Pollution is a harmful by-product of industrial buildings and residential housing. The longer a building is in place, the more pollution it releases into the environment.
Citizens who live or work in buildings situated around pollution will have lower environmental happiness. Whether they're directly exposed to pollution or not, Environmentalists will get angry if they live on a heavily polluted island. Finally, the EU appreciates environmentalism and the level of pollution on the island will affect relations with them.
The amount of pollution that buildings cause can be reduced by issuing edicts; residential pollution can be reduced using an anti-litter ordinance while industrial pollution can be reduced by setting pollution standards. Pollution that's already been released into the environment can be cleaned up by hiring garbagemen in garbage dumps and water treatment plants.