This is the subject of an Engadget article which notes the graphics processor in the iPhone 3G S (PowerVR SGX) supports hardware acceleration of both OpenGL ES 1.1 and 2.0 while the graphics processor in the iPhone 3G (PowerVR MBX) only supports OpenGL ES 1.1.
The real issue here is that games or applications produced for OpenGL ES 2.0 will not simply look crappier on the iPhone 3G. They won't play at all. OpenGL ES 2.0 and OpenGL ES 1.1 are not compatible whatsoever.
This means that developers may need to pick one standard to develop for. Either they can code a version for OpenGL ES 1.1 which will play on both devices, they could code two versions of the same game which is a lot more work, or they could only code an OpenGL ES 2.0 version which will not be able to iPhone 3G owners.
Currently most applications in the App Store are available across all devices with the iPod touch being an exception in some obvious cases. The improvements in graphics and processing power might cause a rift in the App Store where certain games are only available on the iPhone 3G S. These of course would likely be the better more exciting applications leaving a lot of iPhone 3G customers in the dust.