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 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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UPDATE: World Bank Group Announces Fourth Auction of the Pilot Auction Facility: Read more

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 and is planning a fourth auction to allocate a guaranteed price for future carbon credits in the form of a tradable put option.

  • Three auctions (July 2015,May 2016, and the auction planned for 2020) address 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 past three auctions allocated up to $54 million with the potential to abate 20.6 million metric tons of CO2equivalent. The budget for the fourth auction is anticipated to be at least $6 million.
  • 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 (VCS), 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 will not be held. The World Bank continues to be supportive of the Nitric Acid Climate Action Group’s (NACAG) aim of climate-friendly transformation of the nitric acid sector at global scale. More information on NACAG is available at https://www.nitricacidaction.org/.

Resources and Reports:

Auction concept

Lessons Learned from Implementation

Reports on Opportunities for Replication

Blog Posts

Background Research Notes

 

 

Press Releases and Feature Stories

 

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