To help keep finance flowing to projects that combat climate change, the World Bank and partners are developing an innovative pilot program that allows project developers and financiers to compete in an online auction to deliver the largest number of emissions reductions at the lowest cost.
The Pilot Auction Facility for Methane and Climate Change Mitigation (PAF) will auction price guarantees for CO2 emission reductions from projects. The auction, by selecting the cheapest mitigation opportunities offered, is expected to maximize the amount of emission reductions achieved per dollar spent. This could have huge implications for the future of climate finance: auctions and price guarantees have the potential for replication and scaling-up by the Green Climate Fund and others.
The auctions will target specific sectors, starting with technologies that reduce methane emissions, such as methane capture projects at landfill, animal waste, and wastewater sites. A large number of these projects exist in developing countries, and in many cases they are struggling financially. Yet the additional revenue required to unlock these investments is often small. It has been estimated that, counting all developing countries, there are methane reducing projects that could deliver as much as 8,200 million tons of carbon dioxide emission reductions at less than $10 per ton in incremental cost financing.
While the pilot will have resources to support only a sub-set of these, the potential for scaling up is massive.
“We hope this pilot auction facility will be an efficient way to reduce emissions and price carbon. If so, it will be the latest example of the kind of financial innovation needed to spur the private sector investment for scaled up climate action,” said Rachel Kyte, World Bank Group vice president and special envoy for climate change.
In subsequent auctions, the PAF will consider other sectors and technologies. And outside of the PAF’s pilot, the combination of auctions and price guarantees has the potential to go well beyond emission reductions, to target other types of results such as access to energy, health benefits like reducing asthma-inducing air pollution, and preventing stunted crops.
The PAF’s price guarantees will take the form of put options that permit their holders to sell future emission reduction credits to the facility at a known minimum price. This price is determined by the auction.