Last week, the World Bank conducted its second auction in a series of pilots by the Pilot Auction Facility for Methane and Climate Change Mitigation (PAF), an innovative new financing mechanism that aims to attract private sector investment while efficiently reducing emissions.
The PAF incentivizes climate-friendly 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. For this pay-for-performance tool, the World Bank will pay project developers only after independent auditors have verified the emission reductions.
Like the World Bank’s first PAF auction held last year, the auction conducted last week targeted eligible landfill, agriculture, and wastewater methane capture projects. Unlike the first auction where participants bid on a carbon credit strike price, the second auction used a ‘forward format’ that fixed the strike price at $3.50/credit while participants bid on the premium price. The premium price paid per carbon credit allows option holders the right to sell credits back to the PAF at $3.50 per credit before 2020. For a more detailed description on how the first and second auctions worked, see these helpful videos.
Twenty-one companies from 12 countries participated in the second auction on $20 million of climate funds. After 10 auction rounds, 9 methane project developers walked away with put options for up to 5.7 million tons of carbon dioxide equivalent (CO2e) emission reductions at a premium price of $1.41 per ton of CO2e. Upon purchasing the put options, auction winners may either sell eligible emission reductions to the PAF, trade the contracts on the secondary market, or let the contracts expire.
GMI is proud to have informed the development of the PAF mechanism, and welcomed its presence on the Global Methane Forum finance panel (see presentation). We look forward to the third auction to take place this Fall.
For more information, see the World Bank press release.