The World Bank-steered Pilot Auction Facility’s first auction has triggered secondary dealing in both the mechanism’s put options as well as the underlying CERs, as the winning companies aim to ensure enough supply is available to sell to government buyers while preparing for the next auction.

And carbon traders are predicting the second PAF sale – scheduled for May 12 – is likely to spur further activity, as more firms are attracted by the price achieved in the first auction and existing participants grow more familiar with the process, several market sources told Carbon Pulse.

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 pledging more than $50 million between them.

Twelve out of 28 bidders at the first PAF sale in July 2015 collectively won the right to sell 8.7 million CERs for $2.40 each, winning put-style options for between 100,000 and 2 million CERs each for post-2015 emission reductions.

This is far higher than secondary CER prices currently valued at under $0.50 in the moribund EU market, although roughly on a par with prices recently paid by Norway, which applies stricter eligibility criteria to their credits.

Despite scepticism that developers would be deterred by the $600 upfront premium, the winners were heavy on local developers, including four from Brazil and others from Thailand, India and Malaysia.

Internationally-focused firms such as oil giant BP, brokers Amsterdam Capital Trading and project developers Sindicatum also won, though other major operators Shell, Statkraft and Vattenfall were notably absent.

SECONDARY TRADE

“We have heard of some secondary trading happening with the put options issued during the first auction,” said Tanguy De Bienassis, a World Bank official in the team managing the PAF.

“The PAF will not know from which projects the emission reductions will come until the date of the first maturity, when they are brought to us for redemption, for instance Nov. 30, 2016 for put options issued at the first auction,” he added.

An unknown number of PAF options have already changed hands, with reports of at least one winning firm from the first auction snapping up more because they have contracted an ample amount of eligible CERs.

Another firm that did not participate in the first auction is allegedly trying to build towards a monopoly on the underlying credits, buying them up in the secondary market in the hope that some PAF winners will come seeking supply to fulfil their own obligations.

Market participants expect such intermediaries to participate and play a stronger role in the second auction, partly because smaller developers could be deterred by the organisers’ decision to double the minimum bid amount and the size of the refundable deposit, which respectively stand at 200,000 tonnes of CO2e and $12,000.

SUPPLY OUTLOOK

Despite there being around 1,200 dormant or incomplete methane-reduction projects in developing countries in 2012 – prime candidates for participating in the PAF – the facility’s rules eliminate many from the bidding process.

To counter this potential supply squeeze, the second PAF sale casts a slightly wider net than the first, with related VCS and Gold Standard methodologies accepted alongside 35 CDM methane-reduction project types for landfills, agriculture and wastewater sites.

However, the eligibility criteria continues to exclude projects from China because of compatibility issues related to its CER floor price, as well as Turkey, which has been a big supplier of methane offsets to the voluntary market in recent years.

And the number of eligible projects may dwindle further due to the requirement that any units sold to PAF must not be subject to other contractual purchase agreements.

“There may not be many eligible projects out there. A good hard look through the eligibility criteria suggests that a lot of potential supply won’t qualify,” said one trader.

PAF officials are holding a series of webstreamed and in-person consultations for interested bidders until Mar. 28.

Key dates for second PAF auction:

By Ben Garside – ben@carbon-pulse.com