How can a cap and trade policy be implemented to reduce emissions?
A general way cap and trade policy can reduce emissions would first require the government to set a total amount of abatement as the cap. The government can then create permits that limit the amount of total emissions to the cap. The permits are then given to different entities through means such as specific allocation or auction. Once circulating, these permits can be traded amongst different groups; a business where pollution is profitable while abatement is not may buy permits from a business where the opposite is true. To track their emissions, these businesses would need to submit one permit per specific emission quantity produced, and government monitoring would ideally mitigate fraud.

How might permits be traded?
An example of permit trading can be through an auction-type market. In such a scenario, it is likely that the trading price will become the market-clearing price when the quantity supplied equals the quantity in demand; the market-clearing price is also equal to the marginal cost of abatement in the economy.

Have cap and trade policies been implemented in the past?
In the 90s, the US implemented a sulfur dioxide cap and trade scheme in hopes of reducing acid rain; by 2007, the policy was proven effective as annual emissions decreased by 43% since 1990. Another example would be the European Union Emissions Trading Scheme, a cap and trade scheme launched in 2005 that focuses on CO2. The scheme covers about 11,000 polluting installations across the EU as of today and accounts for 57% of nationally auctioned permits.

Are there any drawbacks to cap and trade policies?
One drawback of these policies is that price signals aren’t reliable to determine future abatement investment decisions. With the EU ETS for example, lower levels of demand after the financial crisis resulted in lower demand for less electric power, subsequently causing businesses’ profit-maximizing emission levels to also decrease. Due to the demand being less than the supply, the cost of permits decreased, disincentivizing businesses from taking on abatement expenditures.

Are there any other viable alternatives to cap and trade policies?
Although still technically cap and trade, a price floor that sets a minimum price for participants can prevent intense pollution after permit prices crash. Taxes could also be applied to fossil fuels, yielding the same effect as permits do if the tax rate per unit is the same as the permit cost.

What would be a good amount to tax on fossil fuels?
To start off, fossil fuels are usually subsidized by an average of $15 per ton. As a result, a good net tax or permit cost should be greater than $40. To address the subsidized cost, an ideal tax should be at least $55 per ton. Another avenue to approach the situation would be to remove subsidies altogether and tax based on the best estimate of the cost of burning carbon.

What are some general opinions regarding these two types of policies?
In general, cap and trade policies have been more popular. An advantage these types of policies have is that the ability to price and allocate permits gives governments two revenues of control over emissions. Contrary, taxing could be unfavorable to implement

Price-based policies: uses taxes or subsidies to influence prices

Quantity-based policies: uses caps, bans, and regulations

Cap and trade: permits to pollute are issues and are traded on the market

Price signal: information that is passed through prices of goods that signal to increase or decrease supply and demand

Subsidies: granted money to help industry

A cap and trade policy can be implemented to reduce emissions by setting a total emission limit (cap) and issuing permits that correspond to specific emission quantities. These permits can be traded among entities, allowing businesses to buy permits if reducing emissions is costly for them. The trading of permits can occur through auction markets, where the trading price represents the market-clearing price and the marginal cost of abatement. Cap and trade policies have been implemented in the past with success. The US sulfur dioxide cap and trade scheme reduced emissions by 43% between 1990 and 2007. The European Union Emissions Trading Scheme, launched in 2005, covers numerous polluting installations and has been effective in reducing CO2 emissions. However, there are drawbacks to cap and trade policies. Price signals may not reliably guide future abatement decisions, as lower demand can lead to decreased permit prices and disincentivize businesses from investing in emission reduction. An alternative to cap and trade is implementing a price floor to prevent intense pollution when permit prices crash. Taxes on fossil fuels can also achieve similar outcomes if the tax rate per unit is equivalent to the permit cost. Determining the appropriate tax on fossil fuels depends on various factors. Considering the average subsidy of $15 per ton, a net tax or permit cost greater than $40 would be suitable. To address subsidized costs, an ideal tax should be at least $55 per ton, or subsidies could be eliminated entirely, and taxes could be based on the estimated cost of carbon burning. In general, cap and trade policies have been more popular due to the government's control over pricing and allocation of permits. Taxing, on the other hand, may face opposition when it comes to implementation.

A connection between environmental-price-based policies and something non-environment-related would be a tax on sugary foods to decrease sugar consumption.