.