green taxes

Governments can choose to directly regulate the amount of a negative externality. However this sort of direct regulation is viewed^{[by whom?]} as having a higher cost to society because while Pigovian taxes raise revenue and respond automatically to changes in the market such as lowered cost of production or pollution mitigation, regulations may be too slow to respond to such dynamics in the market. Additionally, with a Pigovian tax there is always an incentive to reduce pollution, whereas with direct regulation, a polluting company has no incentive to pollute any less than what is allowable.
Economic theory^[which?] predicts that in an economy where the cost of reaching mutual agreement between parties is high, and where pollution is diffuse, Pigovian taxes will be an efficient way to promote the public interest, and will lead to an improvement of the quality of life measured by the Genuine Progress Indicator and other human economic indicators, as well as higher gross domestic product (GDP) growth.
Pigouvian taxation results in a "double dividend": it adjusts production to its socially optimal level, and it brings in tax revenue. In a revenue-neutral context, this money can now be used to reduce the (distortionary) taxes in another market. The double dividend, therefore, refers to the efficiency improvement in two separate markets.
Research on green taxation suggest that during the 1990s there was significant correlation between a country's UN Human Development Index (HDI) rank per fixed amount of GDP, and its level of green tax as a percentage of total tax revenues.^{[citation needed]} Furthermore, over periods longer than 5 years, data suggest that countries having higher green tax rates such as Norway, Sweden and Netherlands experience higher GDP growth and higher HDI growth rate.^{[citation needed]} However, these studies only show a correlation between green tax rates and higher GDP/HDI growth, not a causal effect.

[edit] Cap and trade

Another alternative to applying pigovian taxation is for government to place a limit on the total amount of the negative externality and create a market for rights to generate this specific negative externality. In the United States since the late 1970s, and in other developed nations since the 1980s, the concept of a market for "pollution rights" has arisen. Where as the correct Pigovian Tax can be very difficult or costly to know (anything that is not the exact cost of the externality is inefficient), cap and trade does not need as much information to be effective. Giving out the rights for free (or at less than market price) allows polluters to lose less profits or even gain profits (by selling their rights) relative to the unaltered market case. Markets for emissions trading have been set up to bring better allocative efficiency and improved information sharing to the pollution externality problem. Pollution rights markets are a part of the field of Environmental Economics generally, and Free-market environmentalism specifically.

via http://en.wikipedia.org/wiki/Pigovian_tax