Pilot Auction to Help Reduce 5.7 Million Tons of Emissions by 2020

May 13, 2016

Full-scale auction would support projects that remove hundreds of millions of tons of emissions from the atmosphere

WASHINGTON, May 13, 2016—The World Bank Group auctioned 20 million dollars of climate funds yesterday, and this could lead to a reduction of the equivalent of 5.7 million tons of carbon dioxide emissions – or taking 1.2 million passenger vehicles off roads for a year - by 2020. Twenty-one companies took part in a pilot online auction for the right to sell carbon credits, and in order to cash in, the winning 9 firms must reduce methane emissions.

Eligible projects will cut methane emissions from waste disposal including wastewater and agricultural waste. Methane is a highly potent greenhouse gas with a global warming potential at least 25 times that of carbon dioxide.

The auction was the second in a series of pilots by the Pilot Auction Facility for Methane and Climate Change Mitigation (PAF), which tests multiple auction formats that are intended to attract private sector investment while efficiently reducing emissions. This second auction attracted bidders in 12 developed and developing countries, ranging from large multinationals to small local businesses. 

“Through these pilot auctions, we are building up toward ultimately creating a large-scale ‘eBay for climate’ that gives the private sector a platform to gain access to funding. The result could be a significant reduction in climate pollution,” said John Roome, Senior Director for Climate Change at the World Bank Group.

Auction winners paid $1.41 for the right to sell credits back to the PAF at $3.50 per credit before 2020.  The winning firms are free to sell the credits at a higher price if they are able to find other willing buyers.  To be eligible, emissions must be monitored and verified by a third party.

The second auction tested a ‘forward auction’ format, where the value of the contract was fixed at $3.50 per carbon credit and auction participants bid its purchase price. In addition to the Clean Development Mechanism projects eligible in the first auction, emission reductions verified by the Gold Standard and the Verified Carbon Standard are also eligible in the second auction. 

“We will continue to rapidly test and report on various auction approaches, extending them to address emissions of other potent greenhouse gases beyond methane. The learning should be attractive to governments seeking to meet their commitments under the Paris Agreement,” said Vikram Widge, Head of Climate and Carbon Finance at the World Bank Group.

Upon purchasing the contracts, auction winners may either sell eligible emission reductions to the PAF, trade the contracts on the secondary market, or let the contracts expire.

“We looked at a number of possible structures to supply the contracts to auction winners, but ultimately settled on a World Bank issued, zero-coupon bond. In so doing, we were able to minimize costs while also maximizing benefits such as tradability,” said Michael Bennett, Head of Derivatives and Structured Finance at the World Bank.

As a first-of-its-kind online auction for methane reductions, the Pilot Auction Facility aims to promote learning, replication, and scale. The PAF is supported by contributions from Germany, Sweden, Switzerland, and the United States, who have provided more than US$50m.  The PAF was recently awarded Carbon Deal of the Year by Environmental Finance and an Editor’s Award by the global bond industry publication MTNi. 

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