The World Bank agreed to buy 8.7 million methane-cutting CERs for $2.40 each on Wednesday in its first reverse auction for carbon credits, adding that it will look to hold another such event after this year’s UN climate talks.
The bank’s Pilot Auction Facility (PAF) uses competitive auctions to maximise the use of limited government climate funding and leverage private sector financing in carbon-cutting projects.
It is also geared at preventing CDM projects from shutting down due to low CER prices, which have collapsed from above €20 in 2008 to around €0.40 currently.
In this week’s auction, the World Bank offered $25 million in tradable put options, giving bidders a guarantee that it would buy their CERs at a fixed price over the next five years.
If fully exercised, the puts sold at this auction would cost the bank just under $21 million – money that has been pledged by developed nation donors.
The PAF has a targeted capitalisation of $100 million, with the US, Germany, Switzerland and Sweden collectively pledging $53 million.
Vikram Widge, head of climate and carbon finance for the World Bank, told reporters on a conference call that no further countries had promised cash since last year, but that he hoped the success of this week’s auction would attract more interest.
The bank said it is actively fundraising to hold two-to-three more test auctions over the next 18 months.
Under its rules, any credits transacted through the PAF are to be retired and not counted towards any countries’ compliance with emission targets.
The first auction focused on methane-reduction projects at landfills, agriculture and wastewater sites.
While it will be up to the eventual exercisers of the put options to determine from which of the roughly 130 developing countries the CERs sold will originate, the World Bank said most of the eligible CDM projects that are already operational are located in Brazil, India, Indonesia, Malaysia, Mexico and Thailand.
The bank agreed to buy the 8.7 million CERs from 12 winning companies located across eight countries, including Ably Carbon, Amsterdam Capital Trading and BP Energy Asia (click here to see the full list).
The auction attracted a total 28 bidders from developed and developing countries, ranging in size from large multinationals to small local businesses.
It was nearly three times oversubscribed, with initial demand topping 22 million units.
Bidding started at $8/tonne and declined from there, with some participants pulling their offered volumes as prices descended.
Widge said there were “well over 20 million CERs still in play” when the bid price dropped below $5, and despite more exits around the $4 and $3 levels, there remained 10-12 million on the table when prices hit $3.
He added that at $2.50 and even $2.45, the bank wasn’t able to buy all the CERs remaining and would have had to partially fill some bids to stay within its $25 million budget.
“The whole focus was on price discovery, but at the end of the day we weren’t going to do partial allocations. We had to find the most efficient point where we could service everyone.”
That ended up being $2.40/tonne, which is more than five-and-a-half times the current price of CERs trading on ICE Futures Europe.
Each put option was equivalent to 2,000 eligible CERs. The winners were required to pay a premium of $0.30 per CER, or $600 per put, as a form of collateral.
For each put, the winners will receive five options, which one-by-one expire at the end of every November from 2016 to 2020.
The puts, which are effectively worth 30 cents/tonne based on this premium, can be redeemed with the bank or sold to another company.
This means that a secondary market may now emerge, attracting potential buyers that did not participate in this week’s auction but that are able to abate methane under the CDM for less than $2.10/tonne.
Some CDM project developers have voiced scepticism that the upfront payments are enough to deter participants’ bidding prices too low to deliver the resulting methane cuts. Such a situation would not result in a draining of the available funds, but it could take until 2020 to find out that the emission reductions will not occur.
Meanwhile, other developers in poorer nations have said the $600 upfront premium was too expensive for them, but that some traders had told them they would bid for the puts and would later be willing to buy CERs from those developers.
To read more about the participation criteria for the July 15 PAF auction, click here
“The success of this pilot auction sends a clear signal that this new approach to financing climate change mitigation has potential to deliver dividends … This is just the kind of financial innovation needed to help bolster the impact of scarce public funds and entice the private sector to make investments in projects that reduce greenhouse gas emissions,” said Rachel Kyte, World Bank Group vice president and special envoy for climate change.
Widge said the bank is in discussions with donor participants and that a second auction would be announced soon, adding that it would likely take place in early 2016 and not before December’s UN climate talks in Paris.
Different project types and sectors are being considered by participating countries, as well as alternate auction formats, for example forward auctions.
The World Bank previously said the PAF could also be opened up to the voluntary carbon market in the future.
However, Widge said country eligibility was not expected to change, meaning Chinese CERs wouldn’t likely be eligible under the facility.
Projects from China – home to most registered under the CDM – are barred from the PAF due to the country’s minimum CER price.
The bank hopes the facility is replicated by other mechanisms such as the Green Climate Fund (GCF), or within developing countries looking to implement their INDCs.
By Mike Szabo – firstname.lastname@example.org