World Bank Group Announces Auction Focusing on Methane Reduction

Fourth Auction to Take Place Under Pilot Auction Facility

On November 5, 2019, the World Bank Group announced plans for a fourth auction of the Pilot Auction Facility for Methane and Climate Change Mitigation (PAF), with an anticipated budget of over $6 million. The PAF is an innovative pay-for-performance instrument that uses auctions to maximize the use of limited public resources and leverages private sector financing for climate change mitigation. 

The upcoming auction will focus on methane-reducing projects. Buyers will bid to receive a guaranteed price for each ton of methane emissions reduced from key sources, including landfill, animal waste, and wastewater projects. Doing so will reduce emissions that cause climate change while delivering immediate and significant benefits to local communities, including reducing asthma-inducing air pollution and providing electricity.

This price guarantee provides private investors with a financial incentive to fund projects that would otherwise be at risk of shutting down. Using the competitive nature of the auction to determine the value of the guaranteed price maximizes the efficient use and impact of public funds.

WBPAF Video1 Animation

WBPAF Video1 Animation
Introduction to the PAF, what are put options and how they will be used to guarantee a future price on carbon credits.

The PAF previously hosted successful auctions in 2015, 2016, and 2017, so far allocating US $53.9 million of climate finance for up to 20.6 tons of carbon dioxide equivalent, benefitting projects in Brazil, Chile, Egypt, India, Malaysia, Mexico, Thailand, and Uruguay.

“The PAF is proving to be a game changer in delivering results-based finance for climate investments. The model is quicker, more price competitive and is already helping unlock clean investment opportunities by providing critical support to projects that reduce emissions. And in so doing, it is also helping shape the carbon markets of the future,” said Juergen Voegele, World Bank Global Director for Climate Change.

The PAF pays out only after emission reductions are independently verified. Carbon credits that will be eligible for payout will be those generated from the date of the auction – likely in the first quarter of 2020 – through to the end of December 2020.

“By leveraging private sector investment and supporting the most cost-effective projects, the PAF is able to allocate more money to high-quality projects than its initial capitalization. It is a compelling use of funders’ resources for tangible results and benefits on the ground just before updated NDCs have to be presented under the Paris Agreement,” said Karsten Sach, Director General International and European Policy, Climate Policy, German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety.

The World Bank Group works to develop and pilot innovative financial instruments that mitigate climate change. The PAF’s approach of efficiently allocating public funds to the private sector for critical climate actions can be replicated for use with other pollutants or via other financial institutions and has the potential for significant scale up.

About the PAF

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.

Information on how companies may apply to participate in the auction and other eligibility criteria for the carbon credits are published on the World Bank and Pilot Auction Facility’s websites.

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