Breaking: Cash for Clunkers was a dumb idea

[Hauldren Collider]

But wait...how do they decide how many credits there are? If they do so poorly it will be disjoint from the actual carbon saved by windmills for instance.

[Kuciwalker]

If you want flexibility you can set a maximum auction price, and then people can keep buying credits at that price after the initial supply runs out.

[KrazyHorse]

HC and you are speaking at cross-purposes.

In a properly-functioning system, a windmill would not create carbon credits; it would simply not use any (or at least would use vastly less than a coal-fired generator).

Things which would create carbon credits would be any activity which reduce the amount of atmospheric carbon. If they do so in a way in which the carbon will remain sequestered indefinitely then the carbon credits would be equivalent to the amount of carbon sequestered. If they do so in a way in which the carbon will be sequestered for a finite time, then the carbon credit should be based off the carbon forward curve (constructed from instruments like carbon swaps). In reality, for enforcement purposes you would probably want to actually make carbon credit interest payments for as long as the carbon remained sequestered.

Allowing the purchase of carbon credits from outside the enforcement zone would be, of course, foolhardy.

This, I believe, is the type of carbon permits that HC was talking about.

The type that Kuci was talking about are the ones created by the government directly. Their number should be unrelated to the number that are created by carbon sequestration, and should be set such that the market equilibrium price for credits is equal to the best guess of the marginal harm from carbon emission at the market equilibrium net carbon emission rate.

This is all very basic economics and finance (you can do this with supply, demand, and an understanding of the behaviour of one-delta fx products)

[Hauldren Collider]

But with no practical way to reduce atmospheric carbon, how could meaningful carbon credits that would be bought and sold on an exchange (the article says 20 dollars per ton) be meaningful?

[Kuciwalker]

But with no practical way to reduce atmospheric carbon

Carbon sequestration/offset proponents reject the premise.

Also, re: our earlier conversation: do you even understand what the fed does?

[KrazyHorse]

The fed is not quite sure what the fed does, so it is understandable that a high school student might be confused.

[Hauldren Collider]

It controls the money supply through interest rates. I think.

[KrazyHorse]

That is a filthy lie.

[Hauldren Collider]

...Then what does it do?

[KrazyHorse]

For a very long time (until ~2008) its only effective tool was the purchase or sale of short-term Treasuries (or, effectively the same thing, the short-dated repoing of similar securities or agency securities)

The federal reserve traditionally PHRASES its policies in terms of a target rate (not rates!): the fed funds rate (that is, the lowest observed overnight lending in the federal reserve system, i.e. between banks) but its actions are through open market operations.

The federal reserve directly controls two interest rates (previously one): the discount window rate and the rate paid on excess reserves. the former is a very weak tool of monetary policy (banks refuse to avail themselves of borrowing at the discount window for reputational reasons) and the latter has not yet been used in a meaningful way (it is a new tool that the fed granted itself relatively recently)

[Hauldren Collider]

My civics teacher lied to me...

[KrazyHorse]

He may not have known any better. Even some economists fall prey to thinking about monetary policy and short-term interest rates as the same thing.

[Al B. Sure!]

The Fed also decides the reserve requirement which affects the money supply.