This study concentrates on a brief study of what externalities are and how they influence environmental development, whether positive or negative. An externality is either positive or negative and can be derived from either the production or consumption of a good or service, that is, whenever the utility or production function of one economic agent is affected by the unintended or accidental by-products of the activity of another. Negative externalities have caused problems for the environment mostly through pollution and other factors, but the focus will be on the pollution aspect of negative externalities. There have been solutions to this problem which include the carbon tax and Emission Trading Scheme. A carbon tax puts a price on those emissions, encouraging people, businesses, and governments to produce less of them. There are other factors also influencing climate change and the greenhouse effect, but mostly human activities are the main cost of these changes. For this reason, the emission trading scheme is used as a case study for the brief research.