Climate Auctions Program
 
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The World Bank’s Climate Auctions Program, implemented by the Carbon Markets and Innovation team of the World Bank’s Climate Change Group, is based on the work completed by the Pilot Auction Facility for Methane and Climate Change Mitigation (PAF). The PAF developed the Climate Auction Model, which is the basis for the Wolrd Bank’s expanding Climate Auctions Program. The World Bank is evaluating opportunities for replication and scale-up of the Model across a range of sectors.

The Climate Auction Model consists of three key elements:

  • First, price guarantees for future climate results are determined by an auction. These price guarantees provide holders the right, but not the obligation, to sell future climate results to the Facility at a predetermined price. The auction platform provides a transparent means for allocating and determining the value of the price guarantees. The competitive nature of the auction reveals the minimum price required by the private sector to make the pre-defined green investments, therefore maximizing the impact of public funds and achieving the highest volume of climate benefits per dollar.
  • Second, funds are only disbursed once the climate results have been independently verified. This allows climate funders to be certain that results have been achieved before making payment.
  • Third, risk is shared between the public and private sector for green investments. The price guarantees must be purchased by private sector auction winners at a premium price, which is paid upfront before they receive the price guarantee contracts. Auction winners have a greater incentive to deliver climate results when they have paid for the right to deliver them to the Facility in the future.

The PAF, as the first auctioning program of the broader Climate Auctions Program, hosted three successful auctions between 2015 - 2017, allocating nearly $54 million in climate finance. The PAF’s auctions addressed methane and nitrous oxide abatement, and continue to make results-based payments for eligible carbon credits delivered to the PAF through 2020.

The second auctioning program is the Nitric Acid Climate Auctions Program (NACAP), to be implemented in collaboration with the Nitric Acid Climate Action Group . The NACAP will support price guarantees for eligible nitrous oxide emission reductions from nitric acid plants.

The Climate Auctions Program is supported by a World Bank Board-approved Financial Intermediary Fund and the work of teams across the World Bank Group.

 

 

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The Pilot Auction Facility for Methane and Climate Change Mitigation (PAF) is an innovative, pay-for-performance mechanism developed by the World Bank Group to stimulate investment in projects that reduce greenhouse gas emissions while maximizing the impact of public funds and leveraging private sector financing.

  • The key objective of the PAF is to demonstrate a new, cost-effective, and results-based climate finance mechanism that incentivizes private sector investment and action on climate change in developing countries by providing a guaranteed floor price on emission reductions in the form of carbon credits.
  • In 2013, the G8 requested for innovative pay-for-performance approaches to addressing methane. A report by the Methane Finance Study Group supported the establishment of the facility. In its design and development phase, the facility benefited from the support of the Climate and Clean Air Coalition.
  • The PAF auctions are supported by Germany, Sweden, Switzerland (through a joint contribution of the State Secretariat of Economic Affairs (SECO) and the Climate Cent Foundation), and the United States.

The PAF completed three auctions to allocate a guaranteed price for future carbon credits in the form of a tradable put option.

  • Two auctions (July 2015 and May 2016) addressed methane abatement from landfill, animal waste, and wastewater sites, and one auction (January 2017) addressed nitrous oxide emissions from nitric acid (not adipic acid) production.
  • The three auctions allocate up to $54 million with the potential to abate 20.6 million metric tons of CO2equivalent.
  • The put options give owners the right, but not the obligation, to sell the emission reductions achieved by underlying abatement projects to the PAF at a pre-agreed price, the option “strike” price.
  • To purchase the put options, auction winners pay an option “premium” price upfront.
  • The put options are embedded into puttable bonds issued by the World Bank.
  • The World Bank’s obligation under the bonds will is backed by the PAF and supported by funding from the PAF Participants, listed above.

The PAF makes results-based payments for carbon credits.

  • The carbon credits eligible for the PAF are based on the Clean Development Mechanism (CDM), Verified Carbon Standard, and Gold Standard infrastructures already in place for project implementation.
  • The nature of the put option means that the facility’s resources are only disbursed after the emission reductions underlying the carbon credits have been independently verified, making the PAF a “pay-for-performance” facility.

Key Points: Climate Auction Model

The climate finance model developed by the PAF auctions is the “Climate Auction Model,” which includes the following elements:

  • The competitive nature of the auction used to allocate the put options reveals the minimum price required by the private sector to make such investments.
  • The pay-for-performance feature is attractive for public funders facing expanding funding needs and scrutiny on achievements.
  • The model requires risk-sharing between the public and private sectors. Private sector companies or individuals must pay a premium to purchase the put options, and in exchange they receive price guarantees from public funders, which allow the companies to make green investments with confidence.
  • These elements of the Climate Auction Model combine to maximize the impact of public funds and achieve the highest volume of climate benefits per dollar.

 

 

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The Nitric Acid Climate Auctions Program (NACAP) is implemented in collaboration with the Nitric Acid Climate Action Group.

  • The NACAP will support price guarantees for eligible nitrous oxide emission reductions from nitric acid plants with existing or new abatement projects.
  • The NACAP auctioning program is supported by the German Federal Ministry for the Environment, Nature Conservation, and Nuclear Safety.

