Climate Auctions Program

 
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The World Bank’s Climate Auctions Program was implemented by the World Bank’s Climate Change Group  based on the work completed by the Pilot Auction Facility for Methane and Climate Change Mitigation (PAF). The PAF developed the Climate Auction Model, which was the basis for the World Bank’s Climate Auctions Program.

The Climate Auction Model consisted of three key elements:

  • First, price guarantees for future climate results were determined by an auction. These price guarantees provided holders the right, but not the obligation, to sell future climate results to the Facility at a predetermined price. The auction platform provided a transparent means for allocating and determining the value of the price guarantees. The competitive nature of the auction revealed the minimum price required by the private sector to make the pre-defined green investments, therefore maximizing the impact of public funds and achieving the highest volume of climate benefits per dollar.
  • Second, funds were only disbursed once the climate results were independently verified. This allowed climate funders to be certain that results were achieved before making payment.
  • Third, risk was shared between the public and private sector for green investments. The price guarantees were purchased by private sector auction winners at a premium price, which was paid upfront before they received the price guarantee contracts. Auction winners had a greater incentive to deliver climate results when they had paid for the right to deliver them to the Facility in the future.

The PAF, as the first auctioning program of the broader Climate Auctions Program, hosted three successful auctions between 2015 - 2017, allocating nearly $54 million in climate finance. The PAF’s auctions addressed methane and nitrous oxide abatement, and continued to make results-based payments for eligible carbon credits delivered to the PAF through 2020.

The Climate Auctions Program was supported by a World Bank Board-approved Financial Intermediary Fund and the work of teams across the World Bank Group.

 

 

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The Pilot Auction Facility for Methane and Climate Change Mitigation (PAF) was an innovative, pay-for-performance mechanism developed by the World Bank Group to stimulate investment in projects that reduced greenhouse gas emissions while maximizing the impact of public funds and leveraging private sector financing.

  • The key objective of the PAF was to demonstrate a new, cost-effective, and results-based climate finance mechanism that incentivized 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 were 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.

The PAF completed four auctions.

  • Four auctions (July 2015,May 2016, March 2020) addressed methane abatement from landfill, animal waste, and wastewater sites, and one auction (January 2017) addressed nitrous oxide emissions from nitric acid (not adipic acid) production.
  • The four auctions allocated up to $62 million with the potential to abate 24.8 million metric tons of CO2equivalent.
  • The put options gave owners the right, but not the obligation, to sell the emission reductions achieved by underlying abatement projects to the PAF at a pre-agreed price, the option “strike” price.
  • To purchase the put options, auction winners paid an option “premium” price upfront.
  • The put options were embedded into puttable bonds issued by the World Bank.
  • The World Bank’s obligation under the bonds was backed by the PAF and supported by funding from the PAF Participants, listed above.

The PAF made results-based payments for carbon credits.

  • The carbon credits eligible for the PAF are based on the Clean Development Mechanism (CDM), Verified Carbon Standard (VCS), and Gold Standard infrastructures already in place for project implementation.
  • The nature of the put option meant that the facility’s resources were only disbursed after the emission reductions underlying the carbon credits were independently verified, making the PAF a “pay-for-performance” facility.

Key Points: Climate Auction Model

The climate finance model developed by the PAF auctions was the “Climate Auction Model,” which includes the following elements:

  • The competitive nature of the auction used to allocate the put options revealed the minimum price required by the private sector to make such investments.
  • The pay-for-performance feature wass attractive for public funders facing expanding funding needs and scrutiny on achievements.
  • The model required risk-sharing between the public and private sectors. Private sector companies or individuals paid a premium to purchase the put options, and in exchange they received price guarantees from public funders, which allowed the companies to make green investments with confidence.
  • These elements of the Climate Auction Model combined to maximize the impact of public funds and achieve the highest volume of climate benefits per dollar.

 

 

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The Nitric Acid Climate Auctions Program will not be held. The World Bank continues to be supportive of the Nitric Acid Climate Action Group’s (NACAG) aim of climate-friendly transformation of the nitric acid sector at global scale. More information on NACAG is available at https://www.nitricacidaction.org/.

Resources and Reports:

Auction concept

Lessons Learned from Implementation

Reports on Opportunities for Replication

Blog Posts

Background Research Notes

 

 

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