Lax Regulation: a Form of Subsidy

So what do environmental protection and economic development have to do with each other?
The question has come up in relation to Jack Markell's climate prosperity strategy. Will Collin O'Mara, Markell's nominee to head DNREC, focus on economic development rather than protection and enforcement? When I asked O'Mara, he said climate prosperity starts with the proper enforcement of polluting industries. Put another way, a thorough regulatory regime should capture all the costs and benefits of clean and dirty enterprises, making it easier for green industries to compete. A friend summed it up as a carrot and stick approach.
Lax regulation of polluters is a form of subsidy. A polluting industry may show a profit to its investors, but generate costs that don't show up on its books. Costs, such as the health consequences of breathing dirty air or the erosion of soil brought on by mountaintop removal mining or the accumulation of CO2 in the atmosphere, don't show up in a company's financial statements. But these costs are real and are born either by the neighbors of a dirty power plant or the public at large.
For instance, it has been estimated that capturing carbon from coal plants will increase costs at least 20 percent. Once coal power plants are required to take on those costs, either through new technology or a cap and trade system, the net costs and benefits of clean power look much more attractive.