The NACAP is planning to hold at least one reverse auction in the winter or spring 2019 to sell put options to private sector companies.

  • These put options would give the option holder the right, but not the obligation, to deliver eligible carbon credits to the NACAP in the future.
  • In a reverse auction, eligible bidders would compete to determine the level of the put option strike price (the price guaranteed upon redemption for delivery of eligible carbon credits). It is anticipated that the starting price of the auction will be a number between $US15 and $US8. The definitive starting price will be published later in 2018.
  • Auction winners will have to pay an option premium of $US0.06 per carbon credits upfront to purchase the put options.
  • To participate in the auction, bidders will also be required to pay a refundable deposit of $US0.06 before the auction. Unsuccessful bidders will receive this deposit back.
  • The put options would be structured and delivered through a World Bank bond.
  • The auction budget will be will be published later in 2018.

Carbon credits will have to satisfy a set of eligibility criteria at the time of redemption:

  • Country eligibility will be determined by the NACAG. The NACAG will offer financial support for the reduction of nitrous oxide emissions from nitric acid plants located in countries which are eligible for Official Development Assistance, on the condition that the country in which the plant is located is committed to sustaining emission abatement in the nitric acid sector after 2020. A host country eligible for funding will agree to a formal statement of undertaking with the NACAG to ensure that from January 2021, all nitric acid production installations located in the country will be equipped with state-of-the-art technology to remove N2O emissions from their production cycles.
  • Methodology: It is anticipated that Eligible Carbon Credits will have to be Certified Emission Reductions (CERs) or Verified Carbon Standard (VCS) Verified Carbon Units (VCUs), from a project or program of activities that uses one of the methodologies related to Nitrous Oxide abatement from Nitric Acid Production (Not Adipic Acid). The list of eligible methodologies will be published at a later date.
  • Generation period: Carbon Credits generated after January 1st 2017 and onwards are anticipated to be eligible.
  • Environmental, Health & Safety and Social (EHS), and Integrity: To be eligible, Carbon Credits will have to originate from a CDM or VCS project or program of activities that has received a passing Environmental, Health & Safety and Social (EHS), and Integrity report from a Designated Operational Entity (DOE).

The NACAP Secretariat is planning a series of informational webinars ahead of the auction.

Location Date Time Time Zone Venue Registration
Webinar 1 Wednesday, June 6, 2018 09:00 – 10:30 EST Webex Online Register
Webinar 2 Tuesday, July 3, 2018 09:00 – 10:30 EST Webex Online Register
Webinar 3 Thursday, August 2, 2018 09:00 – 10:30 EST Webex Online Register

 

 

Disclaimer:

THE FOLLOWING IS A SUMMARY OF THE WORLD BANK’S PROPOSED PLAN TO ISSUE PILOT AUCTION FACILITY EMISSION REDUCTIONS NOTES (“PAFERNS”). IT IS NOT AN OFFER TO SELL PAFERNS OR AN INVITATION TO OFFER TO BUY PAFERNS. THIS SUMMARY IS SEPARATE FROM, AND SHOULD NOT BE READ IN COMBINATION WITH, ANY FUTURE OFFER OR SALE OF PAFERNS, WHICH WILL BE MADE IN COMPLIANCE WITH APPLICABLE LAWS AND UNDER ENTIRELY SEPARATE LEGAL DOCUMENTATION AND OFFERING MATERIALS. THIS SUMMARY IS VERY HIGH LEVEL FOR SIMPLICITY AND LEAVES OUT MATERIAL INFORMATION AND THE LEGAL DOCUMENTATION THAT IS EXPECTED TO GOVERN THE PAFERNS. FURTHER, IT IS CURRENT ONLY AS OF THE DATE OF POSTING TO THIS WEBSITE AND IS LIKELY TO BECOME OUTDATED AS THE PAFERNS LEGAL DOCUMENTATION IS DEVELOPED. THE STRUCTURE, TIMING AND MECHANICS OF THE ACTUAL PAFERNS, IF AND WHEN THEY ARE ISSUED, ARE SUBJECT TO CHANGE. POTENTIAL INVESTORS MUST OBTAIN A COPY OF THE COMPLETE LEGAL DOCUMENTATION PURSUANT TO WHICH THE PAFERNS WILL BE ISSUED, INCLUDING THE WORLD BANK’S MAY 2008 PROSPECTUS RELATING TO ITS GLOBAL DEBT ISSUANCE FACILITY AND THE FINAL TERMS FOR ANY ISSUANCE OF PAFERNS. POTENTIAL INVESTORS SHOULD NOT RELY ON THIS SUMMARY. BEFORE MAKING ANY INVESTMENT DECISION, POTENTIAL INVESTORS MUST REVIEW THE COMPLETE LEGAL DOCUMENTATION (ONCE AVAILABLE).

Resources and Reports:

Auction concept

Lessons Learned from Implementation

Reports on Opportunities for Replication

Blog Posts

Background Research Notes

 

 

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