World Bank opens up second PAF auction to voluntary market, eyes Q2-16 date

Published 14:02 on December 5, 2015  /  Last updated at 15:53 on December 7, 2015  /  Africa, Americas, Asia Pacific, China, Climate Talks, EMEA, International, Kyoto Mechanisms, New Market Mechanisms, Other APAC, South & Central, US, Voluntary Market  /  No Comments

The World Bank is aiming to hold its second auction under its Pilot Auction Facility (PAF) in the second quarter of 2016, it said on Saturday, adding that it will open the eligibility up to the voluntary market.

The World Bank is aiming to hold its second auction under its Pilot Auction Facility (PAF) in the second quarter of 2016, it said on Saturday, adding that it will open the eligibility up to the voluntary market.

The second auction will target methane emissions from the same sectors as the first one held last June – landfills, agriculture and wastewater sites – but this time it will be a forward auction rather than a reverse one.

“We’re going to test how that mechanism works. We’re going to set the [strike] price … and the auction will go upwards, [with participants] bidding the premium they are willing to pay,” said Vikram Widge, head of climate and carbon finance at the World Bank, speaking at the UN climate summit in Paris.

For example, the bank could set a $3.00/tonne strike, or purchase, price, and if a company successfully bids $0.50 at the auction, the bank would effectively be buying the firm’s credits for $2.50 each.

The second auction will be open to methane-cutting projects registered under the CDM and using certain methodologies, as well as those certified by the Verified Carbon Standard (VCS) and the Gold Standard.

As was the case in the first auction, it will be open to projects in more than 130 developing countries but not China, due to its CER floor price.

The winning bidders will have four years to sell their credits to the bank at the agreed price.

Further information on the auction’s budget, date, participant deadlines, as well as the strike and starting premium prices, will be communicated by the bank early next year.

Widge said the bank is hoping to hold PAF’s third auction later in 2016.

PREVENT CLOSURES

The PAF uses competitive auctions to maximise the use of limited government climate funding and leverage private sector financing in cutting GHGs, while attempting to prevent the closure of projects hit by low carbon credit prices.

It has a targeted capitalisation of $100 million, with the US, Germany, Switzerland and Sweden already pledging more than $50 million between them. Widge said no further cash had been committed so far by countries at the Paris talks.

In its inaugural auction, the bank agreed to buy, in the form of tradable put options, 8.7 million CERs for $2.40 each from 12 projects and companies across eight countries.

If fully exercised, the puts would cost just under $21 million, compared to the $25 million earmarked for the reverse auction, and represent per-unit prices around four times the current cost of CERs on Europe’s secondary market.

Under its rules, any credits transacted through the PAF are to be retired and not counted towards any national emissions reduction goals.

LESSONS

The World Bank is also considering whether to extend the PAF to other sectors and greenhouse gas types.

Earlier this year, it commissioned an analysis to examine methane and CO2 abatement opportunities in the oil and gas sector, for example those relating to gas flaring.

“We found that small- to medium-scale projects in gas flaring, as well as those involving [gas] leak detection are very amenable to [the scheme],” Widge said.

“We’re not going to go there with the PAF itself, but as a financial mechanism and an allocation method, we think it has a lot of potential.”

The bank hopes the PAF model will be considered by other countries and organisations looking to achieve cost-effective emissions reductions.

“It’s not applicable to anything and everything, but it has a wide scope … Now that we’ve demonstrated it, it’s very replicable. It doesn’t have to be limited to the key sectors,” Widge said.

The World Bank also published a report summarising the more than 40 lessons it learned from the establishment of the facility and its first auction.

By Mike Szabo – mike@carbon-pulse.com

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