As both a pollutant that accelerates climate change and a useful form of energy, it may seem like common sense to harness the methane emissions leaking from decaying organics in landfills, agriculture, and waste water sites. Yet, in developing countries the current prices of carbon credits are too low to cover the operating and maintenance cost of capturing the leaking methane. So instead of recovering an economic benefit from the methane byproduct of these sites, the methane commonly vents into the atmosphere as a harmful pollutant.
Enter the World Bank’s innovative new program: the Pilot Auction Facility, or PAF. The PAF incentivizes project developers to capture the methane byproduct by providing a price guarantee for selling carbon credits via a tradeable put option. The purchase of put options enables project developers to hedge the risk of low carbon credit prices that could make the methane capture project unviable. As a pay-for-performance tool, the World Bank will pay project developers only after independent auditors have verified the emission reductions. Thus, project developers achieve a guaranteed floor price for emissions credits generated, while the world at large achieves the positive climate impacts of verified and quantified mitigation of vented methane emissions AND a useful energy source – everybody benefits. Moreover, the use of auctions as a mechanism for distribution ensures the most efficient use of the World Bank’s resources.
The first PAF auction was held on July 15 and targeted eligible landfill, agriculture, and waste water projects. 28 bidders initially sought put options for 22 million metric tons of carbon dioxide equivalent priced at $8/metric ton, but nearly 6 hours and 11 rounds later the auction cleared with 12 winning bidders purchasing options for 8.7 million metric tons of carbon dioxide equivalent priced at $2.40/metric ton (5 times the going rate of July 16th carbon credit price on ICE Futures Europe). Most of the winning projects are in Brazil, India, Indonesia, Malaysia, Mexico and Thailand. World Bank Carbon Finance Specialist Scott Cantor offers a compelling blow-by-blow account of the auction process here.
The PAF plans to announce a second auction following the Conference of Parties climate talks in December. GMI has been working with the PAF team at the World Bank since its conception, and we promise to keep our partners and project network up to date with the latest news. We expect to hold a session dedicated to the PAF at next year’s Global Methane Forum.
Check out the PAF’s full press release here.