World Bank to hold first CER auction under PAF on July 15

Published 13:37 on May 28, 2015  /  Last updated at 00:40 on May 29, 2015  /  Asia Pacific, International, Kyoto Mechanisms, New Market Mechanisms, Other APAC  /  No Comments

The World Bank will host the first methane-cutting CER auction under its Pilot Auction Facility (PAF) on July 15, it announced on Thursday at the Carbon Expo in Barcelona.

The World Bank will host the first methane-cutting CER auction under its Pilot Auction Facility (PAF) on July 15, it announced on Thursday at the Carbon Expo in Barcelona.

The auction will offer $25 million in tradable put options, giving winning companies the right to sell their CERs to the bank at a fixed price for emission reductions made over the next five years.

Bidding will start at $8/tonne, nearly 20 times the current price of CERs in the EU ETS, and the options will be awarded to the lowest-priced bids.

Credits will be retired and not counted towards any countries’ compliance with emission targets.

The PAF has a targeted capitalisation of $100 million, with the US, Germany, Switzerland and Sweden collectively pledging $53 million.

“We are still actively trying to raise additional resources. We hope that the first auction will give us additional momentum to continue raising resources, potentially from countries that haven’t yet joined the PAF,” World Bank official Brice Quesnel told delegates.

“It’s only a starting point, an example to demonstrate the principle that can be scaled and replicated in different areas to stimulate private sector action.”

Quesnel said this could mean future PAF sales extended to different types of project or different types of credits, for example those from the voluntary market. He said the sale structure could also be replicated by the GCF or within individual developing countries looking to implement their INDCs.

He said the second auction would probably be held at least six months after the first.

“Success for us will be if this (model) is scaled up and applied outside these initial tests within the waste and waste water sectors,” said Sweden’s Bengt Bostrom, who added that the PAF was a complement to other donor support for climate action in developing nations.

“It paves the way for least-developed countries to participate in carbon markets … It can be applied independently of future climate agreements, it’s not dependent on new market mechanisms and can work with a reformed CDM or ODA.”

The World Bank in March published the criteria for participating in the inaugural auction.

WIDE PARTICIPATION

Bids can come from firms that own or have invested in methane-reduction projects registered under the CDM involving landfills, animal waste or waste water sources in more than 130 developing countries.

Projects from China – home to most registered under the CDM – are barred from participating in the inaugural auction due to the country’s minimum CER price.

“The auction is going to favour operational projects that already have their investments made, which can bid at a lower price than for new investments,” said Jay Mariyappan of developer Sindicatum, which has several qualifying projects and intends to bid in the auction.

UPFRONT ISSUES

The winners must pay an upfront premium of $600 per put (or 30 cents per CER), which Quesnel said was necessary to “to ensure the bidding process is truthful”.

“Without it, people have been over-optimistic and may not be able to deliver with that price.”

Despite this, some developers are wary that the upfront payments are not enough to deter bidding prices too low to deliver the resulting cuts, according to one developer on the sidelines of the conference who asked not to be named.

Such a situation would not result in a draining of the available funds, but it could take the full five years to find out that the emission reductions will not occur.

Sumon Sumetchoengprachya of the Thai government’s Greenhouse Gas Management Organisation said the upfront fees were too expensive for many small scale developers in her country, but that a secondary market could emerge.

“It’s a lot of money for us, so most of them are not convinced to join the PAF auction. (But) some traders are already saying they would (bid) and are very willing to buy carbon credits from our developers,” she said.

By Ben Garside – ben@carbon-pulse.com